Significant Legal Developments in the Canadian M&A Market Presentation... · Green Mountain Coffee...

Significant Legal Developments in the Canadian M&A Market

March 31, 2011

The Goodmans Team

Jonathan Feldman 416.597.4237 [email protected] Kari MacKay 416.597.6282 [email protected] Michael Partridge 416.597.5498 [email protected]

Contents

Tab

Mergers & Acquisitions .............................................................................. 1

Corporate Finance and Securities .............................................................. 1 Presentation .............................................................................................. 2

Significant Legal Developments in the Canadian M&A Market

Client Communications .............................................................................. 3

Changes to the Regulatory Framework for Insider Reporting U.S. Steel: Federal Court Upholds the Constitutionality of Section 40 of the Investment Canada Act Magna - The OSC Decision OSC Spider Decision Muddies the Waters for Rights Plans Supplemental Disclosure of Magna OSC Releases Decision in Melnyk Case Baffinland - The End of the Auction Generally Means the Time has Come for a Pill to Go Directors' and Officers' Liability Insurance Policies - A Checklist of Matters to Consider

Bios ........................................................................................................... 4

Jonathan Feldman

Kari MacKay

Michael Partridge

goodmans.ca

Mergers and Acquisitions Goodmans is widely recognized as one of Canada’s pre-eminent business law firms, offering market-leading expertise in mergers and acquisitions, corporate and transaction finance, corporate governance, tax planning, litigation and other business related specialities. Founded in 1917, Goodmans has offices in Toronto and Vancouver with over 200 lawyers.

The key legal surveys of clients and peers consistently rank Goodmans’ lawyers as top tier: Goodmans was named Canada’s “National Law Firm of the Year” by International Financial Law Review in each of the last two years.

ACQ Finance Magazine named Goodmans Canada’s Law Firm of the Year in M&A and Capital Markets last year.

The Best Lawyers in Canada ranks 54 Goodmans lawyers and Chambers Global’s Guide to the World’s Leading Lawyers ranks 46 individual Goodmans lawyers among Canada’s finest.

Goodmans is well known for the strength of its M&A practice and, according to industry surveys, Goodmans has more leading M&A lawyers than any other Canadian law firm. Our approach to M&A is characterized by creativity, responsiveness, energy, professionalism and passion for achieving our clients’ objectives. We tend to be results-oriented, providing practical advice and effective solutions.

We regularly advise management and other acquirers, as well as boards, special committees and target companies on a broad range of domestic and cross-border M&A deals, including management and leveraged buyouts, business combinations, take-over bids, proxy contests, recapitalizations, spin-offs, and other strategic transactions. We have represented clients involved in every aspect of a deal - acquirors, targets, special committees, borrowers and issuers, underwriters, investors.. A number of our lawyers have served as senior officials in key regulatory agencies and we are frequently called upon to advise on matters of legislative policy and assist in drafting proposed legislation and regulatory instruments. Our transactions often involve delicate multi-party negotiations and complex multi-jurisdictional issues and we have extensive experience in ensuring that these matters are addressed sensitively and pro-actively in the most efficient manner possible. Above all, we maintain a total commitment to our clients’ goals and a sharp focus on the issues and nuances particular to each situation, enabling our team to respond quickly and effectively to the challenges of each transaction we are involved in , regardless of size.

Representative Work

Some of the recent M&A transactions we have acted on include:

Apax Partners’ $745 million proposed acquisition of Trader Corporation from Yellow Media Inc.

Newmont Mining Corporation’s $2.3 billion proposed acquisition of Fronteer Gold Inc.

Western Coal’s proposed $3.3 billion merger with Walter Energy

Gerdau S.A.’s US$1.6 billion acquisition of Gerdau Ameristeel Corporation

Total S.A.’s $1.5 billion acquisition of UTS Energy Corporation

Four Seasons Hotels Inc.’s US$3.7 billion privatization by Isadore Sharp and his holding company Triples Holdings Limited, Kingdom Hotels International and Cascade Investment, L.L.C.

Hudbay Mineral Inc.’s $530 million acquisition of Norsemont Mining Inc.

The proposed C$51.7 billion acquisition of BCE Inc. by Teachers’ Private Capital, Providence Equity Partners Inc. and Madison Dearborn Partners

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Sirius Canada Inc.’s proposed $520 million merger with Canadian Satellite Radio Holdings Inc.

The $1.1 billion acquisition of the assets and business of Canwest LP and certain of its affiliates, including the shares of National Post Inc. by Postmedia Network Inc.

Green Mountain Coffee Roasters Inc.’s $915 million acquisition of Van Houtte Inc. from an affiliate of Littlejohn & Co.and US$157 million acquisition of Timothy’s Coffees of the World from an affiliate of Sun Capital Partners, Inc.

Cott Corporation’s acquisition of substantially all of the assets and liabilities of Cliffstar Corporation and its affiliated companies for US$500 million

Thompson Creek Metals Company Inc.’s proposed $650 million acquisition of Terrane Metals Corp.

The $22.5 billion merger between Suncor Energy Inc. and Petro-Canada

OJSC MMC Norilsk Nickel’s $6.8 billion acquisition of LionOre Mining International Ltd.

The $239 million acquisition of Menu Foods Limited by Simmons Pet Food, Inc.

OMERS Private Equity’s $231.4 million privitization of Logibec Groupe Informatique Ltée

Canaccord Financial Inc.’s $352.7 million acquisition of Genuity Capital Markets

Vincor International Inc.’s $1.58 billion acquisition by Constellation Wines

GMP Capital Inc. combination of its wealth management business GMP Private Client L.P. with Richardson Partners Financial LimitedMDS Inc.’s sale of its drug discovery and life sciences research unit, MDS Analytical Technologies to Danaher Corporation for US$650 million

Versa Capital Management, Inc.’s privitization and acquisition of Allen-Vanguard Corporation

The Hudson's Bay Company’s $1 billion acquisition by Maple Leaf Heritage Investments Acquisition Corporation

The Special Committee of the Board of Directors of Lions Gate Entertainment Corp. in connection with The Icahn Group’s hostile take-over bid

Parkland Income Fund’s $231 million acquisition of Blue wave Energy from Birch Hill Equity Partners and Blue wave management

Coalcorp Mining Inc’s US$200 million sale of their mining and related infrastructure assets to a subsidiary of The Goldman Sachs Group, Inc.

Keystone North America Inc.’s $290 million acquisition by Service Corporation International

Franco-Nevada Corporation’s $640 million takeover bid for International Royalty Corporation

Newmont Mining Corporation’s US$1.1 billion acquisition of AngloGold Ashanti Australia Limited’s joint venture interest in the Boddingtons Gold Mine Project

The acquisition of the Canadian assets of Waterford, Wedgewood and Royal Dolton by KIPS Capital Partners, LAP

The US$286 million acquisition of Eddie Bauer by Golden Gate Private Equity, Inc.

Revera Inc.’s acquisition of CAPP Investment Board Real Estate Holdings Inc.’s interest in Lifestyle Seniors Housing Portfolio

The $2.65 billion acquisition of Agrium Inc by UAP Holding Corp.

Newmont Mining Corporation’s 1.5 billion acquisition of Miramar Mining Corporation

Onex Corporation’s $960 million acquisition of Husky Injection Molding Systems Ltd

The $414 million sale of Osprey to Quebecor Media Inc to Ontario Teachers’ Pension Plan and Scotia Merchant Capital Corporation

Coeur d'Alene Mines Corporation’s US$1.1 billion concurrent acquisition of Bolnisi Gold NL and Palmarejo Silver and Gold Corporation

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Corporate Finance and Securities Goodmans has an extensive and active corporate finance and securities practice of over 65 lawyers. Our Corporate Finance and Securities Group is a hands-on team of business and legal advisors with a focus on strategy, creativity and results. Our lawyers are known for their flexibility in structuring deals of all sizes, and their professionalism when working with clients’ teams, other advisors, regulators and competitors alike. Our corporate finance and securities lawyers offer seamless planning, advice and execution across all necessary disciplines to effectively complete our clients’ transactions.

The Corporate Finance and Securities Group routinely handles initial and secondary public offerings of all sizes and complexity, private placements, rights offerings, derivative and structured financings, spin-offs, asset securitizations, mutual funds and specialized tax-efficient instruments. Clients include issuers, investment dealers, merchant banks, investors and regulators.

Our group’s advantage lies in its ability to create elegant financing structures with regulatory confidence. Several of our lawyers have held senior positions with principal regulatory agencies across Canada, including the OSC and the TSX. Our clients benefit from the sound regulatory perspective that comes from having former regulators on the team.

