TSX proposal on takeovers gets cold response

'Wholly inadequate' standard would give shareholders a vote only when an acquirer's shares are diluted by more than 50 per cent

JANET MCFARLAND

From Monday's Globe and Mail

April 13, 2009 at 3:08 AM EDT

A new Toronto Stock Exchange proposal to give shareholders a vote on dilutive takeover bids is hitting a wall of opposition as investors argue the threshold for approval is being set far too high.

The TSX recently published a new standard proposing to give shareholders a vote on takeover deals when the acquiring company's shares will be diluted by more than 50 per cent in the transaction. In the United States, Britain and many other countries, the threshold to trigger a vote is 20-per-cent to 25-per-cent dilution.

But while the TSX proposed its new standard in a response to mounting shareholder complaints that Canada had no similar rule, the proposal has not satisfied some of the country's largest investors.

Wayne Kozun, senior vice-president of public equities at the Ontario Teachers' Pension Plan, said the 50-per-cent dilution trigger for a vote is too high and should be lowered to 25 per cent, instead.

He said dilution between 25 per cent and 50 per cent is "significant" and it is not fair to allow it without receiving shareholder approval for the deal.

"If it's a really good transaction, it should be an easy sell to the shareholders," he said.

Stephen Griggs, executive director of the Canadian Coalition for Good Governance, which represents most of

Canada's largest institutional shareholders, said the 50-per-cent threshold was rejected

by his board members last week.

"We feel the TSX's response is wholly inadequate," he said.

He said it means shareholders in Canada would have fewer rights to oppose a dilutive takeover deal than those in most other major countries, which could deter foreign buyers from investing in Canada or make Canadians more likely to invest abroad.

"Not having to get shareholder approval probably makes a deal easier to conclude, but the flip side is the providers of capital from outside of Canada look at provisions like the one the TSX has proposed and say, 'Why would we invest in a country where we do not have reasonable shareholder rights?' " he said.

"And Canada looks like a banana republic or a Third World country from a governance perspective, which means the cost of capital goes up significantly."

The TSX said in its rule proposal, open for public comment until May 4, that the 50-per-cent level is appropriate for Canada because its public companies are far smaller, on average, than those in the U.S., and are more likely to need to use shares to finance deals.

"We believe it would be unduly burdensome and unnecessary to set a requirement based on U.S. exchanges whose issuers are generally of a very different size and nature," the TSX said.

The exchange noted that with a 50-per-cent dilution threshold, 24 per cent of all acquisitions of publicly traded companies in Canada in 2007 and 2008 would have required a shareholder vote. If the trigger was set at 25 per cent, the TSX said 43 per cent of deals would have required a vote.

TSX spokeswoman Carolyn Quick said the purpose of opening the proposal for comment is so the exchange can "hear and consider all points of view."

The amendment comes two months after a surprise ruling by the Ontario Securities Commission ordering a vote on a $550-million takeover bid by HudBay Minerals Inc. for Lundin Mining Corp. HudBay shareholder Jaguar Financial Corp. appealed to the OSC after the TSX approved the deal. Jaguar complained there should be a vote because the offer would have doubled the number of HudBay shares outstanding.

Although there was no legal requirement to hold a vote, the OSC ruled "the quality of the marketplace" would be "significantly undermined" without one.

Jaguar chairman and chief executive officer Vic Alboini said in an interview he believes the TSX's proposed 50-per-cent threshold is adequate for Canada "to get started."

He said a lower threshold "would be okay," but isn't needed right now, especially since he believes many companies will now voluntarily hold votes because of the profile given to issue recently.

But Ermanno Pascutto, executive director of the Canadian Foundation for the Advancement of Investor Rights, said he is concerned the threshold is so high it could easily be abused, with acquirers structuring deals to only pay 49 per cent with shares and the rest with debt that can later be financed with a share issuance.

He added he believes the TSX chose the higher threshold to appeal to managers of public companies whose listing fees provide the backbone of the TSX's revenue.

"I might have a little more confidence in the conclusions reached by the stock exchange if it weren't for the conflict-of-interest issue," he said.