Overview
On March 11, 2024, the Capital Markets Tribunal of the Ontario
Securities Commission (the “Tribunal“)
delivered the written reasons for its December 14, 2023 ruling,
wherein it dismissed the application and cross-application by
Mithaq Canada Inc. (“Mithaq“) and Aimia
Inc. (“Aimia“), respectively, seeking
various relief which arose as part of their ongoing conflict marked
by a proxy battle, unsolicited take-over bid and other
disputes.
Mithaq sought to cease trade Aimia’s private placement
completed in October 2023 (the “Private
Placement“). Mithaq contended that the Private
Placement constituted an improper defensive measure aimed at
hindering Mithaq’s unsolicited take-over bid for Aimia (the
“Mithaq Bid“). Additionally, Mithaq
sought the Tribunal’s intervention to annul the Toronto Stock
Exchange’s (“TSX“) decision
approving the Private Placement without the need for Aimia to
obtain shareholder approval. Aimia brought a cross-application
asking that Mithaq be prevented from relying on an exemption that
permits a bidder to acquire up to 5% of the target’s shares in
the course of a take-over bid if certain conditions are met (the
“5% Exemption“).
The decision provides additional guidance on the circumstances
when a dilutive share issuance can proceed in the face of an
unsolicited take-over bid and reemphasizes the Tribunal’s view
that, other than in exceptional circumstances or where there is
abusive or improper conduct, it must be cautious in granting relief
that alters the carefully calibrated take-over bid regime under
National Instrument 62-104 – Take-Over Bids and Issuer
Bids (“NI 62-104“).
Background
On September 15, 2023, Aimia requested conditional approval of
the TSX for the Private Placement, which approval was provided on
September 28, 2023. Thereafter, on October 5, 2023, Mithaq launched
the Mithaq Bid, which was an all-cash offer to acquire all of the
outstanding common shares of Aimia which it did not own. The Mithaq
Bid was evaluated by Aimia through a Special Committee of the board
formed on October 10, 2023. On October 11, 2023, the TSX maintained
its earlier decision to conditionally approve the Private Placement
but required that Aimia give advance notice to the market (the
“TSX Decision“). On October 13, 2023,
Aimia announced its intention to complete the Private Placement
with undisclosed (but arm’s length) investors, scheduled to
close on October 19, 2023.
The Private Placement involved issuing up to 10,475,000 Aimia
common shares and an equal number of common share purchase
warrants. The investor group could also potentially secure up to
three of the eight board seats. If fully subscribed and all
warrants were exercised, the issued shares would constitute 24.89%
of the then-outstanding common shares of Aimia. The Private
Placement aimed to raise up to $32.5 million in gross proceeds and
was intended for funding Aimia’s operations over the next 12 to
24 months and supporting its strategic investment plan and other
contingencies. Following Aimia’s announcement, Mithaq initiated
legal proceedings against Aimia before the Tribunal, and Aimia made
a cross-application.
When Private Placements could be blocked
In Hecla Mining Company (Re)
(“Hecla“), the Tribunal, in
considering a private placement in the face of an unsolicited bid,
established that a private placement should only be blocked in
cases of “clear abuse of the target shareholders and/or the
capital markets.” This ruling introduced a two-stage test for
assessing whether a private placement is a defensive tactic in
response to a take-over bid:
- First, the panel determines if the private placement is
“clearly not” a defensive tactic aimed at whole or in
part at altering the dynamics of the bid process. If not, the
guidelines outlined in National Policy 62-202 – Take-Over
Bids – Defensive Tactics (“NP
62-202“) do not apply, and the Tribunal will not halt
the private placement unless other valid reasons exist. If
uncertainty remains, the analysis progresses to the second
stage. - Second, the Tribunal weighs the corporate objectives behind the
private placement against the promotion of shareholder choice,
considering various factors to strike a balance.
The Tribunal noted that the “clearly abusive” standard
predated the 1994 amendments to the Securities Act
(“Act“), which added investor protection
against “unfair” practices and the promotion of
“fair” capital markets as purposes of the Act. The
Tribunal seemingly encouraged the possibility of revising this
standard in future proceedings.
Assessment of Defensive Tactics
In assessing whether the Private Placement was a defensive
tactic, the Tribunal considered several factors, beginning with the
burden of proof and the materiality of the placement’s impact
on the Mithaq Bid. Some of the key points from the Tribunal’s
reasons are discussed below.