Representative Work Newmont Mining Corporation’s US$1.7 billion concurrent offerings of common stock and convertible

senior notes

Ivanhoe Mines Ltd.’s proposed $1.2 billion rights offering

SMART Technologies Inc.’s US$660 million initial public offering

Detour Gold Corporation’s US$500 million senior note offering

SouthGobi Energy Resources Limited’s $459 million equity offering – the first listing of a Canadian mining company on the Hong Kong Stock Exchange

Brookfield Renewable Power Inc.’s $450 million medium-term notes offering

Brookfield Office Properties Corporation’s $300 million preferred share offering

Leisureworld Senior Care Corporation’s $190 million initial public offering

NorthWest Healthcare Properties Real Estate Investment Trust’s $187.5 million initial public offering

RioCan Real Estate Investment Trust’s $149 million offering of units

The Brick Group Income Fund’s recapitalization that included a $120 million debt offering and a $130 million asset-based credit facility with GE Capital as agent and lender

Atlantic Power Corporation’s offering of unsecured debentures

Tricon Capital Group Inc.’s initial public offering

CanWel Building Materials Income Fund’s bought deal private placement of subscription receipts

Wells Fargo Financial Corporation Canada’s $1 billion medium term note offering

Migao Corporation’s common share offering

Rio Can Real Estate Investment Trust’s $111 million offering of units

Brookfield Renewable Power Inc.’s $300 million medium term notes offering

Zungui Haixi Corporation’s initial public offering

Rio Can Real Estate Investment Trust’s $150 million debenture offering

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Brookfield Asset Management Inc.’s $300 million offering of preferred shares and $500 million offering of unsecured notes

Great Lakes Hydro Income Fund’s offering of units

ATS Automation Tooling’s common share offering

Anatolia Minerals Development Limited’s common share offering

OMERS Realty CTT Holdings Inc.’s $170 million debenture offering and OMERS Realty CTT Holdings Two Inc’s $180 million debenture offering

Rio Can Real Estate Investment Trust’s $150 million offering of units

Brookfield Asset Management Inc.’s $275 million preferred share offering

Brookfield Properties Corporation’s $275 million offering of preferred shares

H&R Real Estate Investment Trust’s $230 million offering of Series A and B senior debentures

CI Financial Income Fund’s $210 million offering of units

Newmont Mining Corporation’s US$1.7 billion concurrent offerings of common stock and convertible senior notes

Cott Corporation’s common share offering

Morneau Sobeco Income Fund’s bought deal offering of units

New Flyer Industries’ $102 million bought deal offering of income deposit securities

CML Healthcare Income Fund’s bought deal offering of units

Orbit Garant Drilling Inc.’s initial public offering and secondary offering of common shares

Atlantic Power Corporation’s private placement of income participating securities

Whiterock Real Estate Investment Trust’s offering of trust units

Pinetree Capital Ltd.’s $121 million private placement of units

Crombie Real Estate Investment Trust’s offerings of subscription receipts and convertible unsecured subordinated debentures

Sunrise Senior Living REIT’s offering of income participating securities

Northstar Healthcare Inc.’s $170 million initial public offering of cross-border high dividend common shares

H&R Real Estate Investment Trust’s $224 million bought deal offering of units

InStorage Real Estate Investment Trust’s $105 million bought deal offering of units

EarthFirst Canada Inc.’s $140 million initial public offering

Franco-Nevada Corp.’s $1.1 billion initial public offering

Ontrea Inc.’s private placements of $1.2 billion unsecured debentures

OMERS Realty Corporation’s $600 million debenture offering

Lakeview Real Estate Investment Trust’s offering of senior secured debentures

K-Bro Linen Income Fund’s offering of trust units

IBI Income Fund’s offering of trust units

Significant Legal Developments in

the Canadian M&AMarket

March 31, 2011

Note: This presentation provides only a general overview of subjects covered and is not intended to be taken, or relied upon, as advice regarding any individual situation and should not be relied upon as such.

Speakers

Jon Feldman

Kari MacKay

Michael Partridge

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Topics to be Discussed

• Shareholder rights plans

• Magna International Dual Class Share Collapse

• Investment Canada Act

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Shareholder Rights Plans: Overview

• What is the purpose of a rights plan?

• How does a rights plan work?

• When should a rights plan be implemented?

• What are the implications of recent rights plan decisions?

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Shareholder Rights Plans: Purpose• A rights plan is intended to provide a board of directors

greater opportunity to respond to a hostile take-over bid enabling them to act in the best interests of the company

• Purposes of implementing a rights plan include: Providing additional time to:

Consider any take-over bid and make informed decisions; and

Identify, assess and, if appropriate, pursue alternative initiatives

Ensuring all shareholders are treated fairly: By preventing “creeping” acquisitions; and

By ensuring any control premium is shared by all shareholders

• Rights plans do not generally prevent a take-over bid

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Shareholder Rights Plans: Mechanics• Basic mechanic is to cause substantial dilution to the holdings

of any acquiror that does not comply with the terms of the rights plan

• Rights plans operate through the issuance of rights that: Initially attach to the associated shares and are not exercisable,

Following the trigger of a “separation time” The announcement of an intention to become an “acquiring person” Separate and are exercisable at a substantial premium to the prevailing

market price to discourage rights being exercised before a flip-in event

Following the trigger of a “flip-in event” A person becoming an “acquiring person” Are exercisable by all holders (other than the acquiring person) at a significant

discount to the prevailing market price (the ‘poison’ in the poison pill)

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Shareholder Rights Plans: Mechanics• “Acquiring person” typically means any person who is the

beneficial owner of 20% or more of the outstanding voting securities of the target In general, a person is deemed the “beneficial owner” of any securities

that it (or any of its affiliates, associates or joint actors) has the right to become the owner of within 60 days

Exceptions to the definition of “acquiring person” include: Permitted bid acquisitions – acquisitions subject to a “permitted bid” Exempt or pro rata acquisitions – acquisitions that do not change the

percentage ownership of the person

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Shareholder Rights Plans: Mechanics• “Permitted Bid” typically requires a take-over bid to:

Be made by means of a circular to all shareholders

Be open for 60 days

Contain a majority of minority tender condition

Provide that if the majority of minority tender condition is satisfied, the offeror will make an announcement of that fact and keep the bid open for a further 10 days

• Board discretion is limited in ISS compliant plans Can’t amend, redeem or terminate plan without shareholder approval If Board waives plan for one bid, must waive for all bids

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Shareholder Rights Plans: Implementation• So, when should a rights plan be implemented?

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Possible Advantages Possible Disadvantages

Implement at an AGM“Strategic Plan”

Prevents “creeping” acquisitions to above 20% through exempt market purchases, private acquisitions and “preclusive” lock-up agreements

Provides shareholder approval at time of adoption – consistent with regulatory policy and may influence outcome of a future cease trade application

Longer lifespan (unlike a “Tactical Plan” that must be removed if not approved by shareholders within six months)

Almost inevitably will result in a ISS recommendation to be considered at AGM

May elicit shareholder criticism and otherwise affect the vote on other matters at the AGM if shareholders do not want to limit potential control transactions

If a bid occurs some time removed from the AGM, OSC may discount the weight given to the shareholder vote as an indication of the best interests of shareholders in the context of the bid

Could impede the ability to raise capital

Implement as “Tactical Plan”

Allows plan to be tailored to the situation of a specific bid or potential bid

Removes the focus for debate over the plan at the AGM

Shareholder approval not required for 6 months

Not having plan in effect would allow “creeping” acquisitions

Absence of shareholder approval – unless a special meeting is held before the bid expiry –might increase likelihood of plan being cease traded

Limited lifespan

Shareholder Rights Plans: Recent Developments• Traditional analysis “when, not if” a rights plan should be

cease-traded

• Historically, plans have been cease-traded after 45-60 days Defensive tactics should not deprive shareholders of the ability to

respond to a take-over bid or to a competing bid (NP 62-202)

• In contrast, in the U.S., a target’s board may be able to keep its plan in place indefinitely and “just say no” to the take-over bid The recent decision by the Court of Chancery of the State of Delaware

involving the take-over bid for Airgas by Air Products & Chemicals Inc. has confirmed this different approach

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Shareholder Rights Plans: Recent Developments • Decisions in Pulse Data (2007) and Neo Materials (2009) departed

from traditional approach Permitted rights plans to stay in place

• Key facts in both Pulse Data and Neo Materials Recent and informed overwhelming shareholder approval No evidence of coercion

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Shareholder Rights Plans: Recent Developments • “Back to basics” in 2010

• BCSC majority decision in Lions Gate undercuts Pulse Dataand Neo Materials decisions Revert to “traditional approach” only permitted purpose of a rights

plan is to provide additional time to seek improvements to the bid or pursue alternative transactions

If a plan is not advancing a permitted purpose, it must be removed regardless of shareholder approval

• OSC decision in Baffinland confirms that the traditional poison pill analysis is alive and well in Ontario• If significant time has elapsed since the launch of the bid and alternative

offers have arisen, plan has served its purpose and should go

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• Practical Implications of Recent Decisions Targets

Tactical plans are an acceptable defensive tool when used to afford greater time to respond appropriately

Shareholder approval is relevant but not determinative of whether a plan will be allowed to continue

Shareholder approval should be sought when confident that plan will be approved by a significant majority of independent shareholders before initial expiry date of offer

Bidders Favourable decision at cease-trade hearing will be made more likely if bidder

can demonstrate continuation of plan will decrease shareholder choice –maintain ‘take it or leave it’ position (offer may disappear) or no alternative materializing

Shareholder approval factor may be minimized by setting earliest possible expiry date (ideally before target shareholder meeting date, if applicable)

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Shareholder Rights Plans: Recent Developments

