The Ontario Securities Commission released on April 28, 2009 the reasons for its previously issued decision to require the proposed acquisition of Lundin Mining Corporation by HudBay Minerals Inc. to be submitted for approval to the shareholders of HudBay. The decision is significant because it reverses the Toronto Stock Exchange’s long-standing position not to require shareholder approval where two public companies are merging in a share-for-share exchange and there will be substantial dilution suffered by shareholders of the acquiror. The Exchange had determined that no such vote should be required by the HudBay shareholders, which is consistent with the Exchange’s position on earlier similar transactions such as the acquisition of Glamis Gold Ltd. by Goldcorp Inc. in 2006 and the purchase of Allstream Inc. by Manitoba Telecom Services Inc. in 2004.

The reasons contain several other new and important pronouncements by the OSC. One, which could have wide-ranging consequences, is that a fairness opinion prepared by a financial adviser who is being paid a success fee does not assist a board of directors (or its special committee) in demonstrating they have taken due care in approving the transaction. Another is that it is manifestly unfair for the directors of a corporation to set the date of a meeting requisitioned by shareholders at a time that effectively frustrates the purpose of such meeting.


On November 21, 2008, HudBay and Lundin publicly announced a proposed transaction whereby HudBay would acquire all the outstanding shares of Lundin pursuant to a share exchange by way of a plan of arrangement. The imputed price to be paid by HudBay was $2.05 for each Lundin common share, representing a premium of 103 per cent to Lundin’s previous day closing price of $1.01 and a 32 per cent premium to the 30-day volume weighted average trading price.

The transaction was subject to the approval of the Lundin shareholders, but a favourable vote by the shareholders of HudBay was not a condition of the transaction.

HudBay is an integrated base metals mining company with operations primarily in North America. At the time the proposed transaction was announced, it had total assets of just under $2 billion and no long-term debt. HudBay’s market capitalization was about $800 million with just over 153 million common shares outstanding.

Lundin is an international mining company with projects around the world including a substantial investment in the Democratic Republic of Congo. Its total assets were US $4.3 billion with long-term debt of US $234 million. Lundin’s market capitalization was approximately $394 million just prior to the announcement of the transaction. To purchase Lundin, HudBay would have issued 157 million HudBay common shares.

As part of the agreement between HudBay and Lundin, HudBay agreed to purchase shares in a private placement from the Lundin treasury that would represent 19.9 per cent of Lundin’s outstanding shares. Concurrently with the announcement of the transaction, HudBay entered into 12 lock-up agreements with shareholders of Lundin holding approximately 21 per cent of the outstanding Lundin shares (16.9 per cent after the Private Placement). The shareholders agreed to vote all of their shares in favour of the transaction.

Following the announcement of the transaction, HudBay’s share price on the TSX dropped by approximately 40 per cent. The price of the Lundin common shares was not significantly affected. A number of analysts covering HudBay expressed negative views with respect to the proposed transaction and several shareholders, including Jaguar Financial Corporation, wrote to the TSX and asked that the Exchange require that the transaction be submitted to the HudBay shareholders for their approval.  

The TSX Rule

The Rules of the TSX provide that a publicly-traded company must immediately notify the Exchange of any transaction involving the potential issue of listed securities and that the company may not proceed with that transaction without the approval of the TSX. The TSX has discretion to allow such a transaction to proceed, or to impose conditions, one of which is that of shareholder approval. In exercising its discretion, the TSX will consider the effect of the transaction on the quality of the marketplace provided by the TSX, based upon a number of factors, including whether or not the transaction would have a material effect on control of the issuer. Where a transaction involves a listed company acquiring another widely held public company, the TSX has generally taken the position that the transaction does not materially affect control of the issuer.

The TSX Listing Committee met on December 10, 2008 and decided that it would not exercise its discretion to impose a shareholder approval requirement on HudBay.

This position taken by the TSX was consistent with what it had said in several previous share exchange acquisition transactions.