1. Burden of Proof and Materiality
Although the applicant typically bears the burden of
establishing elements of whether a private placement has been used
as a defensive tool, the onus may shift to the opposite party where
the private placement’s impact on the existing bid environment
was material. In the present case, the Tribunal concluded that the
Private Placement’s impact on the Mithaq Bid’s success was
material. As a result of the Private Placement, the number of
shares needed to be tendered to satisfy the statutory minimum
tender condition would increase from approximately 29 million to
approximately 34.3 million (an 18.28% increase). If the Private
Placement investors abstained from tendering, Mithaq would need 59%
of all remaining Aimia shares tendered to meet the condition.
Additionally, the Tribunal acknowledged the material impact on
potential competing bids, as highlighted by Mithaq’s concern
regarding the warrants’ exercise price being four cents higher
than its offer price. Consequently, the onus shifted to Aimia to
prove that the Private Placement was not a defensive tactic.
2. Aimia’s Defense – Application of the different
stages of the Hecla test
Stage – 1: Aimia was unable to show
that the Private Placement was ‘clearly
not‘ a defensive tactic.
Based on the Hecla test, the Tribunal considered the
following three relevant factors for stage one of the test, each of
which alone could be determinative:
- Was the Private Placement designed to respond to
Aimia’s serious and immediate need for financing? Yes.
The Tribunal clarified that the word “immediate” does not
necessarily imply urgency. Instead, “it does imply that the
need currently exists, as opposed to being speculative.” The
Tribunal found that the Private Placement was designed primarily to
meet Aimia’s serious and immediate need for financing. The
Tribunal observed that Aimia had failed to secure other debt
financing options for itself due to the challenging market
conditions. As an investment business, Aimia purchases interests in
other companies and thus requires a cash surplus to invest in
suitable opportunities. This, coupled with Aimia’s projected
growing deficits of $18.7 million and $43.5 million by the end of
2024 and 2025, justified a finding of a serious and immediate need
for financing. - Was the Private Placement planned or modified in
response to, or in anticipation of, a take-over bid? No.
According to NP 62-202, an indicator of whether Aimia took any
steps “in anticipation of” a bid would be whether
Aimia’s board had “reason to believe that a bid might be
imminent.” Here, the Tribunal clarified that a bid is
“imminent” when there is likelihood that a specific bid
will materialize without having a threshold that would be too low
to stall a company’s effort to raise capital. Further, the
Tribunal considered the timing of Aimia’s initiation of the
planning process for the Private Placement, which was much prior to
the announcement of the Mithaq Bid, and noted that there was no
indication of any impending take-over bids during this period.
Mithaq had noted that it had specifically warned Aimia that a bid
was possible, and that any private placement would be viewed as a
defensive tactic. The Tribunal was not inclined to weigh that
factor in favour of Mithaq in light of the four-month time period
that had elapsed between such warning and the initiation of the
bid. - Was the Private Placement part of a good faith,
non-defensive, business strategy? Yes. The Tribunal found
that the Private Placement directly responded to Aimia’s
serious and immediate need for financing. It also noted that the
Private Placement supported Aimia’s strategy to strengthen its
board as the investment group involved would potentially secure up
to three of the eight board seats. While the Tribunal did not
conclude that the Private Placement was primarily designed as a
defensive measure, it noted that once the bid was announced, the
Private Placement took on a more defensive character. Accordingly,
the Tribunal found that the Private Placement could not be
considered as “clearly not” a defensive
tactic.
As Aimia was unable to discharge its onus of proving that the
Private Placement was “clearly not” a
defensive tactic, the Tribunal proceeded to the second stage of the
Hecla analysis.
Stage 2: The Private Placement was not
Clearly Abusive.
The Tribunal applied principles from NP 62-202 to determine
whether to cease trade the Private Placement. Specifically, the
Tribunal considered whether the Private Placement was “clearly
abusive” by examining five factors: (i) the benefit to
shareholders, (ii) the effect on bid dynamics, (iii) the
relationship between Aimia and the Private Placement investors,
(iv) the views of shareholders, and (v) the board’s
consideration of the interplay between the Private Placement and
the Mithaq Bid.