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Magna International• Factual overview

Magna’s historical dual-class capital structure saw Frank Stronachholding approximately 66% of the voting rights with shares that represented less than 1% of the outstanding equity

Stronach was also party to consulting arrangements with floating fees Management of Magna proposed to the Board of Directors a transaction

that would collapse the dual-class structure $300 million cash 9 million new common shares Fixed annual fees on consulting agreement

Board of Directors, on the recommendation of the Special Committee, determined to submit the proposal to Magna’s shareholders, although no recommendation was made and the meeting materials did not contain a fairness opinion

OSC held a hearing and determined the transaction was not “abusive” Ontario court determined transaction to be “fair and reasonable”

Magna International• In a plan of arrangement, in addition to shareholder approval,

the court is required to bless the transaction and determine whether or not the plan of arrangement is “fair and reasonable”

• Recent BCE case held that there are two components to the “fair and reasonable” test: Arrangement has a valid business purpose Objections of the parties whose legal rights are being arranged are

resolved in a fair and balanced way

• Magna decision was first post-BCE case to consider fair and reasonable requirement

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Magna International• The opposing shareholders asserted that:

Because of the uncertain and unquantifiable nature of the potential benefits of the arrangement in contrast to the fixed and assured costs, the court could not make an objective and substantive determination of fairness

The shareholder vote was improperly treated as being determinative of the fairness of the arrangement

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Magna International• Courts clarified that a valid business purpose requires only the

“prospect of clearly identified benefits to the corporation that have a reasonable prospect of being realized if the arrangement is implemented...” In this case, the elimination of Magna’s dual class share structure would

benefit Magna both from a corporate governance and a financial perspective and therefore this test was satisfied

• Court then went on to consider the “fairness” of the transaction and concluded that the test had been met: The outcome of the shareholder vote was a very significant indicator as to

whether or not the plan of arrangement was fair and reasonable (no evidence of coercion or inadequate disclosure)

Fairness opinions and valuations are useful references for shareholders but not required

Other indicia of fairness included positive market reaction, recommendations of market participants (analysts, ISS) and continued presence of a liquid trading market for disgruntled shareholders

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Magna International• Practical implications:

Shareholder support for a plan of arrangement is a key indicator of fairness Courts will be reluctant to interfere with a decision of shareholders provided

that there are no factors that undermine reliability of shareholder vote (i.e., coercion, inadequate disclosure etc.)

For “no recommendation” transactions, enhanced disclosure may be required to ensure shareholders can make an informed decision

For higher profile or more controversial transactions, the OSC may become more actively involved in reviewing shareholder meeting materials

Investment Canada Act• Increased WTO thresholds up to $1 billion (not yet in effect)• Critical piece to application is the business plan

Evidence of “net benefit” Significant undertakings may be negotiated in this context Recently saw action to force U.S. Steel to honour employment

commitments that were provided in connection with Stelco acquisition

• New national security provision may impact deal certainty

• BHP / Potash Only second time a transaction has been blocked Uncertainty over application of “net benefit” test Potential influence of provincial / local stakeholders in review process

• Practice point – make sure Investment Canada Act strategy is considered early in process

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Corporate Securities Law

January 29, 2010

Changes to the RegulatoryFramework for Insider ReportingOn January 22, 2010, the Canadian SecuritiesAdministrators (the CSA) announced changes to theregulatory framework for insider reporting. The newregime, which will come into force on April 30, 2010(possibly later in Ontario), embodies the following keychanges:

• reducing the number of individuals required toinsider report to a core group of “reportinginsiders”;

• accelerating the filing requirement to five calendardays (from the current 10-day reporting require-ment), after a six-month transition period;

• having the reporting requirement give effect to theconversion of convertible securities (in a mannerconsistent with the “early warning” reportingrequirements); and

• simplifying stock-based compensation reportingrequirements, and giving issuers the option to filereports on stock-based compensation on behalf oftheir insiders.

The new rule also clarifies and harmonizes the applica-tion of insider reporting requirements to transactions inderivative securities.

Reducing the Scope of Individuals Required to ReportWhile significant (10%) shareholders, directors and cer-tain specified officers will continue to have insiderreporting obligations, under the new rule not all officerswill have to insider report. Specifically, individuals hold-ing non-specified offices will only have to report if they(i) have access in the ordinary course to undisclosed

material information concerning the reporting issuer,and (ii) directly or indirectly exercise, or have the abilityto exercise, significant power or influence over thebusiness, operations, capital or development of thereporting issuer. (The specified officers include theCEO, CFO, COO, persons with responsibility for prin-cipal business units and individuals with similar func-tions.)

Acceleration of Filing DeadlineEffective October 31, 2010 the deadline for filinginsider reports (other than initial reports) will contractfrom ten calendar days to five. Initial insider reportsmust still be filed within ten calendar days of becominga reporting insider.

Dealing with -Convertible SecuritiesUnder the “early warning” requirements parties areconsidered to beneficially own securities that could beacquired within sixty days on the exercise of convert-ible securities. The new insider reporting rule adoptsthe same framework.

Stock-Based Compensation RequirementsThe new instrument includes two changes intended tosimplify and facilitate reporting of stock based com-pensation.

First, the rule provides a broad definition of “compen-sation arrangements” to ensure consistent applicationof reporting requirements to all types of stock-basedcompensation arrangements, including stock options,stock appreciation rights, phantom shares, restrictedshares or restricted share units, deferred share units,performance units or performance shares, stock divi-dends, warrants, convertible securities, or similar instru-ments, which may be received or purchased as com-pensation for services rendered or in connection withholding an office or employment with a reportingissuer or a subsidiary.

Second, the new instrument allows reporting issuers tofile an issuer grant report with respect to any acquisi-

tion of securities by its directors and officers or by thedirectors or officers of a major subsidiary, pursuant to acompensation arrangement. In such cases, provided thatthe reporting issuer has also previously disclosed theexistence and material terms of the compensationarrangement, the directors and officers who are alsoreporting insiders of the reporting issuer will be exemptfrom the insider reporting requirement and administra-tive efficiencies can be achieved.

Reporting Derivative TransactionsUnder the current regulatory framework the requirementfor an insider to report his, her or its interests in deriva-tives was set forth in a separate instrument, MultilateralInstrument 55-103 Insider Reporting for Certain DerivativeTransactions (Equity Monetization).

The new rule consolidates the insider reporting require-ments, requiring disclosure not only of a reporting insid-er’s securityholdings but also of:

• his, her or its interests in, or rights associated with,related financial instruments involving securities ofthe reporting issuer (a “related financial instrument”includes derivatives and other instruments thataffect the reporting insider’s economic interest insecurities of a reporting issuer or economic expo-sure to a reporting issuer), and

• any other agreement, arrangement or understandingthat has the effect of altering a reporting insider’seconomic exposure to a reporting issuer thatinvolves a security of the reporting issuer or a relat-ed financial instrument.

Effectively reporting insiders are required to disclose alldealings that affect their interests in the reporting issuer.

Notably, the new instrument does not address all con-cerns relating to derivative transactions. For example,economic interests acquired by entities that are notreporting insiders need not be disclosed, notwithstand-ing the extent of such interests. Consequently, aninvestor may be able to acquire a substantial interest in areporting issuer (through derivative arrangements) with-out public disclosure if it does not meet the “significantshareholder” 10% threshold. The CSA has indicatedthat it is continuing to review issues relating to theseconcerns as part of a separate policy initiative.

Consequential Amendments for Passive InstitutionalInvestorsConsequential amendments have been made to therule governing reporting requirements for certainexempt institutional investors (NI 62-103 The EarlyWarning System and Related Take-Over Bid and InsiderReporting Issues). Eligible institutional investors willcontinue to be exempt from the general insider report-ing requirements, and will continue to be required tofile under the early warning or alternative monthlyreporting regimes, provided that in their early warningor alternative monthly reports disclosure is provided ofany positions under related financial instruments andthat any significant change to such positions is report-ed. The amendments define a “significant change” tomean any change in the entity’s interest in, or rights orobligations associated with, the related financial instru-ment that has a similar economic effect to an increaseor decrease in the entity’s securityholding percentage ofvoting or equity securities of the reporting issuer by2.5% or more. (The threshold for a change in materialfact relating to actual securityholdings is 2%.)

To maintain their eligibility for the insider reportingexemption eligible institutional investors must ensurethat their early warning or alternatively monthlyreports disclose their position under related financialinstruments by April 30, 2010.

Please contact any member of the Goodmans corpo-rate securities team to discuss these amendments.

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All Updates are available at www.goodmans.ca. If you would prefer to receive this client Update by e-mail, require additional copies or would like to inform us of a change ofaddress, please e-mail: [email protected]. This Update is intended to provide general comment only and should not be relied upon as legal advice.

© Goodmans LLP, 2010.

Mergers and Acquisitions

June 23, 2010

U.S. Steel: Federal CourtUpholds the Constitutionality ofSection 40 of the InvestmentCanada ActBefore Industry Minister Tony Clement sent a demandletter to United States Steel Corporation (“US Steel”) inMay of 2009, it was unclear how sharp the teeth of theInvestment Canada Act (the “Act”) could be. That demandletter (described in our client communication entitledMinister Clement’s Letter to US Steel) illustrated thegovernment’s resolve. Last week, a decision of theFederal Court upheld the constitutionality of the federalgovernment’s remedial powers under the Act, indicatingthat the teeth may have some bite.

