Breaking News

HudBay's Lundin deal faces investor lawsuit

ANDY HOFFMAN

00:00 EST Tuesday, January 13, 2009

HudBay Minerals Inc.'s controversial $525-million takeover bid for Lundin Mining Corp. ran into a potential roadblock yesterday after the company's largest shareholder filed a lawsuit to try and stop the deal.

SRM Global Master Fund, a Monaco-based hedge fund that owns 11 per cent of HudBay's stock, said it tabled an oppression application against the Toronto company in Ontario Superior Court.

The application seeks a court order forcing HudBay to call a special meeting of shareholders to vote on the transaction before it closes and to elect a new board of directors. SRM is being supported by Corriente Master Fund L.P., a hedge fund based in Fort Worth, Tex., that owns 2.1 per cent of HudBay's stock.

"The applicants allege that HudBay has oppressed, unfairly prejudiced and unfairly disregarded the applicants' rights and interests and the rights and interests of the other holders of common shares of HudBay," SRM said in a press release.

Several HudBay shareholders have publicly slammed the company's plan to take over Lundin, the Vancouver base metals miner struggling with cash flow problems amid the crash in commodity prices.

HudBay has structured the transaction as a so-called "plan of arrangement," allowing it to increase its share float by between 80 and 100 per cent without the approval of shareholders.

Shares of both companies fell sharply yesterday on concerns about the deal, which HudBay and Lundin hope to close by the end of the month. HudBay shares slipped 11 per cent on the TSX while Lundin shares fell 15 per cent.

TSX rules that allow Canadian companies to issue massive amounts of stock for takeovers without getting shareholder approval are becoming a significant issue for some international investors. The New York Stock Exchange, for example, prohibits companies from increasing their share count by more than 25 per cent to make acquisitions without shareholder approval.

The TSX reviewed its rules in 2007, requesting comments on the issue from market participants. It has not changed the rules.

"The fact that the TSX reviewed the requirements for shareholder votes in an acquisition and has not chosen to date to revise the rules despite having completed the request for comment process approximately one year ago, I think that was germane," HudBay's chief financial officer David Bryson said in an interview.

This is not the first time an Ontario court has been asked to weigh in on the issue. In 2006, Rob McEwen, the founder of gold producer Goldcorp Inc., asked an Ontario court to allow Goldcorp shareholders to vote on its takeover of Glamis Gold Ltd. The case was dismissed.

LUNDIN MINING (LUN)

Close: $1.25, down 22 cents

HUDBAY (HBM)

Close $3.43, down 43 cents