The Magna Proceedings: Devising a Litigation Strategy and Elaboration on the BCE Test Kent Thomson [email protected] James Bunting [email protected] Alexander Moore [email protected] ALM500-2011-FA04.qxd 11/22/2010 7:48 PM Page 86 2011 LEXPERT ® / AMERICAN LAWYER The Magna Proceedings: Devising a Litigation Strategy and Elaboration on the BCE Test By Kent E. Thomson, James D. Bunting & J. Alexander Moore1 Davies Ward Phillips & Vineberg LLP The recently implemented plan of arrangement involving shares. The Class B shares were held indirectly by the Stronach Magna International Inc. that eliminated its dual-class share Trust, which is controlled by Magna’s Founder and Chairman, structure in exchange for approximately C$800 million in Frank Stronach. Under its dual-class share structure, holders of compensation to the Stronach family has been described by many Magna’s Class B shares had 300 votes per share, while holders of as extraordinary and unprecedented. The proceedings Class A subordinate shares had one vote per share. As a result, surrounding Magna’s arrangement were widely publicized and the Stronach Trust held 66 per cent of Magna’s voting rights, debated as the case made its way through a hearing before the while owning only 0.6 per cent of Magna’s total equity. Ontario Securities Commission (“OSC”), a fairness hearing in The dual-class share structure was created in 1978 and the Ontario Superior Court of Justice (Commercial List) and approved by Magna’s shareholders at the time.This structure did finally an appeal to the Ontario Divisional Court. This article not include any “coattail” or “sunset” protections for Class A examines, first, the manner in which the Courts applied, and shareholders, which later became prevalent in multiple-voting arguably expanded, the test for approval of a proposed plan of structures in the late 1980s and early 1990s. arrangement to be applied at a so-called “fairness hearing”, as set The proposed arrangement was designed to benefit both forth in the precedent setting decision of the Supreme Court of Magna and its shareholders by eliminating this structure. It was Canada in BCE Inc. v. 1976 Debentureholders.2 Second, this article generally believed that the reason Magna shares traded at a examines the strategic implications of certain shareholders discounted earnings multiple relative to the shares of Magna’s opposed to the arrangement requesting that the OSC bring peer companies was the disproportionate control associated with proceedings to address alleged inadequacies in the nature and the Class B shares held by the Stronach Trust. Thus, in theory, level of disclosure originally provided by Magna regarding the if the Class B shares were eliminated, the trading value of proposed plan of arrangement, rather than waiting for the Magna’s Class A shares would increase. fairness hearing to raise these inadequacies as a basis for objecting A number of Magna’s shareholders opposed the proposed to the court’s approval of the plan of arrangement. arrangement and alleged that it was abusive because, in their view,the consideration proposed to be paid to the Stronach Trust The Proceedings was excessive and would result in an unfair degree of dilution to The Magna proceedings involved an arrangement proposed the company’s Class A shareholders. by Magna to its shareholders pursuant to which Magna would eliminate the corporation’s dual-class multiple-voting structure Background to the Arrangement by acquiring all of the company’s issued and outstanding Class B In the Spring of 2010, members of Magna’s executive Reprinted with permission from The 2011 Lexpert®/American Lawyer86 Guide to the Leading 500 Lawyers in Canada © Thomson Reuters Canada Limited. ALM500-2011-FA04.qxd 11/22/2010 7:48 PM Page 87 GUIDE TO THE LEADING500 LA WYERS IN CANADA management team discussed with Mr. Stronach whether he was challenged the arrangement, and in particular, the consideration open to a transaction that would eliminate Magna’s multiple- proposed to be paid to the Stronach Trust for the Class B shares. voting share structure. These discussions led to the development The opposing shareholders included a number of Canada’s largest of a proposal that was presented to a Special Committee of the and most respected investment firms and public pension plans, Magna Board. Ultimately, the Stronach Trust agreed to sell its such as OMERS Administration Corporation, the Ontario Class B Shares in return for: Teachers’ Pension Plan Board, Jarislowsky, Fraser Limited and CPP Investment Board. • nine million newly issued Class A Shares and $300 million in Certain shareholders opposed to the arrangement filed a cash; written complaint with the staff of the OSC. The complaint • a five-year fixed non-renewable consulting agreement with resonated with staff and on June 15, 2010, staff commenced Magna entitling Mr. Stronach to a declining percentage of proceedings before the Commission in which