Ability to Vote Shares Acquired in a Take-over Bid on a Resolution to Approve a Second-Step Amalgamation
May 6, 2007
Edward P. Kerwin
Bingham v. Ashton Mining of Canada Inc., 2007 BCSC 281 (CanLII)
Supreme Court of British Columbia, March 1, 2007
Court Docket No. S070345
Rio Tinto held a 52% stake in Ashton – Rio Tinto entered into a hard lock-up agreement with Stornoway to sell its shares – Stornoway made a takeover bid for all of Ashton’s shares - 68% of Ashton’s shareholders, including Rio, tendered into the bid – after the expiry of the bid, Stornoway proposed an amalgamation whereby the shares of Ashton’s remaining shareholders would be purchased on the same terms offered in the takeover bid - the amalgamation was approved by Ashton’s shareholders, as required by OSC Rule 61-501, but would not have been approved if Stornoway had not voted the shares held by Rio Tinto and other shareholders who tendered into the takeover bid – the petitioner, who held shares in Ashton, sought a declaration that the amalgamation was void on the basis that the shares of Rio Tinto and other tendering shareholders ought to have been excluded from the vote tally – the court rejected the petitioner’s argument – Rio Tinto was not a joint actor of Stornoway’s – Stornoway was entitled to vote the shares of security holders who tendered into the takeover bid.
Ashton Mining of Canada Inc. ("Ashton") was a public company in the diamond exploration business that was incorporated under the Canada Business Corporations Act, R.S.C. 1985, c. C-44 ("CBCA") and was listed on the Toronto Stock Exchange ("TSE"). Rio Tinto ("Rio") held 52% of Ashton. Rio entered into an agreement with Stornoway Diamond Corporation ("Stornoway") to sell its 52% stake of Ashton for $1.25 per share, which was a 15% premium to the publicly traded price of Ashton’s shares.
Rio’s agreement with Stornoway was a "hard" lock-up agreement, in that Rio agreed to sell to Stornoway even if a third party made a superior bid for Ashton. Under the lock-up agreement, Stornoway agreed to make a bid for all of Ashton’s shares. Stornoway offered per share consideration of either $1.25 cash or one Stornoway share valued at $1.24 plus $0.01 in cash. A maximum amount of $59.5 million cash was available to tendering shareholders. If the number of shares tendered for cash required greater than that maximum amount, Stornoway would be entitled to take up the shares by paying a pro rata amount of cash and fractional shares of Stornoway such that the total cash consideration paid would not exceed $59.5 million. If Stornoway chose not to take up the tendered shares, it was obligated to pay tendering shareholders a pro rata share of $2 million.
Stornoway disclosed in the takeover bid that if fewer than 90% of Ashton’s shares tendered into the bid, then Stornoway may carry out a second-step amalgamation whereby Stornoway would propose to the Ashton shareholders that Ashton amalgamate with a Stornoway-controlled entity. If the amalgamation was approved by the requisite two-thirds majority of Ashton’s shareholders, then such entity would acquire all of the Ashton shares on the same terms as the bid. Stornoway disclosed that in such a scenario it would vote the shares that it acquired from Rio and other tendering shareholders in favour of the amalgamation.
When the takeover bid ultimately expired, approximately 68% of Ashton’s shareholders (including Rio) had tendered into it. As disclosed in the take-over bid circular, Stornoway proceeded to requisition a special meeting of Ashton’s shareholders to vote upon the proposed amalgamation of Ashton and a Stornoway-controlled entity. At the special meeting, approximately 96.5% of the shares, including the shares acquired from Rio, were voted in favour of the amalgamation. If the shares held by Rio were excluded from this tally, 90% of the shares were voted in favour of the amalgamation; however, if the shares held by Rio and other tendering shareholders were excluded, 54% of the remaining shares were voted against the amalgamation.
Immediately after the meeting, Stornoway completed the amalgamation and Ashton was de-listed from the TSE.
The petitioner held shares in Ashton. He opposed the amalgamation. He argued that Stornoway could not properly vote the shares held by Rio and other tendering shareholders on the amalgamation proposal. He sought a declaration from the court that the amalgamation was void and that the parties should be restored to their respective positions.
Issues: Whether (i) the amalgamation constituted a "going private transaction", (ii) the amalgamation complied with the provisions of Rule 61-501 of the Ontario Securities Commission ("OSC"), and (iii) the takeover bid and amalgamation were carried out in an oppressive manner.
Held: The petition was dismissed. The amalgamation was a "going private transaction", but it complied with the provisions of OSC Rule 61-501 and was not carried out in an oppressive manner.