BackgroundIn 2007, US Steel gave certain undertakings to theCanadian government as part of its takeover of StelcoInc. (“Stelco”). Pursuant to the Act, where a non-Canadian proposes to acquire a Canadian business thatmeets or exceeds certain size thresholds, the transactionis subject to review by the Industry Minister (and/or,for certain cultural acquisitions, the Minister ofCanadian Heritage). The acquiror must satisfy the rele-vant Minister(s) “that the investment is likely to be ofnet benefit to Canada.” Often acquirors will be asked toprovide, and will provide, undertakings to bolster thetransaction’s benefits. US Steel’s undertakings addressedconcerns including the protection of Canadian jobs andStelco’s operations in Hamilton.

Statutory FrameworkSection 39 of the Act provides the Minister with thepower to send a demand where the Minister believesthat the non-Canadian acquiror has failed to complywith an undertaking. Section 40 of the Act providesthe Minister with the power, where an acquiror hasfailed to comply with a demand made under Section39, to apply to a superior court for any order that, inthe court’s opinion, the circumstances require, includ-ing, for example, compliance with the undertaking, theimposition of monetary fines or even forced divesti-ture.

US Steel challenged the constitutionality of Section 40on the basis that it violates both the presumption ofinnocence and fair hearing provision of the CanadianCharter of Rights and Freedoms and the fair hearing provi-sion of the Bill of Rights.

Overview of ReasonsWith respect to the Charter, US Steel’s arguments werebased on the premise that an order under s.40 is eitherby its nature a criminal proceeding or involves theimposition of true penal consequences. In short, theFederal Court held that a s.40 proceeding is not by itsnature criminal; in the court’s view, the acquiror is notbeing called to account to the public, as in a criminalprosecution, but rather is “being called to account tothe government for a failure to honour commitmentsmade to the government,” akin to a civil enforcementmechanism. Similarly, the court held that an orderunder s.40, particularly a monetary penalty, is not a“true penal consequence” but is rather a means “topromote and ensure the attainment of the legislativeobjectives.” Significantly, the court held that theamount of an administrative monetary penalty is notdeterminative. Rather, it appears that such penalties,even if potentially very large, do not trigger the consti-tution as long as the legislative regime as a whole meetsthe Charter’s requirements.

With respect to the Bill of Rights, US Steel claimed thatthe procedure provided for under Section 40 of the Actdoes not allow for a fair hearing in accordance with theprinciples of fundamental justice. The court dismissedthese claims on the grounds that, in the context of theAct, an acquiror would be afforded sufficient proceduralprotections to satisfy the principles of fundamental jus-tice.

ConclusionThe Federal Court’s decision remains subject to appeal.However, the decision should provide the governmentwith some confidence that its remedies under the Actare enforceable. The decision should also remind thoseinterested in Canadian acquisitions or mergers that thegovernment is not only willing, but also likely able, toenforce any undertakings.

Please contact any member of the Goodmans M&Ateam to discuss this matter.

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June 30, 2010

Magna - The OSC DecisionThe proposed reorganization of the share capital ofMagna International Inc. – which would result in thecollapse of Magna’s dual class capital structure – hasattracted significant attention due to, among otherthings, the profile of the parties, the premium proposedto be paid to Frank Stronach and related entities to col-lapse a share structure that many institutional sharehold-ers have found objectionable, and the possible implica-tions of the transaction as a precedent for otherCanadian issuers with similar structures.

On June 24, 2010, the Ontario Securities Commission(the “OSC”) released its decision (with reasons to fol-low) in connection with an application by Staff of theOSC to, among other things, cease trade the transactionon the basis that it was in the “public interest” to do soas a result of what Staff believed was insufficient disclo-sure and flaws in the process followed by the Magnaboard of directors.

Magna’s Dual Class Share StructureSince it was founded by Frank Stronach, Magna has hada “dual class capital structure” through which Mr.Stronach and related entities control approximately 66%of the voting rights through a special class of MultipleVoting Shares that represent less than 1% of the out-standing equity. Mr. Stronach, directly and throughassociated entities, also provides services to Magnaunder consulting agreements pursuant to which aggre-gate annual fees are payable of up to $2.3 million plus3% of Magna’s pre-tax profit. In 2007, 2008 and 2009,those fees amounted to $40 million, $10 million and $0,respectively.

This share structure and these consulting agreementshave been the subject of ongoing criticism from vari-ous shareholders over the years and, according tosome, have resulted in a depressed trading price forMagna’s shares.

The Proposed TransactionDiscussions between senior management of Magnaand Mr. Stronach earlier this year resulted in a proposalby management to the Magna board to collapse thedual class share structure and “cap” the paymentsunder the consulting agreements and under which:

• the 776,961 Multiple Voting Shares controlled byMr. Stronach would be repurchased by Magna forconsideration consisting of nine millionSubordinate Voting Shares and $300 million cash –total consideration that Magna valued at $863 mil-lion and that, by some calculations, was about 18times the market value of the Multiple VotingShares,

• the consulting agreements would be extended forfive years with fixed annual fees, and

• Magna’s E-car business would be reorganized andheld through an entity that would be controlled bya Stronach entity through a dual class share struc-ture.

Magna’s board created a special committee of indepen-dent directors to consider the proposal for submissioninitially to Mr. Stronach and, if acceptable to him, toreport to the board as to whether the proposed trans-action should be submitted to Magna shareholdersfor their consideration. The special committeeengaged its own advisors, including CIBC WorldMarkets Inc. as its independent financial advisor andPricewaterhouseCoopers LLP as an independent finan-cial advisor to prepare a valuation of Magna’s E-carbusiness. CIBC was not engaged to, and did not, pro-vide a fairness opinion, adequacy opinion or formalvaluation of the Multiple Voting Shares. However,CIBC did advise the special committee that the repur-chase by Magna of the Multiple Voting Shares on the

proposed terms would result in dilution to the othershareholders of Magna that would be significantlygreater than was the case for other historical transactionsin which dual class share structures were collapsed.

The special committee and, on its recommendation, theMagna board concluded that the proposed transaction –which would be implemented pursuant to a court-approved plan of arrangement, in which the courtwould address the fairness and reasonableness of theapproval – should be submitted to Magna’s shareholdersfor their consideration and approval (including approvalby a majority of the independent holders of theSubordinate Voting Shares).

A special meeting of Magna shareholders was scheduledfor June 28, 2010. The materials for that meeting didnot contain a recommendation by the special committeeor the board or a fairness opinion or copies of thereports prepared by CIBC and PricewaterhouseCoopers.

The ChallengeWhile the trading price of the Subordinate VotingShares moved up after the announcement of the pro-posed transaction, it received mixed reaction from insti-tutional shareholders, with a number of large, Canadianinstitutional investors reacting strongly and vocallyagainst the premium that would be received by Mr.Stronach and related entities.

On June 15, 2010, Staff of the OSC issued a notice ofhearing seeking orders in the “public interest” prevent-ing completion of the proposed transaction and requir-ing enhanced disclosure to shareholders on the basis thatthe transaction would be contrary to the public interestin that:

• the shareholders were being asked to consider thetransaction without a recommendation from theMagna board and the disclosure provided toMagna’s shareholders was insufficient for them tomake an informed decision about the proposedtransaction, and

• the approval and review process followed by theMagna board in negotiating the transaction andproposing it to shareholders was inadequate.

Magna subsequently released additional informationregarding certain aspects of the proposed transaction,including two reports that had been prepared by CIBCand PricewaterhouseCoopers’ valuation of Magna’s E-car business.

The OSC DecisionAfter a two-day hearing, a three-member panel of theOSC determined that the proposed transaction wasnot “abusive” and that it was the shareholders ofMagna that ultimately should decide whether it pro-ceeds.

At the same time, the panel determined that the disclo-sure provided to Magna shareholders was insufficientto permit them to make an informed decision as tohow to vote. The panel noted that the proposed trans-action is complex and constitutes a material relatedparty transaction with no recommendation to share-holders from either the board or the special committeeas to their view of the fairness of the proposed trans-action. As result, the panel expressed concern thatshareholders would be left to their own devices inmaking the decision as to how they will vote. In thiscontext the panel required that, to the extent reason-ably possible, shareholders be provided:

substantially the same information and analysis that theSpecial Committee received in considering and addressingthe legal and business issues raised by the ProposedTransaction. [emphasis added]

The panel also indicated that, in these circumstances,the meeting materials must contain a statement that thedisinterested members of the board or the specialcommittee have concluded that the materials providedisclosure and information sufficient to permit share-holders to make an informed decision as to how tovote on the proposed transaction. The panel orderedthat the transaction not proceed until the disclosurewas augmented and approved by Staff.

The panel did not accept Staff ’s submissions that thecircumstances of the proposed transaction gave rise tothe level of “abuse” that would warrant intervention

2

by the regulator. The panel also noted that, while nei-ther the special committee nor the board was required tomake a recommendation to shareholders:

We have some concerns with the process followed by theBoard, the Special Committee and management in reviewingand deciding to submit the Proposed Transaction toShareholders for approval. We will discuss those issuesin our reasons.