Despite its effect on bid dynamics, and the fact that the
Tribunal took issue with the Aimia Special Committee’s process,
and the board’s process, with respect to their consideration of
the interplay between the Private Placement and the Mithaq Bid, the
Tribunal determined that this was outweighed by the placement’s
benefits to Aimia’s shareholders and the fact that almost every
step involved in the Private Placement preceded the Mithaq Bid.
Therefore, Mithaq failed to demonstrate that the Private Placement
was abusive, let alone clearly abusive.
The Tribunal also concluded that absent the Hecla test,
it was not persuaded that the circumstances surrounding the Private
Placement were sufficient to justify the exercise of its public
interest jurisdiction to cease trade the Private Placement.
Deference to the TSX Decision
In considering Mithaq’s request to set aside the TSX
Decision, the Tribunal noted that it maintained rigorous
intervention criteria for such matters, intervening only when
certain criteria are met, including procedural errors, overlooked
material evidence, new and compelling evidence presented to the
Tribunal that was not presented to the decision maker, or the
Tribunal’s perception of the public interest conflicts with
that of the decision maker. The Tribunal found no errors in
principle and little to criticize about the process undertaken by
the TSX or the TSX Decision, and concluded that Mithaq had failed
to meet the heavy burden imposed on it.
Refusal of Relief Relating to the Minimum Tender Condition
The Tribunal dismissed Mithaq’s request to exclude shares
issued pursuant to the Private Placement from the minimum tender
condition calculation contained in NI 62-104. Citing the need for
predictability and caution in modifying bid frameworks, it
emphasized that such relief should only be granted in exceptional
circumstances or as a result of abusive or improper conduct that
undermined minority shareholder choice. The Tribunal found that the
Private Placement did not deny shareholders the opportunity to
tender. Interestingly, the Tribunal made no reference to the
Alberta Securities Commission decision in Re Bison Acquisition
Corp., 2021 ABASC 18, which is the only other decision that
has addressed this issue and held that the minimum tender condition
could be modified in the circumstances before that tribunal.
Refusal of Relief Relating to the 5% Exemption
Aimia’s attempt to deny Mithaq the ability to purchase up to
5% of the issued and outstanding shares of Aimia during the course
of its bid as permitted under NI 62-104 was rejected by the
Tribunal. Aimia argued that Mithaq was using the highly-conditional
Mithaq Bid as a shield to access the 5% Exemption and acquire a
negative control position over Aimia and that the Mithaq Bid was
not made in good faith. Following adjustments to certain conditions
to the Mithaq Bid, the Tribunal held that the Mithaq Bid was not so
conditional that it cannot be considered to have been made in good
faith. The Tribunal also held that if Mithaq does not exercise its
discretion regarding the conditions in a reasonable manner, there
was the prospect of regulatory intervention. As a result, the
Tribunal saw no public interest issue in Mithaq having access to
the 5% Exemption.
Observations
The decision provides additional guidance, particularly to
issuers when faced with the possibility of an unsolicited take-over
bid at a time when financing may be needed or simply is being
considered. In this regard, we note the following:
- This first application of the two-stage test in Hecla
since that decision highlights the limitations of such test. In the
decision, notwithstanding that the Tribunal found the three
relevant factors in the first stage of the test in favour of Aimia,
the Tribunal proceeded to the second stage of the test, where much
of the analysis appeared to be underpinned by the findings in the
first stage. A singular, broader contextual analysis may well be
more appropriate. - In examining whether a financing can withstand an application
for a cease trade order if done in the face of an unsolicited
take-over bid, the key factors appear to be that the financing
needs to have a clear business purpose and the key steps involved
in the financing precedes the initiation or announcement of the
bid. - Prospective bidders cannot seek comfort in simply issuing a
warning that a take-over bid may be undertaken. Such warnings must
be timely, or they may simply be viewed by a securities regulator
as tactical. - Bidders face a heavy burden in seeking to overturn a decision
of the TSX to approve a private placement without shareholder
approval.
Finally, consistent with its decision in Aurora Cannabis Inc
(Re), 2018 ONSEC 10, the Tribunal once again noted that, at
least in Ontario, it will be difficult for applicants to seek
relief that serves to amend or alter the take-over bid regime under
NI 62-104.
The foregoing provides only an overview and does not
constitute legal advice. Readers are cautioned against making any
decisions based on this material alone. Rather, specific legal
advice should be obtained.
© McMillan LLP 2024
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