Reasons for Decision: In the Matter of Ivanhoe III Inc. and Cambridge Shopping Centres Limited
R.S.O. 1990, c. S.5, AS AMENDED
and
IN THE MATTER OF
IVANHOE III INC. and CAMBRIDGE SHOPPING CENTRES LIMITED
Hearing: January 19, 1999
Panel:
| John A. Geller, Q.C. | - | Vice-Chair |
| Helen M. Meyer | - | Commissioner |
| Derek Brown | - | Commissioner |
Counsel:
| Paul Steep | - | For Ivanhoe III Inc. |
| David Armstrong | ||
| Daniel Benay | ||
| Rene Sorell |
| John Lorne McDougall, Q.C. | - | For Cambridge Shopping Centres Limited |
| Robert Dickson | ||
| Richard Scott | ||
| Christine Dube |
| William Orr | - | For the Special Committee ofthe Board of Directors ofCambridge Shopping CentresLimited |
<><>Janet Holmes
| Jay Naster | - | For the Staff of the Ontario Securities Commission |
| Stan Magidson | ||
| Richard Proulx | - | For the Staff of the Commission des valeurs mobilières du Québec |
| Benoit Dionne | ||
| Alfred Buggé |
Background
Ivanhoe III Inc. ("Ivanhoe") is a Quebec corporation owned by six Canadian pension funds.Its largest shareholder is Caisse de dépôt et placement du Quebéc.
Cambridge Shopping Centres Limited ("Cambridge") is an Ontario corporation and areporting issuer or equivalent under the Securities Act and in the other provinces ofCanada. As at December 11, 1998, Cambridge had 62,531,992 common shares("Shares") and 4,422,727 second preferred shares issued and outstanding. The Sharesare listed on The Toronto Stock Exchange and the Montreal Exchange.
Ivanhoe and its affiliates have been shareholders of Cambridge since 1989. Since thattime, Ivanhoe has gradually increased its holdings of Shares through normal course stockexchange purchases. At the time of the hearing, Ivanhoe, its affiliates and associatesowned 27,324,861 Shares, representing approximately 43% of the outstanding Shares onan undiluted basis and approximately 35% on a partially diluted basis. Ivanhoe also held$60,000,000 aggregate principle amount of convertible debentures of Cambridge dueMarch 11, 2004, $15,200,000 aggregate principal amount of convertible debentures ofCambridge due March 11, 2004 and $2,600,000 aggregate principal amount of convertibledebentures of Cambridge due June 30, 2007.
The next largest shareholder of Cambridge is the Canadian National Railways PensionTrust Fund (the "CN Fund"), holding approximately 17% of the outstanding Shares on anundiluted basis, and approximately 19% on a partially diluted basis.
On October 30, 1998, Ivanhoe informed Cambridge of its intention to make a take-over bidfor up to 15,000,000 Shares at the price of $12.50 per Share, the offer not beingconditional on any minimum number of shares being tendered. Ivanhoe asked Cambridgeto have its board promptly establish a committee of independent directors to mandate aqualified and independent valuator to prepare a formal valuation of the Shares inaccordance with the requirements of Policy 9.1 of the Commission and Policy Q-27 of theCommission des valeurs mobilières du Québec (the "Quebec Commission").
Ivanhoe publicly announced its intention to make the takeover bid on the same date.
On November 3, 1998, Cambridge announced that it had formed a special committee ofits board of directors (the "Special Committee") and would appoint a valuator to conducta formal valuation of the Shares. The members of the Special Committee were T. IainRonald ("Ronald"), as Chairman, David S. R. Leighton, J. Blair MacAulay and TullioCedraschi ("Cedraschi"). Cedraschi is a nominee of the CN Fund on the Cambridge board.
On November 12, 1998, the Special Committee appointed Morgan Stanley & Co.Incorporated ("Morgan Stanley") to prepare a formal valuation. On December 17, 1998,
Morgan Stanley delivered its formal valuation report to the Special Committee.