Implications of the DecisionNotwithstanding that the panel’s decision recognizedthat the proposed transaction is “extraordinary” and“unique”, based on past experience it is inevitable thatthe decision will be relied upon as precedent in other cir-cumstances. While its implications will depend signifi-cantly on the reasons that are yet to be written:

• The decision suggests a greater willingness than hasbeen evidenced in the past for the OSC to reviewdisclosure provided in the context of shareholdermeetings.

• The decision suggests that where a board does notprovide a recommendation to shareholders as tohow to vote (or, perhaps, whether to accept a take-over bid), the OSC may require that shareholdershave access to the same information that the boardhad access to in assessing the transaction.

• The disclosure required by the panel, whichalthough qualified by a standard of reasonableness,may have the potential to compromise privilegethat otherwise might attach to advice provided to aboard and committees of a board.

• As it did in connection with its HudBay decision, itappears that the OSC will continue to comment oncorporate governance processes even in situationswhere those processes were found not to warrantintervention by the OSC.

Please contact any member of Goodmans’ CorporateSecurities Group to discuss this decision.

3




July 12, 2010

OSC Spider Decision Muddiesthe Waters for Rights PlansOn July 2, 2010, the Ontario Securities Commissionreleased a decision concerning a challenge to the share-holder rights plan (or "poison pill") of Spider ResourcesInc. Full reasons have not yet been released, and whenthey are they may shed light on the implications of thedecision. For now, parties involved in or consideringengagement in public M&A transactions are left withuncertainty, as the Spider decision is difficult to recon-cile with earlier "poison pill" cases.

Generally speaking, Canadian securities regulators' deci-sions in "poison pill" cases have reflected the view thatshareholder rights plans may be used to ensure that:

• all shareholders are treated fairly in connection withany take-over bid, and

• directors of a target board are provided with suffi-cient time to evaluate unsolicited take-over bids andexplore and develop alternatives to maximize share-holder value.

In simple terms, with notable exceptions, Canadiansecurities regulators have generally permitted sharehold-er rights plans to stand only for so long as the issuer isdeveloping, and/or there is a reasonable prospect that itmay develop, an alternative for shareholders. TheSpider decision may reflect a view of the OSC thatshareholder rights plans will be permitted to stand forother purposes.

BackgroundThe Rights Plan. Spider’s rights plan had been adopted bySpider in May 2009 and approved by Spider’s sharehold-ers in June 2009.

The Initial Cliffs Proposal and Bid. In May 2010 CliffsResources launched a bid, unsupported by the Spiderboard, to acquire all of the outstanding common shares

of Spider for $0.13 cash per share. Cliffs' offer wasopen until 5:00 pm (Eastern Time) on July 6, 2010and contained a number of conditions, including acondition that the Spider rights plan be waived orinvalidated.

The KWG Deal. In response to Cliffs' initial proposal,Spider entered into a combination agreement withKWG Resources Inc. That agreement gave certaincustomary deal protection rights to KWG, including acommitment by Spider not to solicit alternative trans-actions and a right for KWG to match any (unsolicited)superior alternative proposals received by Spider.Spider announced that it would hold the shareholdermeeting to approve the combination on July 8, 2010,two days after Cliffs’ offer was to expire.

Cliffs Increases, KWG Matches. On June 14, Cliffs pro-posed to increase its offer from $0.13 to $0.165 cashper share, subject to certain conditions. The specialcommittee of the Spider board and the board deter-mined that Cliffs’ $0.165 proposal constituted a “supe-rior proposal” under the agreement with KWG, whichtriggered KWG’s five-day matching right. On June 23,KWG agreed to match Cliffs’ proposal for $0.165 perSpider share. As a result, the Spider board informedCliffs that its revised offer of $0.165 per share was nolonger “superior”.

Cliffs Raises Again. On June 25, Cliffs proposed to fur-ther increase its offer to $0.19 cash per share. Thatproposal was determined by the Spider special commit-tee and Spider board to be a “superior proposal”, andKWG had a further matching right that would expireon July 6, 2010 at 12:01 a.m. (Eastern Time).

The DecisionAt the time of the hearing, Cliffs’ offer was scheduledto expire prior to the shareholder meeting to considerthe KWG merger. Unless the Cliffs offer were extend-ed the continued existence of the Spider rights planwould result in a failure of a condition to the “superi-or” Cliffs offer, and therefore possibly deny sharehold-ers the opportunity to accept it.

At the hearing, Cliffs submitted that the Spider rightsplan had accomplished its purpose in allowing for anauction and should be set aside to allow Spider share-

holders to “choose the way forward”. In support of thisargument Cliffs pointed out, among other things, that bythe expiry date of its offer:

• Spider had agreed not to seek out some other trans-action, foreclosing or dramatically reducing the pos-sibility of other bidders emerging, and

• an auction process had occurred, as a result ofwhich Cliffs’ offer premium had increased from62.5% to 106% (and ultimately to 138%).

The OSC decided not to cease trade the Spider rightsplan. The panel indicated that Cliffs’ application waspremature “considering all the circumstances, and in par-ticular, the ongoing auction between Cliffs and KWGfor Spider”.

Historically Canadian securities regulators have generallynot permitted rights plans to survive in the midst of anauction. In Re Falconbridge Limited, Falconbridge wasallowed to keep a shareholder rights plan in place duringan auction for a limited period of time primarily as aresult of the OSC’s concern that failing to do so mightresult in Falconbridge shareholders being faced with apotentially coercive partial bid. Spider’s shareholders didnot face a similar risk.

In this context, it is unclear why Spider shareholdersshould be denied the choice of being able to acceptCliffs’ offer and suggests that a concern other than coer-cion may have driven the decision.

The Outcome for SpiderOn July 2 –after the OSC hearing – KWG informedSpider that KWG would not exercise its matching right,and the Spider board confirmed that Cliffs’ proposal was

“superior”. As a result, Spider terminated its agree-ment with KWG (paying a break fee), cancelled themeeting of Spider shareholders to consider and voteon the combination with KWG and entered into a sup-port agreement with Cliffs.

On July 6, the special committee and the boardannounced that all of the conditions to Cliffs’ offerhad been satisfied or waived. Cliffs then took up theapproximately 316 million common shares of Spiderthat were validly tendered, resulting in Cliffs owningapproximately 52.1% of the Spider shares then out-standing on a fully-diluted basis. Cliffs extended theoffer to 11:59 p.m. (Eastern Time) on July 16, 2010.

Implications of the DecisionThe Spider decision may suggest an increasing reluc-tance on the part of the OSC to intervene to ceasetrade a rights plan. Such a view might appear to beconsistent with the decision of the OSC in Neo andthe Alberta Securities Commission in Pulse Data.However, the decision would appear to be inconsistentwith the views expressed by the British ColumbiaSecurities Commission in April in its decision in LionsGate – although the reasons of the BCSC also are yetto be issued – and inconsistent too with prior deci-sions. In the absence of guidance that may be provid-ed by the reasons, and in light of other recent “pill”decisions, the OSC has made it increasingly difficult toadvise acquirors or targets as to the likely outcome ofa “pill” hearing.


2All Updates are available at www.goodmans.ca. If you would prefer to receive this client Update by e-mail, require additional copies or would like to inform us of a change of

address, please e-mail: [email protected]. This Update is intended to provide general comment only and should not be relied upon as legal advice. © Goodmans LLP, 2010.

Corporate Securities LawJuly 15, 2010

Supplemental Disclosure ofMagna

IntroductionOn July 8, 2010, Magna International Inc. filed a sub-stantial supplement to its management information cir-cular for the special meeting of shareholders that origi-nally had been scheduled for June 28, 2010 to consider areorganization of Magna that would result in, amongother things, the collapse of Magna’s dual class capitalstructure.

The supplement was filed as a result of a decision ofthe Ontario Securities Commission (see our June 30,2010 Update - “Magna - The OSC Decision”) that con-cluded that Magna’s original circular did not provide thedisclosure necessary for shareholders to be able to makean informed decision when voting on the reorganizationin circumstances where neither Magna’s board nor itsspecial committee had made any recommendation as tohow shareholders should vote. The OSC required thatshareholders be provided with substantially the sameinformation and analysis that the special committeereceived in considering and addressing the legal andbusiness issues raised by the reorganization.

