On January 23, 2009, the Ontario Securities Commission ("OSC") released its decision with respect to the proposed acquisition by HudBay Minerals Inc. ("HudBay") of all of the shares of Lundin Mining Corporation ("Lundin"). The OSC ordered that HudBay shareholder approval of the transaction by a simple majority is required before HudBay issues any securities in connection with the transaction. The OSC also ordered that such approval is a condition to the listing on the Toronto Stock Exchange ("TSX") of the common shares that HudBay proposes to issue to Lundin shareholders in exchange for their Lundin shares.
The transaction was structured as a plan of arrangement which, under corporate law, requires the approval of Lundin shareholders but not HudBay shareholders. The TSX decided not to exercise its discretion to require HudBay shareholder approval in spite of requests that it do so from four major HudBay shareholders holding in aggregate 16% of the HudBay shares. The OSC set aside the TSX decision.
The OSC concluded that the economic consequences of the transaction to the HudBay shareholders were extreme. In its view, the facts gave rise to serious concerns about HudBay's governance practices and the fair treatment of HudBay shareholders. The OSC found that in assessing the impact of the transaction on the quality of the marketplace, the fair treatment of HudBay shareholders was fundamentally more important than "deal certainty" in the particular circumstances. The OSC also found that to allow the transaction to proceed without HudBay shareholder approval would be contrary to the public interest.
Key considerations included the following:
(i) Economic Impact. The transaction had an enormous impact on the rights and economic interests of HudBay shareholders. The HudBay share price dropped 40% after the public announcement of the transaction. That exceeded the usual market reaction to a merger announcement.
(ii) Dilution. The transaction would result in the issue of HudBay shares representing just over 100% of the number of HudBay shares currently outstanding. That level of dilution meant the transaction was a merger of equals, not an acquisition by HudBay of Lundin. In such circumstances, one would expect that the shareholders of both parties would be entitled to a vote, not just the shareholders of Lundin, as planned. Voting, distribution and residual rights would be fundamentally changed.
(iii) Board Reconfiguration. Five of the nine directors of the merged entity would be former directors of Lundin. The proposed reconfiguration of the board underscored that the transaction was a merger of equals.
(iv) Timing of Meetings. Although the initial announcement of the transaction referred to a closing date "prior to May 30, 2009", the Lundin shareholder meeting was subsequently scheduled for January 26, 2009, potentially permitting completion of the transaction on January 28, 2009. The meeting requisitioned by HudBay shareholders to remove the HudBay board was scheduled for March 31, 2009. Accordingly, the transaction could be closed before the HudBay shareholder meeting occurred. That was unfair to HudBay shareholders.
The OSC rendered its decision in response to a request from a HudBay shareholder that the OSC set aside the TSX decision that HudBay shareholder approval was not required for the transaction. The OSC noted that it generally defers to the judgment of the TSX in its areas of expertise. However, according to the OSC, in the case at hand no evidence was provided to the OSC with respect to the factors considered by the TSX in assessing the impact of the transaction on the quality of the marketplace and therefore the OSC could not defer to the TSX decision. The TSX Company Manual requires the TSX to consider such impact on the quality of the marketplace when the TSX exercises its discretion to impose conditions when approving the listing of shares.
In considering any possible prejudice to the parties of requiring shareholder approval, the OSC observed that HudBay and Lundin, being highly sophisticated, would be familiar with the regulatory context. This context included the TSX's ability to exercise discretion and also the policy review announced by the TSX on October 12, 2007 (the "TSX Request For Comments") to consider whether or not shareholder approval should automatically be required above a specified maximum level of dilution. However, the OSC emphasized that in reaching its decision, it was relying upon the existing provision in the TSX Company Manual in which a specific level of dilution alone was not determinative in exercising discretion to require shareholder approval.
The TSX Request For Comments noted that many exchanges, including the London Stock Exchange and the New York Stock Exchange, automatically require shareholder approval for issuances of shares exceeding a specified level of dilution. The TSX has such a threshold but it does not apply when shares are issued to acquire a public company.
In a similar case in 2006, Robert McEwen, a shareholder and the founder of Goldcorp Inc. ("Goldcorp"), asked an Ontario court to make an order requiring Goldcorp shareholder approval for its acquisition of Glamis Gold Ltd. However, the court confirmed that under corporate law, no such approval of the plan of arrangement was required and the court was not willing to find oppression in the circumstances. In that case, the Goldcorp shareholders were to retain a 60% ownership position in the merged entity and six of the ten directors of the merged entity were to be Goldcorp directors.
Given the various factors considered, the HudBay decision by the OSC does not necessarily create a bright line dilution threshold that triggers shareholder approval requirements. Nonetheless, parties considering a "merger of equals" involving 100% dilution may be well advised to plan for shareholder meetings for both parties to the merger.
The OSC's full reasons will be issued in due course.