In its submissions to the TSX, Jaguar made a number of points, including the following:

  1. HudBay shareholders would suffer dilution in excess of 100 per cent as a result of the transaction.  
  2. There would be an enormous impact on the economic interests of the HudBay shareholders in that the merged company would now be exposed to highly risky mining ventures outside of North America and would assume a very significant amount of long-term debt.  
  3. A significant premium was payable by HudBay to Lundin shareholders, although the transaction was effectively a ‘merger of equals’.  

HudBay and Lundin responded that the TSX had never required shareholder approval in similar circumstances for past transactions, and that if a new rule was to be created, it should not be done at the expense of this particular transaction. They argued that it is important that there be ‘deal certainty’ and that people are entitled to know the rules of the game before they structure and announce their transactions.

In deciding to reverse the decision of the TSX, the OSC articulated the following factors as being most relevant to its decision:

  • Dilution — The fact that the transaction would result in the issuance of additional HudBay common shares representing over 100 per cent of the shares previously outstanding was an extremely important consideration. This level of dilution suggests a ‘merger of equals’ and why, in a merger of equals, should shareholders of one party (Lundin) be entitled to vote on the transaction while the shareholders of the other party (HudBay) are not?
  • Economic Impact on Shareholders — The fact that the HudBay share price fell by approximately 40 per cent following the announcement of the transaction was viewed by the Commission as one reflection of the significant impact of the transaction on the shareholders of HudBay.
  • Corporate Governance — The Commission believed it was significant that following the merger, five of the nine directors would be former directors of Lundin. HudBay had argued that two of those individuals were already directors of HudBay, but the OSC noted that these two directors had been appointed to the HudBay Board only fairly recently. Again, this suggested to the Commission a merger of equals rather than an acquisition of Lundin by HudBay. The Commission felt that HudBay shareholders should have the right to vote on such a fundamental change to their board of directors.
  • Transformational Impact of Transaction — The Commission felt that the proposed transaction represented a dramatic shift in business plan for HudBay. There would be a significant increase in HudBay’s risk profile since it would be exposed to mining operations in higher-risk jurisdictions around the world, including Russia and the Democratic Republic of the Congo (compared to HudBay’s almost exclusively North American operations). The transaction would lead to a significant increase in HudBay’s long-term debt which would impact liquidity and other financial measures.
  • Fair Treatment of HudBay Shareholders — The OSC felt that the combined effect of the considerations discussed above raised serious concerns as to the fair treatment of HudBay shareholders. The Commission concluded that the fair treatment of the HudBay shareholders was fundamentally more important than considerations such as deal or regulatory certainty.  

Shareholder Meeting Requisition

The corporate law statutes in Canada require a public company to call a shareholders’ meeting if a requisition is made by one or more shareholders with over 5 per cent of the outstanding shares. The statutes do not, however, state when the meeting must be held.

In November 2008, Jaguar and two other HudBay shareholders requisitioned a HudBay shareholders’ meeting for the purpose of replacing the HudBay directors. HudBay rejected the requisition as being not from registered shareholders.  

In December 2008, the shareholders filed a second requisition with HudBay for a shareholders’ meeting, and this time, after a two week delay, HudBay agreed to call the meeting and scheduled it to be held on March 31, 2009.  

At the same time, everything possible was being done to accelerate the timing of the merger. The original HudBay/Lundin press release contemplated that the Lundin proxy circular would be mailed to shareholders in the first quarter of 2009 with closing expected by May. In fact, the proxy circular was mailed on December 22, 2008 so that the Lundin shareholder meeting could be held on January 26, 2009, with closing scheduled to occur two days later, on January 28, 2009.

HudBay obviously scheduled its shareholder meeting so that it would occur well after the merger transaction had closed. The OSC was not impressed and had this to say:

“While HudBay and Lundin may have the legal right to make these decisions under corporate law, they appear to us to be actions taken for the purpose of frustrating the legitimate exercise by HudBay shareholders of their right to require a shareholders meeting to consider the replacement of the HudBay board, in effect, a shareholder vote on the Transaction. If the Transaction is completed before the requisitioned shareholders meeting, the principal purpose for that meeting will be frustrated. That is manifestly unfair to the shareholders of HudBay. If shareholders wish to challenge a transaction by exercising their fundamental right to elect or remove directors in accordance with their legal rights to do so under corporate law, the board of directors should not be permitted to actively frustrate that objective in this manner.”

