In a recent decision of the
In refusing to cease trade
What you need to know
- The bar for cease trading a private placement in the context of outstanding activism or a takeover bid will be high where an issuer can demonstrate that the issuance was primarily designed to address a serious and immediate need for financing.
- A need for financing over a 12-month period can reasonably be seen as "immediate", and the time period over which the need is measured is not restricted to the bid period.
- Demonstrated capital requirements combined with difficulty obtaining financing from alternative sources will support a finding that an issuer has a serious and immediate need for financing. Retaining advisors, providing access to due diligence materials and engaging with regulators will also be viewed favourably.
- Whether or not activism or a takeover bid was reasonably imminent at the time a private placement is planned is relevant to the Tribunal's assessment of whether the transaction was a defensive tactic.
- The disclosure of potential activism or a takeover bid among a range of options will not necessarily be viewed as indicating to the issuer that such actions are reasonably imminent. In addition, where significant time has passed in the absence of a proxy contest or formal takeover bid being launched, an issuer's pursuit of its legitimate need for capital will be given priority over shareholder concerns that the transaction is abusive.
- Applicants seeking to set aside a decision of a self-regulatory organization or stock exchange face a heavy burden.
- whether the private placement would benefit shareholders;
- the extent to which the private placement alters the pre-existing bid dynamics;
- whether the private placement investors are related to the target, or to each other, in such a way as to enable the target's board to summarily reject the bid or a competing bid;
- whether the views of other shareholders should influence the Tribunal's decision; and
- whether the target's board appropriately considered the interplay between the private placement and the bid.
Background
Beginning in early 2023, Mithaq became dissatisfied with
Aimia's governance. To address its dissatisfaction, Mithaq increased its shareholdings and initiated a vote "no" campaign in the lead-up toAimia's April 2023 AGM seeking to bring about change toAimia's board of directors (the Board). The election was very close with the Chair of the Board failing to be re-elected and with none of the other directors receiving more than 52.41% of the votes cast. In response to the refusal byAimia to permit Mithaq to review the 2023 AGM proxies, Mithaq commenced an application to theOntario Superior Court (the Proxy Review Application). In response, inMay 2023 ,Aimia commenced litigation against Mithaq alleging that it was engaged in undisclosed joint actor conduct seeking orders preventing Mithaq from voting itsAimia shares, acquiring additionalAimia shares, or requisitioning a special shareholder meeting. A few weeks later, Mithaq increased its shareholdings inAimia to 30.96%. Mithaq disclosed to both the market andAimia that it was considering a range of options, including both activism and a takeover bid, and that it would challenge any private placement as an improper defensive tactic, citing thatAimia had no need for financing. At the same time,Aimia adopted a shareholder rights plan, without shareholder approval, which it announced was in response to Mithaq's increased shareholdings.On
October 5 , Mithaq Canada made an all-cash offer for all outstanding shares ofAimia at$3.66 per share and sought a declaration from theSuperior Court in its Proxy Review Application that the Board was not elected at the 2023 AGM. OnOctober 13 ,Aimia announced that it intended to complete a private placement to a group of undisclosed investors, and to close the transaction onOctober 19 . The private placement would be for an equal number ofAimia common shares and share purchase warrants with the share price of$3.10 per share (and warrants exercisable at$3.70 ), which together represented 24.9% of the then-outstandingAimia common shares. After theToronto Stock Exchange (TSX) approved the private placement without requiringAimia to obtain shareholder approval, Mithaq Canada sought orders from the CMT cease trading the private placement as a defensive tactic and, in the alternative, reversing the TSX's decision.The CMT decision
The Tribunal confirmed that it has broad, but not unlimited, discretion to intervene to cease trade a private placement implemented as a defensive tactic to a takeover bid. That discretion is informed by the purposes of the Securities Act and its takeover bid provisions, including the protection of the bona fide interests of shareholders of the target company and providing an open and even-handed bid environment. To guide its exercise of discretion in respect of Mithaq Canada's request to cease trade the private placement as a defensive tactic in response to the bid, the Tribunal affirmed the test set out in
Hecla Mining Company (Re).The Hecla test involves two parts. First, the Tribunal considers if the private placement is "clearly not" a defensive tactic designed, in whole or in part, to alter the dynamics of the bid process. If the private placement has a material impact on the bid environment, the burden falls to the issuer at this stage. If the private placement is "clearly not" a defensive tactic, then it will not be cease traded unless some other independent and sufficient reason for it to do so exists. On the other hand, if it cannot be said that the private placement is "clearly not" a defensive tactic, the Tribunal undertakes the second part of the analysis: to balance the corporate objectives of the private placement against facilitating shareholder choice. To resolve this question, a number of factors are considered, including:
Leaving open the possibility that the standard may be refined in a future case, the Tribunal applied the standard from Hecla that it should only block a private placement where there is "a clear abuse of the target shareholders and/or the capital markets".