On December 14, 1998, Ronald met with René Tremblay, president and chief executiveofficer of Ivanhoe, ("Tremblay") to advise Tremblay of the preliminary valuation range thatMorgan Stanley had arrived at. Ronald expressed two concerns with the proposedIvanhoe offer. Firstly, Ronald advised that the Special Committee felt that the offeringprice should be toward the higher end of the $14.50 to $17 valuation range in thepreliminary valuation. Secondly, the Special Committee felt that the offer should be for allShares not held by Ivanhoe and its affiliates, and not merely for control. Ronald said that,unless Ivanhoe was prepared to meet these conditions, it should not proceed with its offer.Tremblay expressed concern with both of these conditions. Tremblay and Ronaldarranged for Ivanhoe's financial advisers, RBC Dominion Securities Inc. ("DS"), to meetwith Morgan Stanley to review and discuss the latter's approach and calculations. Thismeeting took place on December 15, 1998 and, as a result, Morgan Stanley's finalvaluation range was changed to $14 to $16. DS then asked to be permitted to meet withthe Cambridge board to express DS's views on the valuation. This request was refused,but DS was permitted to meet with the Special Committee on December 17, 1998.
On December 17, 1998, Tremblay advised Ronald that Ivanhoe proposed to go ahead withits offer on the originally contemplated basis.
Also on December 17, 1998, the Special Committee approved Morgan Stanley's valuationreport and decided to (a) recommend it to the Cambridge board, (b) recommend to theboard a shareholders rights plan, and (c) appoint ScotiaMcLeod Inc. ("Scotia McLeod") toprovide financial advice to the Special Committee. At a meeting held on the same date,the Cambridge board accepted the Special Committee's recommendations.
On December 18, 1998, the Cambridge board announced that it had approved theadoption of a shareholders rights plan (the "Plan"), to become effective upon receipt of allnecessary regulatory approvals. The press release announcing the Plan stated that theprime objective was to ensure that the Cambridge board would have sufficient time toproperly consider any proposed take-over bid for that company and to allow time forcompeting bids to emerge.
Ivanhoe's take-over bid (the "Bid") was mailed to holders of Shares on December 23, 1998.The Bid was open for acceptance until 6:00 p.m. (Vancouver time) on January 21, 1999.Ivanhoe's take-over bid circular stated that "The purpose of the Offer is to increase theholdings of the Offeror in Cambridge. The Offeror currently has no other plans forCambridge."
On January 4, 1999, the Cambridge board issued its directors' circular with respect to theBid, recommending against acceptance of the Bid.
The Plan, although adopted by the Cambridge board, has not been presented to theshareholders of Cambridge for approval. By its terms, the Plan expires 60 days after itseffective date, that is on February 15, 1999. In the Plan, the Cambridge board reservedto itself the right to amend the Plan without the approval of any holders of rights issuableunder the Plan or of Shares.
Ivanhoe Application
On December 24, 1998, Ivanhoe applied to the Commission for:
a) a cease trade order pursuant to clause 127(1)2 of the Act with respect to therights proposed to be issued pursuant to the Plan; and
b) an order under clause 127(1)3 of the Act removing the prospectusexemptions in sections 72 of the Act in respect of the distribution of rightsunder the Plan and in respect of the exercise of those rights.
A similar application was made to the Quebec Commission.
Hearing
A joint hearing in respect of Ivanhoe's application was held by the Commission and theQuebec Commission on January 19, 1999.
Mr. Steep, on behalf of Ivanhoe, called two witnesses, Tremblay and Peter Buzzi ("Buzzi")a vice-president and director of DS.
Tremblay described the discussions which had taken place between Ivanhoe andCambridge, the background of the Bid, and other matters. As regards Ivanhoe'swillingness to extend the time for acceptance of the Bid, he said the following.
"We have no intention as of this date to extend this offer and our offer will endJanuary 21st, and the reason is, as I stated before, it is that we have otheropportunities and we have to remove this uncertainty, or an incertitude on thisinvestment, and we have to decide what we will do. I think for the shareholders,too, but for us, too, because we have, as I said, other opportunities, and I don't wantto penalize our relationships with other potential partners that we could have inEurope, for instance."
Buzzi, amongst other things, expressed DS's view that Morgan Stanley's value range wastoo high, and that it was not reasonable to expect other offers to come forward for anumber of reasons, including Ivanhoe's substantial ownership of Shares.
Mr. McDougall, on behalf of Cambridge, also called two witnesses, Ronald and DanielSullivan ("Sullivan"), a deputy chairman and member of the executive committee of ScotiaMcLeod.
Ronald also described the discussions which had taken place between Ivanhoe andCambridge, as well as the reasons for Cambridge's actions, and other matters.
Sullivan described, among other things, the number of confidentiality agreements in placewith other potential bidders, the progress in attempting to achieve other offers for theShares, and the likelihood of such other offers coming forward. Sullivan stated that:
- "we are pleased with the progress that we are making and we think that thereis a reasonable prospect of coming up with other offers"
- "we think that, given the uniqueness of the opportunity there is a reasonablelikelihood that there is going to be another offer or offers" and
- "In my opinion, I think there is a good chance that another offer or offers aregoing to emerge."
