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OSC throws down gauntlet on TSX transparency

HudBay Minerals decision casts negative light on exchange's decision-making process

JACQUIE McNISH

00:00 EST Wednesday, February 04, 2009

Shareholders couldn't flee HudBay Minerals Inc. fast enough in November when the company unveiled a bid to acquire Lundin Mining Corp. through a share swap that called for HudBay to flood the market with 157.6 million new shares.

In one frantic day, panicky investors sold more than 20 million shares of HudBay's stock, driving the company's stock price down 40 per cent to a close of $3.16 on Nov. 21. As the mining stock melted like magma, at least one person saw opportunity and snapped up a 1-per-cent stake in the company to kick-start a shareholder revolt.

The investor was Vic Alboini, a former corporate lawyer with McCarthy Tétrault LLP, who transformed himself several years ago into a scrappy junior stock financier. The brassy bet by his company, Jaguar Financial Corp., on HudBay culminated in a regulatory decision that may have swept away one of the last vestiges of a regulatory regime that is viewed in some quarters as lax.

It also serves as a warning shot to companies seeking to take advantage of grim markets by driving hard bargains. After what he describes as a "terrible" year of deal making and investing in 2008, Mr. Alboini is one of a growing breed of investors who see shareholder activism as one of the few levers left for unlocking value from distressed companies.

"We will see more activism," Mr. Alboini warns. "In this kind of bleak environment, there is more opportunity for shareholders to be frustrated."

Within weeks of Jaguar's investment in HudBay, it appeared that Mr. Alboini had badly miscalculated his ability to right what he called an "unconscionable" shareholder wrong. Borrowing well-worn pages from the activist play book, he began his campaign against HudBay by unleashing a torrent of legal attacks and press releases against the takeover bid.

First Jaguar boldly announced that the pint-sized company with $10-million in annual income intended to launch a takeover bid for HudBay, a mining titan with more than $1-billion of annual revenue. Then it moved to replace the company's directors, attack executive compensation and question what it called conflicts of interest.

"The directors of HudBay are in hiding. They are afraid. They do not want this transaction reviewed by their owners. They do not care about their owners," Mr. Alboini said.

For all the harsh words, however, HudBay remained largely silent and the company's stock price spoke volumes by limping near lows.

In December, Mr. Alboini shifted gears and demanded that the Toronto Stock Exchange force the mining company to hold a shareholder vote on a deal that would increase its outstanding shares by 100 per cent. The move was a long shot. Such a long shot that Mr. Alboini said "no one should have been surprised" when the TSX's listing committee decided on Dec. 10 that it would not require a vote by HudBay's shareholders on the controversial decision.

A spokeswoman for the TSX, a self-regulatory agency and publicly listed company, declined to discuss the decision.

Ordinarily, Mr. Alboini's march against the HudBay deal would have been stopped dead in its tracks by the TSX's decision. His only hope for appeal was the Ontario Securities Commission, which only rarely has overturned decisions by the exchange.

Fortunately for Mr. Alboini, these are not ordinary times. After enduring double-digit losses in the financial crisis, investors are less inclined to sit on the sidelines when deals threaten shareholder values. Soon after the TSX decision, Mr. Alboini's sputtering protest was backed by a handful of funds, including one of the country's largest pension funds, Ontario Teachers' Pension Plan, which appealed for the OSC to intervene.

The other thing working in Mr. Alboini's favour was the three-person panel selected by the OSC to review the TSX's HudBay decision.

Leading the panel was vice-chairman Jim Turner, a former Torys LLP lawyer and counsel at one time to the OSC during a critical shareholder rights decision. That was in 1987, when an order by the OSC effectively thwarted a takeover bid for Canadian Tire that would have paid the controlling Billes family a substantially bigger premium than the one offered to minority shareholders. Any student of the Canadian Tire decision would see echoes of the OSC's indignation in last month's HudBay decision.

"The quality of the marketplace," the panel said in its decision, "would be significantly undermined by permitting the transaction to proceed without the approval of the shareholders of HudBay. Fair treatment of shareholders is a key consideration going to the integrity and quality of our capital markets."

One of the more compelling things about the regulator's decision is that it did not stop at merely overturning the TSX's decision. The commission also cast an unflattering light on the TSX, which it took to task for offering little evidence or guidance as to why it allowed HudBay's takeover to proceed without a shareholder vote.

"We have no basis upon which to determine whether the TSX's conclusion ... is appropriate," the OSC said.

Investors such as Mr. Alboini were quick to celebrate the OSC decision as a victory for shareholder rights. But maybe there is something else to cheer here. The OSC has thrown down the gauntlet by challenging the transparency and process behind the exchange's decision making. Indeed, details about the powerful listing committee at the TSX are so closely guarded that a spokeswoman declined to provide the name of the chairperson or members of the listing committee that reached the HudBay decision.

The easiest way for the exchange to recover from the negative scrutiny would be to toss into the dustbin a listing standard that many legal minds think belongs to another era. Stock exchanges in London and New York require shareholders to vote on any transaction requiring a stock issue of more than 20 per cent of the company's shares outstanding. No such rule exists at the TSX, although the exchange has spent nearly two years studying the issue.

It shouldn't involve much decision making for the TSX to adopt the rule. The OSC has already sent a loud and clear message that shareholders should be allowed to vote when deals significantly threaten shareholder values.

"What the OSC has said," Mr. Alboini said, "is that fairness to shareholders trumps deal certainty."

jmcnish@globeandmail.com