Summary of the Supplemental DisclosureMagna’s supplemental disclosure was to respond to 12specific items required by the OSC decision andincludes:

• a discussion of how management and the boardarrived at the consideration to be paid and thepotential economic benefits to the shareholders;

• an explanation of the relevance to determining thevalue of certain prior transactions and privatizationand restructuring proposals;

• a description of the potential alternatives consid-ered by the special committee;

• a detailed discussion of the review and approvalprocess adopted by the special committee (includ-ing the steps taken to negotiate the terms withdetailed information as to what variations wereproposed and the responses to those proposals);

• inclusion of the reports of CIBC World MarketsInc. and PricewaterhouseCoopers LLP (whichreports had already been publicly disclosed) and adiscussion of the advice received with respect tothe material financial elements of the reorganiza-tion;

• the dilution suffered by minority shareholders inother historical transactions in which dual classshare structures had been collapsed and the rele-vance to shareholders under the reorganization;

• a clear statement of how CIBC assessed the reor-ganization from a financial perspective and the rea-sons why it concluded that it could not provide afairness opinion;

• a discussion of the advice received by the specialcommittee as to the nature of the legal standard tobe applied by a court in determining whether thearrangement is fair and reasonable and what mat-ters the court would likely consider in reaching thatdetermination;

• a clear statement by the special committee whetherthey have concluded that (a) the reorganization isfair and reasonable in accordance with the applica-ble corporate law standard, or (b) they havereached no such conclusion (the special committeestated that the choice to approve or reject the pro-posed reorganization would result in a fair and rea-sonable result);

• an explanation as to why the change in the marketprice of the shares subsequent to the publicannouncement of the terms of the reorganizationdoes not change the position of the board or thespecial committee that it cannot make any recom-mendation to shareholders as to how they shouldvote (and clarifies that there is at least a questionwhether the increase in the market price was also

affected by the other public announcements on thatday);

• the analysis related to Magna’s conclusion that it isexempt from a valuation requirement under therelated party transaction rules; and

• explains what it means to say that the purchase priceis equal to the fair market value determined bymutual agreement “taking into account the valuationwork conducted by PwC for the SpecialCommittee”.

As required by the OSC, the supplemental disclosurealso includes a statement that the special committee hasconcluded that the circular, as supplemented, providesdisclosure and information sufficient to permit share-holders to make an informed decision as to how to vote.

Lessons for the Future While the unique circumstances suggest that the OSC’sdecision need not be viewed as requiring a fundamentalshift in Canadian disclosure practices, it does suggestthat in higher profile transactions there is the real possi-bility that the OSC may become actively involved in thereview of shareholder meeting materials that – in con-trast to the United States – generally have not been sub-ject to review by Canadian securities regulators. TheMagna experience reinforces the importance of a boardprocess and record that directors and their advisors willbe comfortable with if it was required to be disclosed ingreater detail than often has been the case in Canada inthe past.




Corporate Securities LawOctober 8, 2010

OSC Releases Decision inMelnyk CaseOn September 30, 2010, the Ontario SecuritiesCommission released its decision in the case againstEugene Melnyk, the founder and former Chairman andChief Executive Officer of Biovail Corporation. OSCStaff had alleged that:

• statements made by Biovail regarding the financialimplications of an in-transit loss of a valuable ship-ment of pharmaceuticals were, in a material respectand at the time and in the light of the circum-stances under which they were made, misleading oruntrue,

• Mr. Melnyk had authorized, permitted or acquiescedin Biovail’s alleged misstatements, and

• Mr. Melnyk had thereby violated Ontario securitieslaw and engaged in conduct contrary to the publicinterest.

A three-member panel of the OSC concluded thatalthough Mr. Melnyk had not contravened Ontario secu-rities law, his conduct was contrary to the public inter-est.

BackgroundOn September 30, 2003, three trucks left Biovail’s man-ufacturing facility in Manitoba carrying a substantialamount of Wellbutrin XL, an anti-depressant drug man-ufactured by Biovail for delivery to a customer in NorthCarolina. The following afternoon, one of the truckswas involved in an accident outside Chicago, resulting inthe damage to a portion of the truck’s shipment.

Two days later, Biovail issued a press release announcingthat preliminary results for its third quarter indicatedthat revenues for the quarter would be below previous-ly-issued guidance and that the loss of revenue and

income associated with the loss of the Wellbutrin ship-ment had contributed significantly to this unfavourablevariance. Bioval estimated that the revenue associatedwith the shipment was in the range of $10 to $20 mil-lion. The OSC panel determined that the statementswere misleading and untrue, that Biovail repeated thesestatements in subsequent press releases and analysts’calls and that Biovail failed to clarify the statements insubsequent disclosures. Biovail eventually reported inMarch 2004 that the actual revenue loss from the acci-dent was $5.0 million, though it did not make clear thatthe accident affected its fourth quarter results and notthose of its third quarter.

In its decision, the panel concluded that:

• there was a substantial likelihood that a reasonableinvestor would have considered these statements,taken together, important in making an investmentdecision with respect to Biovail’s shares,

• Mr. Melnyk knew or should have known by thetime the second press release referencing the acci-dent (issued five days after the initial release) wasissued:- that any revenue attributed to the Wellbutrinshipment was properly attributable to the fourthquarter under the contract governing the shipmentand the accident could not have impacted Biovail’sthird quarter financial results, and

- that the $10 to $20 million estimate of the rev-enue associated with the shipment was misleadingor untrue, and

• Mr. Melnyk knew or should have known thatBiovail’s statements were, in a material respect andat the time and in the light of the circumstancesunder which the statement was made, misleadingor untrue.

Notwithstanding this finding, the panel concluded thatMr. Melnyk did not contravene Ontario securities lawas the press release in which the materially misleadingor untrue statements were repeated was not, at thattime, required to be filed under Ontario securities law(which is an essential element of liability under Section122(1) of the Ontario Securities Act).1 Nonetheless, thepanel exercised the Commission’s public interest juris-

1 National Instrument 51-102 has since been amended to require that reporting issuers file a copy of any news release issued by it that discloses informationregarding its historical or prospective results of operations or financial condition for a financial year or interim period. That section came into effect on March 31,2004, after the events that gave rise to the Melnyk proceeding, and therefore had no application in that proceeding.

diction under Section 127 of the Securities Act to findthat Mr. Melnyk’s conduct was contrary to the publicinterest.

“...in a material respect” – the Reasonable InvestorStandard

Under Section 122(1) of the Securities Act, a statement ina document required to be filed or furnished must bemisleading or untrue in a material respect in order for itto contravene securities laws. The Melnyk decision isnoteworthy for the statement by the OSC that theappropriate standard of materiality for a document, suchas a press release, that is a disclosure document intendedto be relied upon by investors in making investmentdecisions is the “reasonable investor” standard. Underthis standard, a statement would be material if there is asubstantial likelihood that a reasonable investor wouldconsider it to be important in making an investmentdecision. The Commission cautioned that its adoptionof this standard in the Melnyk matter should not beinterpreted as suggesting that the reasonable investorstandard is the only appropriate standard of materialityfor purposes of Section 122(1). The circumstances inwhich the words “in a material respect” apply will varyand those circumstances may require a different standardof materiality.

Interestingly, the adoption of the reasonable investorstandard could be interpreted to result in a lower thresh-old for quasi-criminal liability under Section 122(1) ofthe Securities Act 2 than for civil liability under Part XXIII(addressing prospectuses, etc.) or Part XXIII.1 (address-ing secondary market disclosure). For a statement toattract civil liability, it must relate to a fact that wouldreasonably be expected to have a significant effect onthe market price of an issuer’s securities. By contrast,for a statement to fall under the scope of Section 122(1)and potentially result in a person being subject to a fine,imprisonment or both the statement need only beimportant to an investor in making an investment deci-sion (which does not necessarily mean that it should rea-

sonably be expected to have a significant impact onmarket price).

Disclosure and Public Interest JurisdictionThe OSC’s decision in the Melnyk case also illustratesthe breadth of its interpretation of its public interestjurisdiction under Section 127 of the Securities Act.The panel cautioned that there should be no doubt inthe minds of market participants that the Commissionis entitled to exercise its public interest jurisdictionwhere any inaccurate, misleading or untrue publicstatement is made, whether or not that statement con-travenes Ontario securities law.

The Melnyk decision affirms the Commission’s viewthat:

• there is a public interest in ensuring that all publicstatements made by reporting issuers and othersare accurate and not misleading or untrue and canbe relied upon by investors in making investmentdecisions,

• there must be a reasonable basis for any forward-looking information or estimate and, if there issignificant uncertainty with respect to a statement,that uncertainty should be specifically disclosedand discussed,

• the inclusion in a press release of a general “safeharbour” warning that any forward-looking infor-mation contained in such release is subject to risksand uncertainties will not protect a statement inthe press release from allegations that it was mis-leading or untrue in a material respect, and

• more is expected of officers and directors withsuperior qualifications, such as experienced busi-ness people, and more is expected of inside direc-tors who have much greater involvement in corpo-rate decision-making and much greater directaccess to corporate information.




2 A breach of Section 122(1) of the Act is punishable by a fine of up to $5 million and/or a prison term of up to five years less a day


November 25, 2010

Baffinland - The End of theAuction Generally Means theTime has Come for a Pill to GoOn November 19, 2010 the Ontario SecuritiesCommission cease traded the shareholder rights plan ofBaffinland Iron Mines Corporation (“Baffinland”), threedays ahead of the scheduled expiry of the unsolicitedbid for Baffinland that had been made by Nunavut IronOre Acquisition Inc. (“Nunavut”). While theCommission’s reasons have not been released, its deci-sion to cease trade the Baffinland rights plan wouldappear to reaffirm that the Commission will be inclinedto find that the “time has come for a plan to go” if atarget has agreed to support a transaction - thereby end-ing an “auction” and a search for alternative transactions- and will not, in the absence of “coercion”, allow arights plan to be used to “level the playing field”between competing transactions.