Analysis of Issues
The two principal issues which had to be considered by the Commission were:
1. in view of the facts that the Plan had been adopted in the face of the Bid andhad not received shareholder approval, should it be permitted to stand; and
2. if the Plan was permitted to stand, had the time come for it to be terminatedby the Commission.
The general position with respect to a rights plan put into place in the face of a bid andwithout a vote of shareholders was enunciated by the Commission in In the Matter of CWShareholdings Inc. and WIC Western International Communications Ltd. (1998), 21OSCB2899 at p. 2908, where the Commission said the following:
We conclude that the Bid is in no way coercive. Holders of Class B Shares are freeto respond to the Bid if they consider that it is in their best interest to do so, and arealso free to retain their Class B Shares if they would prefer to take their chances onthe future of WIC. There is no change of control as a result of the Bid which wouldalter their position.
The Rights Plan was put into place in the face of the Bid and without a vote ofshareholders. In such circumstances, it is, at the very least, necessary for the targetcompany to demonstrate that it was necessary to do so because of the coercivenature of the Bid or some other very substantial unfairness or impropriety. This wasnot done by WIC in this case.
The Bid would have given Ivanhoe control of Cambridge, but leaving outstanding a verylarge minority position. The Bid was made at a price below the value range for the Sharesestablished by Morgan Stanley in its valuation report.
In its directors' circular, the Cambridge board made the following statement.
"The Offer is "partial bid". A partial bid structure is inherently coercive because itforces shareholders to make a decision as to whether to accept an offer (and inrespect of how many shares), reject such offer, sell into the market or maintain theirposition without knowing whether and to what extent other shareholders will acceptsuch offer and without knowing the price at which the shares will settle after suchoffer. A shareholder may feel compelled to deposit to a take-over bid which theshareholder considers inadequate, out of a concern that in failing to do so, theshareholder may be left with illiquid or minority discounted shares. Informationabout tender and post-bid trading price is obviously material to a shareholder'sinvestment decision since the extent to which any one shareholder can have itsshares purchased at the Offer price, as opposed to sold in the market at the post-bid settled price, depends on the extent to which other shareholders tender theirCommon Shares to the Offer."
In general, we agree with this statement.
In our view, the Bid was coercive since it put pressure on minority shareholders to disposeof whatever shares they could before being locked into a minority position. There was noassurance whatsoever that Ivanhoe would ever bid for the remaining minority shares.
The evidence was that, because of the already large institutional shareholdings inCambridge, the market for Shares was a relatively illiquid one. In our view, if the Bid issuccessful, the market for the shares will likely become an even less liquid one.
Accordingly, what the Commission described in Regal (see below) as the "fear factor" wasin our view likely to exist.
Had we not concluded that the Bid was coercive, we would have immediately cease tradedthe Plan, since we agree with the Commission's determination in WIC that, if a rights planis put into place in the face of a bid and without a vote of shareholders, it is, at the veryleast, necessary for the target company to demonstrate that it was necessary to do sobecause of the coercive nature of the bid or some other very substantial unfairness orimpropriety. We have concluded that the Bid is in fact coercive. In the circumstances, wedo not consider that it would be in the best interest of the holders of Shares toautomatically cease trade the bid because it was put into place in the face of the Bid andwithout a vote of the holders of Shares.
Has the time come?
The issues to be considered in determining whether the time to terminate the Plan hascome were outlined by the Commission in its decision in In the Matter of MDC Corporationand Regal Greetings & Gifts Inc. (1994), 17OSCB 4971 at p. 4979, as follows:
In our view, the question of "has the time come" cannot be answered merely bycounting the number of days which have passed since the announcement of a bid.The number of days, by itself, is not determinative in the absence of convincingevidence that "the interests of the --- shareholders would actually or potentially beharmed" (to quote Lac).
It is true that Jorex teaches that "there comes a time when the pill has to go".However, this is not to say that, once a take-over bid has been made, a shareholderrights plan can have no effect, and that it must automatically be struck down by theCommission so as to allow the bid to proceed at the stated expiry date of theacceptance period of the bid. If there appears to be a real and substantialpossibility that, given a reasonable period of further time, the board of the targetcorporation can increase shareholder choice and maximize shareholder value, then,absent some other compelling reason requiring the termination of the plan in theinterests of shareholders, it seems to us that the Commission should allow the planto function for such further period, so as to allow management and the board tocontinue to fulfil their fiduciary duties.