On the facts before it, the Tribunal determined as follows:
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The private placement did have a material effect on the bid environment, because it posed a serious impact on Mithaq Canada's ability to satisfy the minimum tender condition. In addition, the Tribunal accepted Mithaq Canada's argument that the
$3.70 exercise price of the warrants might discourage other potential bidders forAimia or might even discourage Mithqa Canada from improving its$3.66 /share offer price. Aimia could not demonstrate that the private placement was "clearly not" a defensive tactic. While the primary purpose of the private placement was a good faith, non-defensive business strategy to respond toAimia's demonstrated "serious and immediate" need for financing1, the private placement could also reasonably be seen to have taken on a defensive aspect in response to Mithaq's activism, particularly once the takeover bid was announced onOctober 3, 2023 . The Tribunal further concluded that the private placement was not planned in response to, or in anticipation of, Mithaq Canada's activism or takeover bid because at the time of planning in earlyJune 2023 there was no ongoing proxy contest and a bid was not "reasonably imminent". In Mithaq's disclosure to the market andAimia that activism and a takeover bid forAimia were among a range of possibilities being considered, the bid was only "one among a range of options" Mithaq was considering at the time. In addition, Mithaq's activism and pursuit of litigation regarding the 2023 AGM results were not viewed by the Tribunal as equivalent to an ongoing proxy contest, and no bid was formally commenced for several months after the possibility of a bid was first disclosed by Mithaq. As a result, the Tribunal determined it would be unreasonable to preventAimia from pursuing financing options in the intervening time period. On the other hand, the Tribunal also concluded that although the private placement was "part of a good faith, non-defensive business strategy" when planned in earlyJune 2023 as Mithaq's activism continued,Aimia relied on the private placement to help resist that activism. As a result, the Tribunal concluded thatAimia had failed to establish that the private placement was "clearly not" a defensive tactic.- On balancing the corporate objectives served by the private placement against the facilitation of shareholder choice, the Tribunal concluded that the private placement was not a "clear abuse" of
Aimia shareholders or the capital markets. The Tribunal found that the private placement would benefit shareholders even though it was dilutive and priced at a discount because the issuance of shares helpedAimia meet its serious and immediate need for financing. Further, while the Tribunal accepted Mithaq Canada's position that the private placement materially interfered with Mithaq's ability to achieve the minimum tender condition, and thus lessened the likelihood that the bid would succeed, that impact was "overwhelmed" by the fact that almost all steps in planning the private placement preceded the announcement of the bid. - Of note, on balancing corporate objectives and shareholder choice, the Tribunal determined that no deference was owed to the evaluation and work undertaken by the Special Committee of
Aimia's board as a result of deficiencies in its governance processes. In particular, the Special Committee did not appear to have considered the extent to which the private placement might affect shareholder choice in respect of the bid or whether there were ways to amend the private placement to make it more compatible with the bid (or an improved Mithaq Canada bid or competing bid). Nevertheless, these deficiencies coupled with the impact that the private placement had on the bid dynamics were insufficient to outweigh the benefit the private placement presented toAimia shareholders in the form of financing.
The Tribunal also rejected Mithaq Canada's position that the Board's pattern of entrenchment, including its litigation against Mithaq, its refusal to permit the proxy review, and its adoption of a shareholder rights plan (without shareholder approval), was material to the Tribunal's assessment. In particular, the Tribunal was not prepared to assess the private placement as a defensive tactic in response to Mithaq's efforts to achieve a change of control through the Proxy Review Application. In reliance on the
In connection with Mithaq's alternative relief asking the CMT to set aside the TSX decision, the Tribunal confirmed that applicants face a heavy burden in seeking to set aside a TSX Listing Committee decision not to require shareholder approval of a share issuance. While a finding that a private placement is not an improper defensive tactic does not necessarily preclude the Tribunal from setting aside a decision of the TSX, the Tribunal will generally adopt a restrained approach when asked to interfere with such a decision. In this case, the Tribunal concluded that the TSX Listing Committee had sufficiently considered the applicable legal principles. There was also no new and compelling evidence to justify the Tribunal's intervention. While the TSX had not considered the fact that the private placement investors had decided not to tender to Mithaq Canada's bid (as disclosed in
Finally, the Tribunal refused
Footnote
1. On this point, the Tribunal clarified that "immediate" in this context does not mean "urgent" and could be met with evidence of an existing (and not speculative) financial need over a period of 12 months, for example.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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