On January 23, the Ontario Securities Commission ordered HudBay Minerals Inc. to obtain shareholder approval prior to closing its proposed acquisition of Lundin Mining Corporation. The decision overturned an earlier decision by the Toronto Stock Exchange (TSX) to allow the transaction without requiring a shareholder vote.
Last year, HudBay and Lundin announced that HudBay had agreed to acquire all of the outstanding common shares of Lundin on the basis of 0.3919 HudBay common shares for each Lundin common share. The total number of shares to be issued to Lundin shareholders under the proposal was slightly more than the total number of HudBay shares outstanding at the time. The market did not look kindly on the proposal; HudBay’s share price dropped 40% on the announcement.
Section 611 of the TSX Company Manual provides that shareholder approval will normally be required if a proposed acquisition would result in a listed company issuing over 25% of the number of outstanding shares on a non-diluted basis. Section 611(d) of the Manual gives an exemption where the company being acquired is a reporting issuer with 50 or more beneficial shareholders.
However, section 603 of the Manual provides that the TSX has discretion to accept notice of a proposed transaction and can impose conditions such as shareholder approval. Section 604 provides that shareholder approval will generally be required if a transaction will result in a change of control of the issuer.
Challenging the Proposal
Jaguar Financial Corporation, a HudBay shareholder, filed an application with the OSC to review the TSX’s decision. The application cited the following grounds for OSC review:
1. The exemption in section 611(d) is out of step with current regulatory best practices. Virtually every other exchange would require shareholder approval in this circumstance and the TSX itself has requested comment on whether the provision should be amended.
2. The sheer size of the proposal and the effect on shareholders justify a review.
3. Shareholders are opposed to the proposal. This is demonstrated by the negative market reaction.
4. The proposal would result in a material change of control of HudBay, where 5 of 9 directors of the amalgamated company would be former Lundin directors.
5. HudBay’s special board committee reviewing the proposal did not do adequate due diligence.
The OSC normally defers to the judgment of the TSX, particularly in areas of the TSX’s expertise. There are limited circumstances in which it will intervene. The fact that it would have reached a different decision is not one of them.
The OSC hearing panel found the TSX’s determination that the proposal would not result in a change of control of HudBay to be within a range of reasonableness.
The panel then reviewed Section 603 of the TSX Manual, which requires the TSX in exercising its discretion to consider the effect that a proposed transaction would have on the quality of the TSX marketplace. The minutes of the TSX Listing Committee simply stated that “in this circumstance the rules would not require the transaction to be approved by HudBay shareholders,” and that it would “not be appropriate” to exercise discretion to require a shareholder vote. The TSX did not provide the panel with any affidavit evidence.
The panel concluded it had no basis upon which to determine whether the TSX’s conclusion not to require HudBay shareholder approval was within a range of reasonableness and, consequently, whether it should defer to the TSX’s judgment. The panel limited itself to interpreting and applying the existing Section 603, and explicitly stated it was not changing the rule. The fact that the TSX proposed amending the rule was not a consideration.
The panel interpreted “quality of the marketplace” to include the impact on market participants. More or less following the grounds set out in Jaguar’s application, the panel found a number of factors that it believed would have a negative effect on HudBay’s shareholders if the proposal were allowed without shareholder approval.
The TSX appears to have taken a restricted view of the basis on which it could impose shareholder approval. It seems to interpret “quality of the marketplace” to mean that a proposed transaction will result in shareholders having a less liquid and efficient market in their securities. In this case, the fact that a large number of shares would be issued should, if anything, increase liquidity.
The OSC has taken a more expansive view, interpreting “quality of the marketplace” to include upholding shareholders’ reasonable expectations of what the exchange would require.
This decision is not a hard-and-fast rule that issuers must obtain shareholder approval for acquisitions of other listed companies. However, it is a shot over the bow that the TSX’s existing practices must change. The TSX will likely respond (and quickly, no doubt) by removing section 611(d) of the Manual and requiring shareholder approval anytime an acquisition will result in more than 25% of the outstanding shares being issued. Approaching this on a case-by-case basis will leave the TSX open to criticism no matter what its decision and no matter how thoroughly it analyzed whether to exercise its discretion.