In 2007, the Toronto Stock Exchange published a proposed amendment requiring approval from shareholders of an issuer who issued securities as the purchase price for an acquisition of a public company, and where the offering amounted to a dilution exceeding 50 per cent.
The proposal went nowhere, largely because stakeholders responded with widely divergent views. So the existing rules, which made it entirely a matter of discretion for the TSX whether to mandate a shareholder vote if an issuer wanted to issue a substantial percentage of its share capital to acquire another public company, remained in force.
But the proposal suddenly resurfaced last month. For this, both proponents and opponents of the measure will likely have the Ontario Securities Commission’s January ruling in Re HudBay Minerals Inc. to thank.
The OSC, that followed its January order and partial reasons with full reasons in April, gave HudBay’s shareholders the right to vote on the company’s proposed acquisition of Lundin Mining Corp. after the TSX refused to order a vote.
“It’s no coincidence that the proposal resurfaced so soon after HudBay,” says Paul Findlay, a partner at Borden Ladner Gervais LLP. “The OSC sent a clear signal to the TSX that the Commission thinks there should be some shareholder vote requirement for the acquirer’s shareholders in similar circumstances.”
The ruling surprised M&A practitioners. “Before HudBay, most practitioners would have been confident that the TSX would not order a vote if the dilution was less than 100 per cent,” says Kevin Thomson, a partner at Davies Ward Phillips & Vineberg LLP’s Toronto office.
Still, views differ on HudBay’s impact, which will be short term if the proposed amendment is adopted and long term if it is not.
“It was the reluctance of the TSX to put evidence forward about how it arrived at its decision not to require a vote that forced the OSC to examine the issue itself,” Thomson says. “So HudBay’s impact will not be as dramatic as people might have believed at first blush. I think it will primarily affect the way the TSX approaches a similar hearing in the future by being much more prepared to provide evidence regarding the basis of its decision.”
Such evidence would presumably allow the OSC to defer to the TSX on the basis that the Exchange had acted rationally and reasonably in approaching the decision. “I would be enormously surprised if the OSC would be as prepared to intervene in similar situations in the future as it was in HudBay,” Thomson says.
Tina Woodside, a partner at Gowling Lafleur Henderson LLP’s sees HudBay as an instance of bad facts making bad law.
“I think what upset the OSC was that HudBay effectively removed shareholders’ voices by rescheduling the closing to take place ahead of the shareholders’ meeting,” she says. “Still, I think advisers are going to have to think much harder than they did in the past about a vote from the acquirer’s shareholders even when it’s not required under securities law, corporate law, or exchange rules.”
HudBay is certain to be the leading case on how the TSX will apply its discretion in the future under the existing rule.
“There were lots of very bad facts that made it ripe for the Commission to intervene,” says Rob Staley, a partner at Bennett Jones LLP’s Toronto office, “but at least now there’s some guidance as to how the TSX’s discretion should be exercised.”
Several key considerations governed the OSC’s ruling that the absence of shareholder
approval would be contrary to the public interest.
To begin with, the transaction would have an enormous impact on HudBay shareholders.
HudBay’s share price, for example, dropped 40 per cent after the deal was announced.
As well, the 100-per-cent dilution meant that the transaction was more a merger of equals than an acquisition of HudBay by Lundin. The fact that a majority of the merged entity’s directors would be former directors of Lundin underscored the merger of equals scenario. It made no sense, then, that only Lundin’s shareholders should be entitled to a vote.
Finally, scheduling the HudBay shareholders’ meeting after the potential closing date for the transaction was unfair to the shareholders.
However one sees HudBay’s impact, many believe keeping the existing rule is preferable to making a vote mandatory.
“The central problem with a mandatory rule on the buy side is that acquirers will have to consider whether they want to go through the arduous process of preparing voluminous documentation, mailing it, and soliciting proxies in the hope that they can get a vote favourable to something the board already believes is in the interests of the company,” Thomson says. “There’s also going to be a concern on the target’s part that the acquirer will put itself in play by having a shareholders’ meeting, which is precisely the kind of opportunity interlopers are looking for.”
From the purchaser’s perspective, the greatest disadvantage of a mandatory rule is that it creates uncertainty as to whether the transaction will close.
Thomson posits a situation where a delay created by the need for significant regulatory approval is protracted by the mechanics and legalities involved in holding a shareholders’ meeting.
“What if there’s a change in the business of the acquirer over which the target has no control?” he asks. “That could radically alter the willingness of the acquirer’s shareholders to approve the deal, leaving the target company with a failed sale process that has nothing to do with the target.
“So if you were choosing between two potential buyers, one of whom requires a shareholder vote and one that does not, which offer would you accept?”
The upshot, he says, is companies bidding in a competitive market who are required to obtain such approval will have to offer a price that is substantially higher than they might otherwise put forward. “What a mandatory rule would promote is the structuring of transactions with more substantial cash components and less dilution for shareholders,” he says.
“If the change is enacted, and as the debt markets come back, you’ll see many more transactions that will be structured to avoid this requirement.”
Of course, more cash means more debt. “That’s a critical component that’s often overlooked in the debate,” Thomson says. “It’s easy to make the argument that shareholders should have the right to approve any transaction that fundamentally affects the company in which they invested, but what that argument ignores is the downside to investors of requiring shareholder approval mechanisms.”
Thomson says that uncertainty still exists over the new rule’s adoption. “There’s going to be quite a number of comments from both sides,” he says.
The comment period expired on May 4.