In our view, our determination of where the public interest lies required us, in thiscase, to consider two principal questions.
1. If the Plan is permitted to remain in effect for a reasonable further period, isthere, on the evidence, a reasonable possibility that a better offer will comealong during the period so that, whether or not this results in MDC raising itsbid, the shareholders of Regal will be advantaged?
2. If the Plan is not terminated prior to the end of the current period for theacceptance of the bid, is it likely that RGG will not extend the period foracceptance for such "reasonable further period", and thus deprive the Regalshareholders of the opportunity to decide whether they wish to accept theRGG bid?
Buzzi attempted to convince us that there was no reasonable possibility that a better offerwould be forthcoming. Tremblay attempted to convince us that Ivanhoe would not extendits offer if we allowed the plan to remain in effect.
On the other hand, Sullivan attempted to convince us that there was in fact a reasonablepossibility that a better offer would come along before February 15, 1999.
We have concluded that there is such a reasonable possibility. We also concluded thatthere was every reason to believe that, if we allowed the Plan to remain in effect for areasonable period of time, Ivanhoe would in fact extend the bid. In these cases biddershave a tendency to try to convince us that their bids will not be extended, but in fact theyalmost always are. (We note that, following the hearing, Ivanhoe did, in fact, extend thetime for acceptance of the Bid.)
Independence of the Special Committee
Mr. Steep, on behalf of Ivanhoe, argued that, because the CN Fund was the next largestshareholder to Ivanhoe in Cambridge, because Ivanhoe had in the past made a higheroffer to the CN Fund for its Shares than that contained in the Bid, and because the CNFund had an advantage not available to other holders of Shares in its representation onthe Cambridge Board, Cedraschi could not be considered an independent director, andaccordingly we should be sceptical of any views expressed on behalf of the SpecialCommittee as to share values or other matters.
We did not find this argument to be convincing. In our view, a representative of asignificant institutional shareholder who nevertheless forms part of the shareholder groupwhose securities are being bid for has, at least in the circumstances of this case, the sameinterest as the other offeree shareholders, and should be considered to be independent.
Bona fides of Special Committee
In In the Matter of Lac Minerals Ltd. and Royal Oak Mines Inc. (1994), 17 OSCB 4963 atp. 4970, the Commission expressed its reluctance to interfere with the board of a targetcompany's ability to carry out its duties under corporate or fiduciary law except to the extentthat it was necessary to do so in the interests of the target company's shareholders. TheCommission said the following:
"Except to the extent that we believed it was appropriate to do so in the interest ofthe Lac shareholders, we were reluctant to interfere with the Lac Board's judgementon the continued use of the Lac Rights Plan, particularly when to do so might relievethem of their duties under corporate or fiduciary law. Our reluctance was influencedby the fact that, unlike in the Canadian Jorex case, the Chairman of the Lac Boardindicated that he expected that they could develop a transaction that would creategreater value to shareholders within a limited period of time.
The Lac Board was charged with fiduciary duties to act in the best interests of thecorporation. If the board were to fail to properly carry out those duties it would beresponsible to the Lac shareholders. Such duties extended to the use of defensivetactics, such as the Lac Rights Plan, in the face of a take-over bid.
The position of the Lac Board was that it was doing what was expected of it underthe Lac Rights Plan and that it was attempting to maximize shareholder value. Wewere satisfied that in this case the Lac Board understood its responsibilities."
Although, in our view, it was improper for Ronald to tell Tremblay that, if Ivanhoe did notmake the offer that the Special Committee wanted, Ivanhoe should not proceed with itsproposed offer, we are satisfied from the evidence that the Special Committee otherwiseunderstood its fiduciary obligations, and was acting in a bona fide attempt to increase thechoices available to the holders of Shares and to maximize shareholder value. Indeed,Tremblay acknowledged as much. When asked whether he would not agree that, in theway they had conducted the process so far, the Special Committee had done what theybelieved to be in the best interests of the Cambridge shareholders as a whole, Tremblayresponded "I agree with you there, in the way that what they believed it was in the best ofinterests, yes."
Decision
Accordingly, at the conclusion of the hearing we announced our decision that the time hadnot yet come and that we were prepared to leave the plan in effect until February 15, 1999.However, we stated that, if the plan remained in effect on February 16, 1999 at thecommencement of business, an order would automatically issue cease trading the plan.
February 19th,1999.
"J. A. Geller" "H. M. Meyer" "David Brown"