The relevant facts in Baffinland were relatively straight-forward:

• On September 22, 2010, Nunavut made an unso-licited offer to purchase all of the outstanding com-mon shares of Baffinland for $0.80 per share. Acondition of the offer was that the Baffinland rightsplan, which had been adopted by the Board andapproved by shareholders in 2009, be terminated orcease traded. The offer was initially set to expire onOctober 28, 2010 but was subsequently extended to7:00 p.m. on November 8, 2010.

• On November 1, 2010, Nunavut applied to theCommission to cease trade Baffinland’s rights plan.

• On November 8, 2010, the day on which Nunavut’s

offer was to expire but prior to the hearing to con-sider Nunavut’s application, Baffinland enteredinto an agreement to support ArcelorMittal S.A.making a bid to acquire all of Baffinland’s com-mon shares for $1.10 cash per share.

• Following the announcement of ArcelorMittal’soffer, Nunavut further extended its offer toNovember 22, 2010, and the Commission sched-uled a hearing for November 18, 2010 to considerNunavut’s application for an order cease tradingthe rights plan.

In this context, it appears that:

• Baffinland had concluded its search for alternativetransactions when it agreed to support theArcelorMittal transaction, and

• the principal argument for the continued operationof the rights plan was that the impending expiry ofthe Nunavit bid might coerce shareholders toaccept the $0.80 per share that it offered ratherthan waiting for the ArcelorMittal bid which wouldoffer them $1.10 for each of their shares.

The rejection by the Commission of this argument isconsistent with its decision in the context of the bid in2001 by Trilogy Retail Enterprises L.P. for ChaptersInc., where the Commission indicated that it is notacceptable to use a rights plan to ensure that compet-ing bids are open to shareholders simultaneously.

More recent decisions had suggested that a more flexi-ble approach might be adopted. For example, in theunique circumstances of the contest for control ofFalconbridge Inc. in 2005, the Falconbridge sharehold-er rights plan was permitted to survive to prevent oneof its suitors, Xstrata plc, from acquiring an auction-ending blocking position. In the summer of 2010, theCommission had declined to cease trade a rights planadopted by Spider Resources Inc. - the Commissionsaying that it was premature “considering all the cir-cumstances, and in particular, the ongoing auction”between two competing bidders to cease trade a rightsplan – which appeared to indicate indicate that rightsplans could be used for purposes other than to permitthe development of alternatives (in that case, apparent-

ly contrary to the Chapters decision, to align the timing oftransaction proposals). Please see our July 12, 2010client update entitled “OSC Spider Decision Muddies theWaters for Rights Plans”.

More generally, the Commission’s decision concerningthe shareholder rights plan in Neo Material TechnologiesInc. had suggested that, in unusual circumstances, rightsplans might be sustainable for broader purposes.

The OSC’s Baffinland decision appears to confirm thatthe “traditional” test for the appropriate time for a rightsplans “to go” continues to be relevant - plans will gener-ally be permitted to stay in place only where they couldreasonably be considered to be facilitating the possibilityof a value-maximizing alternatives.

Please contact any member of the Goodmans’Corporate Securities Group to discuss this decision.



http://www.goodmans.ca/files/file/docs/07.12.2010%20Corp%20Sec%20Update.pdf

Corporate LawFebruary 28, 2011

Liability Insurance Policies forDirectors and Officers – A Checklist of Matters toConsiderDirectors and officers face a wide and growing range ofpotential personal liabilities in the course of carryingout their duties. A directors’ and officers’ liability insur-ance policy (or “D&O policy”) can help protect againstthese risks. D&O policies are negotiable and policyterms and conditions can vary materially. The followingis a brief outline of certain issues that directors andofficers should consider when reviewing their D&Opolicy.

Types of Coverage • In addition to “Side A” and “Side B” coverage,

does the policy also provide “Side C” coverage?

Most policies offer two types of coverage: “Side A”,which covers directors and officers personally fornon-indemnified claims, and “Side B”, which reim-burses the corporation for the costs of indemnify-ing directors and officers. In addition, many policiesoffer “Side C” coverage, which covers claims madeagainst the corporation itself.

• Is there protection against the risks associatedwith sharing the policy among the directors andofficers and the corporation in the case of “SideC” coverage?

To protect against the risks that coverage may beexhausted, the corporation may consider: - purchasing “Side A only” and/or “Side ADifference in Conditions (DIC)” excess coverage(i.e., meaning additional insurance for the benefit ofthe directors and officers only); and- including a “priority of payments” clause infavour of the directors and officers.

• To the extent there are excess policies, do thesepolicies “follow form”, such that coverage wouldbe extended in accordance with the same termsand conditions as the primary policy?

Expiration of the Policy• When does the policy expire?

D&O policies are typically sold for one-year termson a “claims-made” basis, which means that cover-age will only apply to claims made during the poli-cy period, regardless of when the wrongful actgiving rise to the claim occurred. More specifically,a policy is most commonly provided on a “claims-made and reported” basis, where claims must notonly be made, but reported to the insurer, duringthe policy period.

• Does the policy provide the option to purchasean “extended discovery period”?

In the event that the policy is not renewed, extend-ed discovery coverage provides for a further periodof protection (usually 12 months) for claims aris-ing within the policy period, but discovered duringthe extended reporting period.

• Is the extended discovery period only availablewhere the insurer chooses not to renew or ter-minate the policy?

If possible, the extended reporting period shouldalso be available where the insured decides not torenew or terminate coverage.

Who is Covered• How are the terms “director” and “officer”

defined?

- Are all past, present and future elected orappointed directors and officers of the corporationcovered?- Is coverage afforded to individuals acting as “defacto” or foreign equivalent directors and officersof the corporation?

• Should coverage be extended to all fiduciaries?

• Are the directors and officers of the corpora-tion’s subsidiaries covered?

- What constitutes a subsidiary for the purposesof coverage? Does it cover non-incorporated enti-ties such as limited partnerships? Does it coverdirectors and officers who are nominees of thirdparties?

- Does the policy include the directors and officersof subsidiairies acquired after the commencement ofthe policy?

• Is there protection in the event of death or legalincapacity?

- Does the policy extend to the heirs, legal repre-sentatives, estates and legal assigns of the insuredsin the event of their death or legal incapacity?

• Does coverage only apply to directors and offi-cers in their capacity as directors and officers?

- Does coverage extend to a director or officer act-ing as an advisor or consultant to the corporation?

Scope of Coverage• What constitutes a “claim”?

- Do informal allegations made against the directorsor officers constitute a claim?- Is a claim required to be in writing?

• What types of claims are covered?

- Is coverage limited to claims based on negligence,or does coverage extend to intentional and deliber-ate conduct?- Are regulatory investigations and enforcement pro-ceedings covered?- Are administrative, civil and arbitration proceed-ings covered?

• Does the definition of “loss” include coveragefor fines and penalties?

• Are statutory liabilities covered?

For example, directors may be personally liable for:- unpaid employee wages and vacation pay; and- unremitted employee source deductions, CanadaPension Plan and Unemployment Insurance premi-ums, as well as income taxes withheld on paymentsto non-residents and sales tax.

• What types of damages are covered?

- Are punitive or exemplary damages included? - Are damages resulting from both judgments andsettlements covered?

• How are defence costs covered and advanced?

- Does coverage extend to full legal, accounting,adjusting and investigative costs? Are these appliedto reduce the policy limit?

Policy Exclusions• What types of claims are excluded from cover-

age?

Common exclusions include claims arising from:- the specific intention or conduct of the individ-ual, such as fraud, wilful misrepresentation, dis-honesty or the obtaining of a personal benefit towhich the director or officer was not legally enti-tled;- bodily injury or property damage;- environmental damage or pollution;- matters which are uninsurable at law;- insider trading;- claims existing prior to the commencement ofthe policy;- allegations made by one insured against anotherinsured (also known as the “insured vs. insured”exclusion); and- violations of pension legislation or common lawby fiduciaries of any pension, profit sharing orother employee benefit plan or trust.

• Can the policy exclusions be restricted?

• Are exclusions based on the misconduct ordishonesty of a director or officer subject to afull severability clause?

• Can the insurer deny coverage for alleged mis-conduct or dishonesty?

Ideally, coverage should only be denied where themisconduct or dishonesty is proved by final adjudi-cation or there is an admission of liability.

• How restrictive is the “insured vs. insured”exclusion?

- Does it provide a full defence costs carve out?- Does it contain carve outs for claims broughtoutside of the U.S. or Canada?- Does it contain a carve out for derivative actionsbrought against the directors?- Does it contain a carve out for claims made byformer directors of the corporation?- Does it contain a carve out for claims made by atrustee in bankruptcy (or administrator, monitor,examiner or rehabilitator)?- Does it contain a carve out for employmentpractice matters?

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- Does it contain a carve out for claims for contri-bution and/or indemnity?

Defence of a Claim• Who controls the defence of the action? Who

selects defence counsel?

- Is there a “duty to defend” on the part of theinsurer (i.e., is the insurer required to defend thedirectors and officers in litigation commencedagainst them)? How expansive is the duty?- Has the insurer reserved the right to approvedefence expenses and be associated with the defencewhere the insured controls the defence of theaction?