Financial Adviser Fees

Under the heading “Other Matters”, the OSC took the opportunity of this HudBay Decision to comment on the arrangements between HudBay and its financial adviser, GMP Securities, LP (GMP). The terms on which GMP had been retained were fairly standard. Among other fees, GMP was entitled to a signing fee when the arrangement agreement was entered into and a much larger success fee payable upon closing of the transaction.

The OSC’s comment was as follows:

“Such fees create a financial incentive for an advisor to facilitate the successful completion of a transaction when the principal focus should be on the financial evaluation of the transaction from the perspective of shareholders. While the Commission does not regulate the preparation or use of fairness opinions, in our view, a fairness opinion prepared by a financial adviser who is being paid a signing fee or a success fee does not assist directors comprising a special committee of independent directors in demonstrating the due care they have taken in complying with their fiduciary duties in approving a transaction.”

In effect, the OSC has questioned the independence of a financial adviser who delivers a fairness opinion where the financial adviser is entitled to a success fee. Boards are advised to seek fairness opinions in transactions as they are viewed as important in demonstrating that the board made an informed and careful decision in deciding to approve the transaction. If the ‘primary’ financial adviser to the board is to receive a success fee, as is usually the case, boards may now feel the need to retain a second financial adviser with the sole responsibility to deliver a fairness opinion, for a fixed fee not tied to the success of the transaction.

It is interesting that the OSC chose to raise the independence of the fairness opinion provider in the decision. It leads to the obvious question of whether the OSC will seek to regulate fairness opinions in a manner similar to the regulation of formal valuations in situations of perceived conflict of interest, such as related party transactions.

HudBay Vote of Shares in Lundin

The OSC also took the opportunity of this decision to comment upon the effect of the private placement of Lundin shares to HudBay.

On December 11, 2008, HudBay paid $136 million ($1.40 per share) to acquire 97 million shares of Lundin representing 19.9 per cent of the outstanding Lundin common shares (after the private placement). This transaction was not tied to the plan of arrangement in the sense that it was completed prior to the plan of arrangement becoming effective and it was not conditional upon the consummation of the plan of arrangement.

In connection with the private placement, HudBay agreed to vote its newly acquired 19.9 per cent of Lundin in favour of the plan of arrangement.

The OSC felt otherwise. The Commission expressed the view that HudBay has a different, and potentially conflicting, interest in the outcome of the vote on the plan of arrangement, relative to the other Lundin shareholders. The Commission stated that HudBay should not, as a matter of principle, be permitted to vote those shares in favour of the transaction. When those shares are added to the shares covered by the lock-up agreements, the result would be that approximately 36.8 per cent of the Lundin shares would be voted in favour of the plan of arrangement. The OSC said that:

“In our view, an acquiror should not generally be entitled, through a subscription for shares carried out in anticipation of a merger transaction, to significantly influence or affect the outcome of the vote on that transaction. The acquiror in a merger transaction has a fundamentally different interest in the outcome of the transaction than the shareholders of the target.”


The OSC released its decision to require a HudBay shareholder meeting on the morning of January 23, 2009. The same day, the HudBay shares traded as high as $4.60 on the TSX, up significantly from their closing price of $3.52 the day before. HudBay and Lundin announced on February 23, 2009 that they were terminating the arrangement agreement and abandoning the merger as it was apparent the HudBay shareholders would not approve the transaction. On March 23, 2009, the HudBay Board of Directors resigned, and a new Board was elected at the shareholders’ meeting held on March 25, 2009. The TSX is currently reviewing its rules with respect to the need for shareholder votes in share-forshare merger transactions and it is quite likely a new rule will be adopted, probably similar to the rules already in place at other stock exchanges, requiring a shareholder vote when the dilution to be suffered by the acquiring company’s shareholders exceeds some threshold level. The draft rule issued for comment by the TSX on April 3, 2009 proposed a 50 per cent dilution threshold.