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North America-Court of Appeal rules on dissenting shareholder rights on compulsory squeeze out – equal treatment prevails over equal opportunity

The recent decision by the Court of Appeal in Shoom v Great-West Lifeco Inc has significant implications for offerors intending to take a company private, where the offeror has provided target shareholders with multiple forms of consideration from which to choose. In Shoom, the court ruled that the offeror was compelled to offer shares to a dissenting shareholder, notwithstanding a clearly disclosed limit on the number of the shares available to target shareholders who tendered to the bid.

Upon completion of a takeover bid in Canada, an offeror may wish to take the target private by relying upon provisions available under most Canadian corporate statutes which permit an offeror which has acquired not less than 90% of the shares of a target company to acquire the balance of the shares of the target company. Accordingly, the 90% threshold is frequently a bid condition in Canadian takeovers. If the offeror does not achieve the 90% threshold, the offeror may still consider a going private transaction by way of amalgamation squeeze out, statutory arrangement or other form of corporate reorganization whereby the dissenting shareholders would have their shares exchanged for a different form of security.

In Shoom, Great-West Lifeco (Lifeco) and Great-West Life Assurance Company (GWL) made a successful takeover bid for all of the outstanding common shares of London Insurance Group (LIG), acquiring greater than 99% of such shares. Shareholders of LIG had four options from which to select, only two of which were relevant to the case. The first option was to receive cash of $34 per LIG common share (Option 1). The second option was to receive shares of Lifeco, subject to a limit on the aggregate number of Lifeco shares to be issued (Option 2). In the end, the maximum share allocation was exceeded and, in accordance with the conditions clearly disclosed in the takeover bid circular, the available Lifeco shares were allocated pro rata as of the date of the initial take-up under the bid to shareholders who chose Option 2, with the balance of the consideration paid in cash. After the completion of the takeover bid, the offerors sought to compulsorily acquire the outstanding common shares of LIG which they did not already own pursuant to section 206 of the Canada Business Corporations Act (the CBCA).

The respondent in the case, Mark Shoom in Trust, had purchased common shares of LIG which were not tendered to the takeover bid. Under section 206 of the CBCA, Shoom was required to elect to transfer his shares to the offerors on the terms on which the offerors acquired the shares of the offerees who accepted the takeover bid or to demand payment of the fair value of such shares. When Shoom sought to exercise Option 2, the offerors notified Shoom that Option 2 was exhausted pursuant to the terms of the bid. Due to the intervening increase in the price of Lifeco shares, Option 2 was more valuable than Option 1.

Shoom therefore brought an application for a declaration that he was entitled to deposit his shares on the same basis as the offerees who had transferred their shares under Option 2. The issue in the initial application and the subsequent appeal to the Court of Appeal was the interpretation of the words "on the terms on which the offeror acquired the shares of the offerees who accepted the takeover bid". The offerors argued that the wording should be interpreted to require that the same options be provided to dissenting shareholders as were available under the takeover bid, subject to all limits placed on such options. As clearly disclosed in the takeover bid circular, Option 2 was subject to a maximum number of Lifeco shares being issued. Accordingly, the offerors argued that the maximum share allocation was exceeded and all of the available Lifeco shares had been allocated.,

Both the lower court and the Court of Appeal noted that Shoom was a sophisticated party who engaged in arbitrage by purchasing LIG common shares after the initial take-up under the takeover bid, notwithstanding that Shoom would have full knowledge that the share component of the bid might be exhausted at the time of the compulsory acquisition. However, the courts felt that Shoom's knowledge and motives were irrelevant to the case. As the lower court stated "it may make Shoom a less sympathetic applicant, but it does not deprive him of any rights that accrue to other shareholders".

The Court of Appeal considered the decision of the English court in Re: Carlton Holdings Ltd, which involved the interpretation of the equivalent English compulsory acquisition provisions. In that case the offeror refused a dissenting shareholder's request for a cash option because the time limit had expired and because the cash payment was an obligation of a third party. There was no time limit on the share exchange option which the offeror attempted to force upon the dissenting shareholder. The court ruled that dissenting shareholders must be given the same choices that accepting offerees had under the takeover bid even if some of these choices were time limited and no longer available.

In reaching its decision in Shoom, the Court of Appeal stated that "it is not simply the terms on which the offer was made that are relevant, it is the terms on which the offeror acquired the shares that are important". As a result, dissenting offerees must be provided with all choices upon which the offeror acquired the shares of tendering offerees. To accept the appellants' argument in this case that Option 2 was not available because the maximum number of Lifeco shares had been exhausted would, in the opinion of the court, deprive dissenting shareholders of a particular option leaving shareholders subject to undue pressure in the face of a takeover bid. Accordingly, Shoom was granted the right to receive Lifeco shares on the same basis and on the same allocation ratio as shareholders who tendered to the bid under Option 2.

In Shoom, the Court of Appeal has decided that an equal opportunity to consider the options offered under a takeover bid does not sufficiently protect the interests of dissenting shareholders. Instead, dissenting shareholders must be treated the same as target shareholders who accept the takeover bid. As a result, offerors which are considering using the compulsory acquisition provisions to take a target company private, and which seek to limit the number of shares to be issued as consideration under the takeover bid, will have to account up-front for the possibility that additional shares will have to be issued to dissenting shareholders.

Nicholas Dietrich and Mark Travers

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