• Can settlements or compromises be made with-out the consent of the insurer?

• Does the policy address how defence costs willbe allocated (for example, where a claimincludes both insured and non-insured aspects,or involves insured and non-insured parties)?

- Is a set percentage or pre-determined formulaprovided?

• How will defence costs be allocated where aclaim is made against the directors and officersof the corporation and the corporation jointly?

- Should priority be given to losses associated withthe wrongful acts of the directors ahead of theindemnification costs of the corporation?

Cancellation and Rescission• Can the insurer cancel coverage at any time

upon notice to the insured?

This right may be removed where the policy allowsthe introduction of a “non-cancellation” clause.

• Does the policy afford protection against rescis-sion (for example, if the insurer attempts torescind the policy based on misrepresentationsin the policy application or financial statementsaccompanying the policy application)?

- Does the policy include a severability clause thatexempts innocent insureds from rescission of thepolicy based on misrepresentations made or knownby other insureds? - Is there a provision stating that the policy is “non-rescindable”, at least with respect to “Side A” cover-age?

Special Circumstances• Directors and officers may be particularly vul-

nerable in the case of insolvency, a change ofcontrol as a result of a merger, acquisition orIPO, or retirement. Does the policy affordprotection against these risks?

In anticipation of such risks, directors and officersshould consider:- purchasing separate insurance;- purchasing run-off insurance;- arranging for non-cancellable insurance for aspecified period of time; and/or- ensuring that limits and breadth of coverage willbe maintained or renewed for a specified period oftime by the applicable board or corporation.

Dispute Resolution• Is there an affirmative alternative dispute reso-

lution clause with respect to disputes betweenthe insurer and the insured?

Consideration should be given to whether it wouldbe preferable to provide for the resolution of dis-putes by arbitration rather than by mediationand/or court proceeding.

The foregoing is not meant to be an exhaustive list ofmatters to consider when assessing your D&O policy.Documentation should be reviewed with the guidanceof qualified professionals, as D&O policies are highlycomplex and will differ from insurer to insurer.

Please contact Francy Kussner or any member of theGoodmans Corporate Securities Group to discuss yourDirectors’ and Officers’ Liability Insurance Policy.

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goodmans.ca

Jonathan Feldman [email protected] 416.597.4237

Profile Jonathan Feldman is a partner at Goodmans. His practice focuses on corporate and securities law with an emphasis on mergers and acquisitions. Transactions in which Jonathan played a leading role include representing:

Telecommunications Services of Trinidad and Tobago in its proposed acquisition of the material assets of Columbus International Inc.

Pala Investments Holdings in its proposed take-over bid for Neo Material Technologies Inc. The purchaser group, which included Ontario Teachers’ Pension Plan, Providence Equity Partners,

Madison Dearborn Partners and Merrill Lynch Global Private Equity in its proposed $52 billion acquisition of BCE Inc.

The purchaser group, which included Ontario Teachers’ Pension Plan and Providence Equity Partners in its proposed acquisition of Telesat Canada

ATI Technologies Inc. in its US$5.4 billion acquisition by Advanced Micro Devices Stephenson’s Rental Services Income Fund in its $134 million acquisition by Edgestone Capital Partners Somerset Entertainment Income Fund in its US$50 million acquisition of the music production and

distribution business of Compass Productions, Inc.

Before joining Goodmans in 2004, Jonathan was an associate in the M&A Group of White & Case LLP in New York, where he represented clients in a broad range of corporate and commercial transactions. Jonathan continues to work with private equity clients on various acquisition transactions. Recently, Jonathan has also been involved in a number of strategic reviews advising boards with respect to potential sales transactions. Jonathan has been a frequent author and lecturer on topics including recent developments in the Canadian M&A market, the evolving role of shareholder rights plans and the rise of shareholder activism in Canada. He has also served as an Adjunct Professor at the University of Toronto Law School where he has taught the course “The Art of the Deal”. Jonathan is an active member of the community. As a co-founder of the Barrie to Baycrest 100km annual bike ride, Jonathan has been instrumental in helping raise over $7 million for the Baycrest hospital in Toronto.

Education McGill University, B.A., 1994 L'Institut d'etudes Politiques a Paris, PIER, 1995 McGill University, M.A., 1996 University of Toronto, LL.B., 1999

Year of Call 2000 New York 2005 Ontario

goodmans.ca

Kari MacKay [email protected] 416.597.6282

Profile Kari MacKay is a partner at Goodmans. Her practice focuses on all aspects of corporate and securities law, with particular emphasis on mergers and acquisitions, corporate finance and corporate governance.

Kari provides advice on the structuring and execution of a variety of M&A transactions, including complex international mergers and combination transactions. Her practice has included advising:

HudBay Minerals Inc. in connection with corporate and strategic initiatives, including its recent $530 million supported take-over bid for Norsemont Mining Inc.;

Green Mountain Coffee Roasters Inc. in its $915 million acquisition of Van Houtte Inc. from an affiliate of Littlejohn & Co., LLC and its US$157 million acquisition of Timothy’s Coffees of the World, Inc.’s wholesale business from an affiliate of Sun Capital Partners, Inc.;

Canaccord Financial Inc.’s recent acquisition of The Balloch Group, a leading boutique Chinese investment bank, and its $352.7 million acquisition of all of the partnership interests of Genuity Capital Markets;

Pan-Canadian Third Party Asset-Backed Commercial Paper Investors Committee in the C$32 billion successful restructuring of third-party structured asset-backed commercial paper, in respect of which Kari led the Goodmans' team providing corporate and securities law advice;

Coeur d’Alene Mines Corporation in its U.S.$1.1 billion acquisition of Bolnisi Gold NL and Palmarejo Silver and Gold Corporation;

Royal Group Technologies Limited in response to an unsolicited proposal from Cerberus Capital Management, L.P. and the subsequent $1.7 billion negotiated acquisition by Georgia Gulf Corporation; and

Altus Group Income Fund in each of its offerings, its recent conversion and its 23 acquisitions since its IPO in 2005.

In the field of corporate finance, Kari represents both market participants and issuers in public financings and private investments of debt and equity. She also provides practical business advice on an ongoing basis to corporate clients relating to securities compliance and corporate governance matters.

Having completed a concurrent program, Kari graduated with both Canadian and U.S. law degrees. This dual exposure compliments her international M&A practice. She joined the firm in 1999.

Kari has participated as a member of Canada's national sailing team and continues to compete in the sport.

Education University of Detroit (J.D., 1997) University of Windsor (LL.B., 1997) Queen’s University (B.Comm, 1994)

goodmans.ca

Michael Partridge [email protected] 416.597.5498

Profile Michael Partridge is a partner at Goodmans. His practice focuses on corporate finance, mergers and acquisitions, private equity transactions and fund formations and securities law. His recent experience includes representing:

Western Coal Corp. in connection with its proposed $3.3 billion merger with Walter Energy, Inc. Gerdau S.A. in connection with its US$1.6 billion acquisition of the minority interest in Gerdau

Ameristeel Corporation Mandalay Resources Corporation in connection with its acquisition of Compañía Minera Cerro Bayo

Ltda. from Coeur d’Alene Mines Corporation and an associated $23 million public offering of units Canaccord Financial Inc. in connection with its $286 million acquisition of Genuity Capital Markets CanWel Building Materials Group Ltd. in connection with a $45 million bought deal offering of

convertible debentures Brookfield Special Situations Management Limited, an affiliate of Brookfield Asset Management Inc., in

connection with its sale of Concert Industries Corp. to P.H. Glatfelter Company for $246.5 million CanWel Building Materials Income Fund in connection with its acquisition of Broadleaf Logistics

Company, $57.5 million subscription receipt financing and conversion into a corporation Western Coal Corporation in connection with its sale of AGD Mining Pty Ltd. to Mandalay Resources

Corporation Canaccord Capital Corporation in its capacity as agent for an “at the market” equity distribution program

for H&R Real Estate Investment Trust The underwriters in connection with public offerings of senior unsecured notes and preferred shares by

Brookfield Asset Management Inc. for gross proceeds of $800 million Jilin Jien Nickel Industry Co., Ltd. in connection with its $30 million investment in Liberty Mines Inc. Cambrian Mining Plc in connection with its merger with Western Canadian Coal Corp. in a transaction

valued at $120 million The sponsors in connection with the formation of Cameron Capital Partners III, L.P. and its investment

in Herbal Magic Inc. General Atlantic LLC in connection with its investment in Trow Global

Michael joined Goodmans as an associate in 1998. From 2000 to 2002, Michael was an associate at a Silicon Valley based law firm where his practice focused on the representation of emerging growth companies, publicly traded technology companies and venture capital funds in M&A transactions, venture capital financings and general corporate and securities law matters. He returned to Goodmans in 2003 and became a partner in 2005.

Michael is a member of the Law Society of Upper Canada and the California State Bar. He is also the corporate and securities law editor of the Toronto Law Journal and a contributing editor of Corporate Financing.

Education University of Western Ontario, B.A., 1993 Osgoode Hall Law School, LL.B, 1996

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