Breaking News

Teachers' takes aim at TSX over HudBay

ANDY HOFFMAN

04:21 EST Monday, January 19, 2009

The Toronto Stock Exchange is under fire from one of Canada's largest pension funds over rules permitting HudBay Minerals Inc.'s plans for a massively dilutive share issue to pay for its controversial takeover of rival Lundin Mining Corp.

Ontario Teachers' Pension Plan is writing the TSX, urging it to change regulations that will allow HudBay to double its share count for the $500-million friendly deal without the approval of shareholders.

The head of Teachers' public equities division says that such a dilutive share issue would need majority support from HudBay shareholders if the company's primary listing were on the New York Stock Exchange, London Stock Exchange or in almost any other jurisdiction. Wayne Kozun, Teachers' senior vice-president of public equities, warns that international investors are turning away from Canada because of the TSX's corporate governance loophole.

"We have to get it cleaned up because this could cause these investors to shy away from Canada in the future, which would raise the cost of capital for Canadian companies, which is bad for everyone," Mr. Kozun said in an interview.

Teachers' public objections to the deal come as HudBay prepares to defend two separate legal challenges to the takeover that will be heard this week.

TSX spokeswoman Carolyn Quick declined to be interviewed on the issue of the exchange's security-holder approval requirements for acquisitions, which Mr. Kozun said are out of step with the rest of the world. Ms. Quick said in an e-mail that the exchange sent out a call for comments on the issue in October, 2007.

According to rules that took effect in 2005, the TSX does not allow a company to issue more than 25 per cent of its stock to buy a privately held company without shareholder approval. However, the TSX does allow such dilution for the purchase of a publicly traded company.

The NYSE requires companies to hold a shareholder vote for transactions requiring a company to issue more than 20 per cent of its stock. The LSE requires shareholder approval for a transaction exceeding 25-per-cent dilution.

The TSX argued in the past that its rules are different because Canadian companies are, on average, smaller than their U.S. and British counterparts, and have less access to capital and credit.

In the case of HudBay, the Toronto company plans to issue approximately 153 million shares to Lundin shareholders, an amount equal to its current share count.

"HudBay is going to be issuing 100 per cent or more of their outstanding shares to consummate this transaction. When you are an owner of something and what you own changes substantially, you should be given some sort of a vote on the situation. ... We are definitely going to be making our feelings known that we do not support the company management or board in this sort of a transaction," Mr. Kozun said.

HudBay has said the all-stock deal will preserve the company's strong cash balance sheet while providing its shareholders with world-class mining assets, including Lundin's Neves-Corvo copper and zinc mine in Portugal and its 25-per-cent stake in the promising but troubled Tenke Fungurume mine in the Democratic Republic of the Congo.

HudBay chief financial officer David Bryson said management of Vancouver-based Lundin wanted HudBay to skip the vote. He said the HudBay board carefully considered the issue before giving its approval for the deal.

"Requiring a HudBay shareholder vote would have created deal uncertainty with Lundin, not because we would have expected to have lost such a vote, but just because you can never be sure," Mr. Bryson said.

Teachers is not alone in its opposition to the Lundin transaction, which the companies hope to close by the end of the month. HudBay's largest shareholder, Monaco-based hedge fund SRM Global Master Fund Ltd. Partnership, which owns 11 per cent of HudBay's shares, has teamed with Fort Worth, Tex., investor Corriente Master Fund LP to challenge the deal in an Ontario court.

An Ontario Superior Court judge is slated to hear the case Friday to determine whether HudBay has oppressed its shareholders by conducting the Lundin takeover without their approval.

Controlling about 13 per cent of HudBay's outstanding shares, SRM and Corriente want the company to hold a shareholder meeting to vote on the transaction and to elect a new board of directors before the deal closes.

Jaguar Financial Corp., another HudBay shareholder opposed to the deal, has appealed to the Ontario Securities Commission to force HudBay to give shareholders a vote on the deal. The OSC hearing is scheduled for today.