Overview
On March 3, 2024, the Capital Markets Tribunal (Tribunal)released its reasons in the matter of Mithaq Canada Inc.1 The Tribunal's decision arose from an application by Mithaq Canada Inc. (Mithaq), the largest common shareholder of Aimia Inc., for a cease trade order in respect of a private placement by Aimia (Offering) that was publicly announced after Mithaq commenced its unsolicited takeover bid for Aimia. Mithaq alleged that the Offering was an abusive defensive tactic to stymie its takeover bid. The Tribunal found that while the Offering had a "defensive character," it was primarily designed to respond to Aimia's serious and immediate financial needs and dismissed Mithaq's application because the Offering was not "clearly abusive."
Background
Aimia is a publicly traded company listed on the Toronto Stock Exchange (TSX). It is engaged primarily in the business of acquiring equity in other companies. In May 2023, Mithaq filed early warning reports disclosing that it controlled 30.96% of Aimia's common shares. A month prior, it had voted against the election of Aimia's board at a contentious shareholder meeting at which no director nominee received more than 52.41% of the vote and the chair of the board was not re-elected.
On September 28, 2023, Aimia received conditional approval from the TSX for the Offering, however, no public announcement of the Offering was made at that time. Shortly thereafter, on October 5, Mithaq announced its takeover bid for Aimia. On October 13, Aimia announced that it intended to complete the Offering on October 19 and the proposed investors of the Offering indicated that they did not intend to tender to Mithaq's bid. Mithaq immediately commenced its application before the Tribunal and was granted interim relief on October 19 that delayed the completion of the Offering.
Cease trade order not granted
On completion of the hearings, the Tribunal declined to issue a permanent cease trade order for the Offering which permitted Aimia to complete the Offering. Contrary to Mithaq's position that the Offering was designed to thwart its takeover bid, the Tribunal determined that the Offering "was designed primarily to meet Aimia's serious and immediate need for financing." It did have the additional characteristic of changing the dynamics of the bid environment in a way that was unfavourable to Mithaq. However, that characteristic, while of some consequence, was secondary to the main purpose. It did not warrant interfering with the private placement. In its analysis, the Tribunal reiterated the test from Hecla2: that a private placement should only be cease traded where there is "a clear abuse of the target shareholders and/or capital markets." It explained that the rationale for the test is to balance the legitimate corporate objectives for the Offering against facilitating shareholder choice.
The Tribunal remarked in obiter that it "questioned whether the standard of "clear abuse" should persist" given that "the genesis of the standard" predates amendments to the Securities Act that introduced new objectives such as fostering fair capital markets and protecting investors against unfair practices. However, since neither party prepared submissions opposing the standard, the Tribunal stated that it was open to a party "in some future proceeding" to "submit that the standard ought to change."
First stage of the Hecla test
In considering whether to cease trade the Offering, the Tribunal applied the test set out in Hecla which consists of two stages. The first stage involves a gatekeeping function in which the panel determines if the private placement is "clearly not" a defensive tactic. Generally, the onus is on the applicant to show that it is at least unclear whether the private placement was a defensive tactic. If the applicant can, as a preliminary matter, show that the placement has a material impact on the "existing bid environment," the onus reverses and the respondent must prove that the placement is clearly not defensive. The Tribunal found that the Offering had a material impact on the bid environment because issuing over 5 million new shares to investors who had declared their intention not to tender to the bid would materially increase the number of shares needed for Mithaq to fulfill the minimum tender condition. The Tribunal also speculated that the warrant exercise price associated with the Offering could discourage other potential bidders or discourage Mithaq from improving its bid, which created another material impact on the bid environment. Accordingly, the onus shifted to Aimia to show that the Offering was clearly not defensive.
In deciding this question, the Tribunal considered the three factors set out in Hecla. First, it assessed whether the Offering was designed to respond to Aimia's serious and immediate need for financing. The Tribunal concluded that it did, based on Aimia's projected future deficit position. The Tribunal elaborated that "immediate need" does not mean financial distress and it "does not necessarily imply urgency. It does imply that the need currently exists, as opposed to being speculative." The second factor the Tribunal considered was whether the Offering was planned or modified in response to or in anticipation of the takeover bid. It determined that Aimia's board of directors (Board)only had sufficient reason to believe a bid was imminent on October 3 when Mithaq announced the bid. The Tribunal did not consider the early warning reports Mithaq filed that year to be enough to ground a belief that a bid was "imminent" and noted that the Offering was then already near the implementation stage, demonstrating that it had not been planned in response to the bid. The third factor considered was whether the Offering was part of a good faith, non-defensive, business strategy. The Tribunal determined that the Offering's main purpose and design was to respond to Aimia's need for financing. However, once Mithaq's bid was announced it "more clearly took on a defensive character." Consequently, the Tribunal could not conclude that the Offering was "clearly not" a defensive tactic, and turned to the second stage of the Hecla test.
Second stage of the Hecla test
At the second stage, the Tribunal considered whether the Offering constituted a "clear abuse" of Aimia shareholders or the capital markets based on the five factors set out in Hecla. First, the Tribunal found that the Offering would benefit shareholders because it would satisfy Aimia's need for financing and outweighed the disadvantage of dilution from the issuance of new shares. Second, the Tribunal looked at the effect of the Offering on pre-existing bid dynamics. While acknowledging its earlier finding that the Offering had a material effect on bid dynamics, the Tribunal gave little weight to this factor because almost every step of the Offering preceded Mithaq announcing its bid. The third factor was the relationship between Aimia and the investors participating in the Offering. Since the investors were not acting in concert and dealing at arm's length to Aimia the Tribunal gave this factor no weight. The fourth factor was the views of the shareholders. The Tribunal also gave this factor no evidentiary weight because the unsworn letters and emails the parties filed in support of their positions offered too limited of a sample to properly assess shareholders' views. The final factor considered was whether the Board (specifically its Special Committee "appropriately considered the interplay between the Offering and Mithaq's bid." The Tribunal criticized the Special Committee's work as less comprehensive than it might have been. Accordingly, it did not give deference to the Special Committee's business judgement under the Hecla analysis. Instead, the Tribunal reached its "own conclusion independently" and determined that the Offering was not clearly abusive because its benefit to the shareholders outweighed its impact on the bid environment.
Takeaway
The decision in Mithaq reaffirms the Hecla test for assessing private placements, clarifies the meaning of certain qualifiers such as "immediate need," highlights the need for robust procedures to be in place and followed in regard to a board's consideration of an overlapping bid and private placement, and puts parties on notice that evidence of shareholders' views must be quantitatively substantive (and perhaps formalized) to have persuasive value. However, the Tribunal's comments on the "clearly abusive" standard creates some uncertainty regarding its views on the appropriateness of certain aspects of the Hecla test in future proceedings.
Ultimately, the Tribunal emphasized that "it was significant that [the Offering] was negotiated and largely completed before Mithaq's bid was announced." As the timing of an action which may be perceived as a defensive measure becomes more proximate to a bid, the perceived defensive action will likely be placed under greater scrutiny, and the issuer, with its counsel, should carefully consider the other factors of the Hecla test.
For more information on this topic, please reach out to the authors, Benjamin Iscoe, Andreas Kloppenborg, Matthew Fleming, Jason Saltzman, Raphael Eghan and Jaskaran Grewal.3
Footnotes
1. Mithaq Canada Inc (Re), 2024 ONCMT 9.
2. Hecla Mining Company (Re), 2016 ONSEC 31.
3. The authors would like to thank Stefan Rus, articling student, for his assistance in preparing this insight
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