Law Times

PAGE 10 FOCUS January 25, 2010 • Law Times Shareholders must approve share issuances: TSX BY JULIUS MELNITZER For Law Times O n Dec. 1, the Toronto Stock Exchange re- placed its discretion- ary rule requiring shareholder approval in the mergers-and- acquisitions context for a dilu- tive share issuance that "mate- rially aff ected" a purchaser's control. Th e new rule is a bright- line test that requires approval when a purchaser issues shares representing dilution in excess of 25 per cent. "Th e movement is in the right direction because the palatability of an increase in capital that signifi cantly aff ects the stake of existing sharehold- ers is defi nitely the kind of de- cision that cries out for share- holder approval," says Philip Anisman, a Toronto securities lawyer. "While the TSX is one of the last jurisdictions to im- plement a mandatory rule, the New York Stock Exchange, for after the fact," he says. "Th at's consistent with similar require- ments internationally." Th ere's little doubt, however, that the new rule will change business dynamics. "It's hard to predict the de- The new rule creates administra- tive burdens that may lead some buyers to reconsider a decision to purchase, says Kevin Thomson. example, has had a bright-line approach since the '60s." Anisman also says the 25-per-cent threshold is appro- priate. "Twenty-fi ve per cent prior to distribution is 20 per cent gree of impact that the change will have," says Ralph Shay of Fraser Milner Casgrain LLP. "But there will almost cer- tainly be a decrease in share- exchange off ers." In other words, while a bright-line test increases regu- latory certainty, it diminishes deal certainty for substantial share-exchange off ers, which by defi nition will now require approval by the purchaser as well as the target. From the buyer's perspective, that's just one more obstacle to closing a share-exchange bid. Th e need for a vote also in- creases the administrative bur- den involved in a transaction. "Th e 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 volumi- nous 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," says Kevin Th omson of Da- vies Ward Phillips & Vineberg LLP. "Th ere's also going to be a concern on the target's part that the acquirer will put itself in play by having a sharehold- ers' meeting, which is precisely the kind of opportunity inter- lopers are looking for." Th omson posits a situation where a delay created by the need for signifi cant regulatory approval is considerably pro- tracted by the mechanics and legalities involved in holding a shareholders' meeting. "What if there's a change in the business of the acquir- er over which the target has no control?" Th omson asks. "Th at could radically alter the willingness of the acquirer's shareholders to approve the deal, leaving the target com- pany 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 share- holder vote and one that does not, which off er would you ac- cept?" Th e upshot, Th omson says, is that companies bidding in a competitive market that are re- quired to obtain such approval will have to off er a price that is substantially higher than they might otherwise put forward. "A mandatory rule promotes 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 transac- tions that will be structured to avoid this requirement." Of course, more cash means more debt. "Th at's a critical component Starting from $62.50 per month More value for your money! Cases that you can't find anywhere else can be found in BestCase, a new web-based research service from Canada Law Book, containing: • Comprehensive collection of reported and unreported decisions dating back to 1898 and including: • Canadian Criminal Cases – since 1898 • Dominion Law Reports – since 1912 • Labour Arbitration Cases – since 1948 ... plus others! • Renowned case summaries • Case citator eREPORTS included at no extra charge ... continuing legal education delivered to your desktop! BestCase subscribers can now receive our eREPORTS – electronic versions of "paper parts" of our law reports. Emailed to you, the eREPORTS link from the subject index to the full reported judgment (including headnote). No more photocopying required to get copies of decisions exactly as they appear in a law report! 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To be sure, Canadian compa- nies will have lost an important tactical advantage as the price of conformity to international norms. But a review of the man- datory rule's evolution in Ontario reveals a history of consultation and discussion by regulators. It all began in 2007, when the TSX published a proposed amendment requiring approval by shareholders of a company that issued securities as the pur- chase price for an acquisition in which the off ering amount- ed to a dilution exceeding 50 per cent. Th e proposal went nowhere, however, largely be- cause stakeholders responded Contact your Account Manager today! 1.800.263.2037 Canada Law Book is a Division of The Cartwright Group Ltd. Bestcase-reduce costs (LT 1-2x4).indd 1 www.lawtimesnews.com with widely divergent views. In April 2009, it resurfaced, almost certainly in reaction to the Ontario Securities Com- mission's ruling in January in the HudBay Minerals Inc. pro- posal to buy Lundin Mining Corp. Th e OSC ruling gave HudBay's shareholders the right to vote on the company's proposed acquisition of Lun- din after the TSX had refused to exercise its discretion and order a vote. "Before HudBay, most prac- titioners would have been con- fi dent that the TSX would not order a vote if the dilution was less than 100 per cent," Th om- son says. Th e dynamics, then, have LT0125 1/20/10 9:46:35 AM certainly changed. LT

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• Leader Passes Away
• Traffic Woes
• Focus On Mergers and Acquisitions