Whether the Amalgamation Was a "Going Private Transaction"
The first issue considered by the court was whether the amalgamation amounted to a "going private transaction" within the meaning of section 183 of the CBCA. If the amalgamation was not a "going-private transaction", then it could be approved by two-thirds of all shares. If it was such a transaction, then the amalgamation had to comply with applicable provincial securities laws, namely Rule 61-501, which requires approval by a majority of the minority shareholders.
A transaction will amount to a "going-private transaction" under the CBCA if it results in securities holders’ interests being terminated without consent of the holder and without the substitution of an interest of equivalent value in participating securities of the corporation or of a successor corporation which have rights and privileges that are equal to or greater than the affected participating securities.
In this case, the court determined that the interests of the securities holders were clearly terminated without consent. Furthermore, as indicated by the terms of the offer, the shares of Stornoway taken up by tendering shareholders were worth $1.24, not $1.25. In the court’s view, this did not amount to a substitution of participating securities of "equivalent value". Even if "equivalent value" required only a substitution for shares carrying equivalent voting rights, the court reasoned that shareholders who received cash and a fraction of a Stornoway share could not be said to receive shares carrying equivalent voting rights.
Accordingly, the court held that the transaction amounted to a "going private transaction" and, pursuant to section 93 of the CBCA, had to comply with the applicable provincial securities laws, which in this case was the Securities Act , R.S.O. 1990, c. S.5, as amended (the "OSA") and the OSC Rule 61-501.
Whether the Amalgamation Complied with Rule 61-501
The second issue was whether the amalgamation complied with the provisions of Rule 61-501. In the context of a second step business combination, Rule 61-501 expressly states that "the votes attached to securities acquired under a formal bid may be included as votes in favour of a subsequent business combination in determining whether minority approval has been obtained." if the security holder who tendered shares into the bid was not a joint actor with the offeror in respect of the bid, and the offeror must disclose in its bid which of the shares it holds would be required to be excluded from a vote.
The petitioner argued that Stornoway and Rio were joint actors. In support, the petitioner first pointed to the hard lock-up agreement between the parties. The court noted that one might presume that a shareholder bound by such agreement is acting jointly with the offeror; however, such a view might "stifle enthusiasm for takeover bids" by preventing the completion of second-step transactions. Lock-up agreements may serve a useful purpose for offerors, and section 1.1 of Rule 61-501 expressly exempts lock-up agreements as indicia of joint actorship. Thus, Rio and Stornoway could not be said to be joint actors solely upon this basis.
The petitioner also argued that Rio was a joint actor on the basis that it was an "associate" of Stornoway’s. The OSA defines "associate" to include a company of which a person beneficially owns more than 10% of its voting securities. In this case, the petitioner argued that Rio ultimately acquired approximately 17% of Stornoway’s shares pursuant to the bid, and thus ought to have been deemed to have beneficially owned such shares at the time of the bid. The court disagreed. The court held that the number of shares acquired by Rio in the bid was indeterminate until the time of the bid’s expiration, since it depended on the number of other shareholders that tendered into the bid. Consequently, at the time of the bid, Rio could not be said to have been a beneficial owner of these shares.
Finally, the petitioner argued that Rio was a joint actor on the basis that its fortunes had become inextricably linked to Stornoway’s wellbeing as a result of the substantial number of Stornoway shares that Rio would receive pursuant to the bid. The court summarily rejected this argument on the basis that Rio clearly preferred to receive cash instead of shares, and that Rio could simply liquidate its shares in Stornoway on the open market.
As a result, the court concluded that Stornoway and Rio were not joint actors within the meaning of Rule 61-501. As a result, Stornoway was entitled to vote the Rio shares on the amalgamation proposal. The court also held that, contrary to the arguments of the petitioner, Stornoway did not make any misrepresentations in its bid circular that disentitled it to vote the shares held by other tendering shareholders. As such, all of these shares were properly included in the vote, and the minority approval process complied with the provisions of Rule 61-501.
Whether the Amalgamation was Oppressive
The third and final issue was whether the combined actions of Ashton, Rio and Stornoway were oppressive under section 241 of the CBCA. In light of the court’s conclusions above, it was of the view that all of these entities acted blamelessly, and hence there was no ground for a finding of oppression.
The court went on to note, in obiter, that even if it had found oppression, it would have declined to grant a declaration in the petitioner’s favour. The petitioner must have known that to undo the amalgamation after the event would be "extremely difficult and disruptive". The petitioner had been aware of remedies potentially available to him prior to the amalgamation, but he chose not to act at that time. Furthermore, the petitioner’s aim was merely to increase the amount of consideration he received for his shares. The petitioner was fully able to invoke the dissent provisions under the CBCA and attempt to claim additional compensation by that route. There was no need to undo the amalgamation and generate widespread uncertainty among the investing public in order to remedy one shareholder’s desire for greater consideration.
Before: Rogers J.