they alleged, among Magna’s pre-tax profits over the life of the agreement; and other things, that the disclosure in Magna’s Circular was • a 26.67 per cent equity interest in and 73.33 per cent of the inadequate. voting rights associated with an electric car partnership Pursuant to the interim order, the shareholder vote was between Magna and the Stronach Trust valued at $300 million, originally scheduled to be held on June 25, 2010. As a result, a conditional upon the Stronach Trust contributing $80 million three-member panel of the OSC, chaired by Vice Chair James to the partnership. Turner, was constituted immediately and held a two day hearing within eight days of the Statement of Allegations being filed. Mr. Stronach made it clear to the Special Committee and Certain shareholders opposed to the transaction, including members of management that if this proposal was not acceptable OMERS, Teachers and CPPIB, were granted intervenor status to Magna’s Class A shareholders he was happy for the Stronach and appeared at the hearing. They argued that the process Trust to continue to own the Class B shares and to preserve the undertaken by Magna was flawed and that the proposed status quo. arrangement was abusive and coercive. These shareholders Magna’s Board was essentially presented with a “take it or leave requested that the OSC issue a permanent cease trade order that it” opportunity.The Board, acting on the recommendations of its would preclude the proposed arrangement from proceeding before Special Committee, determined that it would present the it was ever put to a shareholder vote. proposed transaction for consideration by the company’s Class A shareholders. The Special Committee and the Board decided to The Commission’s Decision make no recommendation to shareholders on how to vote. The decision of the Commission was released on June 24, Although the Special Committee obtained financial advice from 2010, shortly after the hearing came to an end. The Commission CIBC World Markets regarding the costs and potential benefits concluded that the disclosure in the Circular was inadequate of the transaction, at the outset of its engagement CIBC had having regard to the particulars of the transaction. The indicated that it would not provide a fairness opinion because the Commission held that in circumstances such as these where there degree of dilution associated with the transaction was outside the was: (i) no Board recommendation with respect to how range of precedent transactions and the potential benefit to shareholders should vote or concerning the fairness of the shareholders depended on a future increase in the trading multiple proposed transaction; and (ii) no fairness opinion, shareholders of Magna’s shares. CIBC does not attempt to predict future were “left to their own devices in making the decision as to how movements of share prices when delivering fairness opinions, and they will vote.” As a result, the Commission concluded that as a matter of policy does not issue fairness opinions in shareholders should, to the extent reasonably possible, be provided circumstances such as these. with substantially the same information and analysis that was The proposed arrangement was announced publicly on May made available to the Special Committee. 6, 2010. Magna subsequently obtained an interim order in respect The Commission rejected the contention of the opposing of the calling and holding of a meeting of shareholders to consider shareholders that the proposed transaction was abusive of the the proposed arrangement and mailed a Management Proxy Class A shareholders or the capital markets and should be stopped Circular to its shareholders on June 2, 2010. in its tracks, stating that whether the transaction should proceed was a business and financial decision that the shareholders were The OSC Proceedings entitled to make. However, the Commission held that a A number of Magna’s Class A shareholders immediately shareholder vote could not proceed until Magna delivered an Reprinted 87with permission from The 2011 Lexpert®/American Lawyer Guide to the Leading 500 Lawyers in Canada © Thomson Reuters Canada Limited. ALM500-2011-FA04.qxd 11/22/2010 7:48 PM Page 88 2011 LEXPERT ® / AMERICAN LAWYER amended Circular that provided an appropriate level of disclosure been followed and that the proposed arrangement had been put to Magna’s shareholders. forward in good faith.The bulk of his reasons focused on the third criterion, namely whether the proposed arrangement was fair and Revised Circular and The Shareholder Vote reasonable. In considering Justice Wilton-Siegel’s application of Following the release of the Commission’s decision, Magna the two-pronged fair and reasonable test from BCE, it is important postponed the shareholder vote to July 28, 2010. Magna also to note that BCE arose in very different circumstances from those mailed an extensive supplement to the Circular to shareholders, in Magna.