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The "going private" transaction : a genre of minority shareholder squeezeout 1980

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THE "GOING PRIVATE" TRANSACTION A GENRE OF MINORITY SHAREHOLDER SQUEEZEOUT EDWIN GRANT KROFT LL.B., YORK UNIVERSITY, 1978 THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF LAWS THE FACULTY OF GRADUATE STUDIES FACULTY OF LAW We accept t h i s thesis as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA OCTOBER, 1980 (c) EDWIN GRANT KROFT, 1980 by IN In presenting th i s thes is in pa r t i a l fu l f i lment of the requirements for an advanced degree at the Univers i ty of B r i t i s h Columbia, I agree that the L ibrary sha l l make it f ree ly ava i l ab le for reference and study. I further agree that permission for extensive copying of th is thesis for scho lar ly purposes may be granted by the Head of my Department or by his representat ives. It is understood that copying or pub l i ca t ion of th is thes is for f inanc ia l gain sha l l not be allowed without my writ ten permission. Department of L.^.^ The Univers i ty of B r i t i s h Columbia 2075 Wesbrook Place Vancouver, Canada V6T 1WS Date OCToegft \ /go ABSTRACT The phrase "going private" refers to a transaction i n which the c o n t r o l l i n g shareholders who are instrumental in the management of a "public" company seek to terminate public p a r t i c i p a t i o n and transform the firm into a private or closely-held entity. Minority shareholders of such companies located i n Canada and the United States have described t h i s process as unfair, disgraceful and a perversion of the whole financing process because of the a b i l i t y of the insiders to time t h e i r departure, to dictate the amount of compensation they are to receive and to regulate the amount of disclosure which would otherwise enable them to judge the adequacy of the consideration offered. Consequently, they have sought to enjoin going private transactions on one of two grounds. On one hand, they have objected to being forced to give up t h e i r investment even at the f a i r e s t p r i ce, claiming, i n ef f e c t , a vested right to remain as shareholders of the issuer. A l t e r n a t i v e l y , when the applicable corporate statute or constating documents of the Company expressly permit shareholder squeezeouts, they have complained of being deprived of the i n t r i n s i c or f a i r value of t h e i r shares and denied the procedural safeguards which would better enable them to make informed investment decisions. This thesis i s directed to a study of these c r i t i c i s m s . Following a review of the assorted techniques used i n squeezeout transactions and the exist i n g procedural safeguards available to the minority, the claim by minority shareholders that they have a vested right to remain as shareholders of a public company i s analyzed and rejected. Instead, i t i s argued that Canadian courts should only enjoin squeezeout transactions i n j u r i s d i c t i o n s which have not enacted legal rules designed to a s s i s t shareholders i n commanding the i n t r i n s i c value of t h e i r shares. Assuming that an acquiror of minority shares has complied s t r i c t l y with a l l corporate and s e c u r i t i e s procedural requirements, but the price offered for minority shares i s less than t h e i r i n t r i n s i c value, an - i v - injunction should be issued only on the grounds that the opportunity to vote as a separate class, or the co n t r o l l i n g shareholders or directors have committed a breach of a fi d u c i a r y duty owed to the Company. - v - TABLE OF CONTENTS Page I. INTRODUCTION 1 I I . THE DYNAMICS OF A GOING PRIVATE TRANSACTION 3 I I I . THE REGULATION OF A GOING PRIVATE TRANSACTION 6 A. THE PROCEDURAL FORMALITIES AFFECTING AN ACQUIROR 6 1. AS AN OFFEROR IN TAKEOVER BID, ISSUER BID OR COMPULSORY ACQUISITION PROCEEDINGS 6 2. AS A CONTROLLING SHARE- HOLDING OF THE ISSUER 9 3. AS A DIRECTOR OF THE ISSUER 10 B. PROHIBITION IN THE FACE OF FULL PROCEDURAL COMPLIANCE 11 1. EXPROPRIATION IN THE ABSENCE OF EXPRESS STATUTORY AUTHORITY 11 2. THE PAYMENT OF LESS THAN INTRINSIC VALUE FOR MINORITY SHARES 19 C. THE PATH TO INTRINSIC VALUE: THE ENACTMENT OF RULES CREATING ARTIFICIAL MARKET CONDITIONS 22 1. STATUTORY REQUIREMENTS 23 - v i - (a) THE PROBLEMS INHERENT IN JUDICIAL EVALUATION 25 (b) THE RESPONSE OF THE COURTS TO DATE 30 2. THE ONTARIO PROPOSALS 34 D. ENJOINING A GOING PRIVATE TRANSACTION IN THE ABSENCE OF RULES CREATING ARTIFICIAL MARKET CONDITIONS 42 1. JUDICIAL RELIEF 42 (a) MAJORITY OF THE MINORITY TEST 43 (b) PROPER CORPORATE PURPOSE TEST 45 (c) FIDUCIARY DUTIES 53 (i) DIRECTORS' DUTIES 53 ( i i ) THE MAJORITY- MINORITY DUTY 53 IV. CONCLUSION: TOWARDS A RATIONAL SCHEME OF REGULATING GOING PRIVATE TRANSACTIONS A. THE REGULATORY FRAMEWORK PROPOSED FOR CANADA 65 B. A SIMILAR ALTERNATIVE: THE BRUDNEY-CHIRELSTEIN ANALYSIS 67 C. THE PROSPECT OF SUCCESSFUL REGULATION 71 FOOTNOTES 73 BIBLIOGRAPHY 197 APPENDIX: 232 TABLE 1 233 TABLE 2 234 - v i i - ACKNOWLEDGMENT The author wishes to acknowledge the h e l p f u l c r i t i c i s m s and comments of Messrs. L. Getz, R.K. Paterson and A.F. Sheppard, and to thank the University of B r i t i s h Columbia, Faculty of Law, and the law firm of Russell & DuMoulin for the use of th e i r f a c i l i t i e s during the preparation of t h i s work. I - 1 - I. Introduction Over the past four years many shareholders have been compelled to s e l l t h e i r shares i n Canadian public or reporting companies at less than adjusted book or going concern value when these companies have "gone private". (1) Going private has consequently been described as "unfair, disgraceful and a perversion of the whole financing process".(2) The phrase, "going private", i s a recent addition to the vocabulary of the corporate p r a c t i t i o n e r . It refers to a transaction i n which the c o n t r o l l i n g shareholders( 3) ("the insiders") who are instrumental i n the management of a "public" company ("the issuer") seek to terminate public p a r t i c i p a t i o n and return the firm to the status of a cl o s e l y held e n t i t y ) by providing the minority shareholders with cash or redeemable se c u r i t i e s i n exchange for t h e i r e x i s t i n g shares. Evidencing t h e i r displeasure at the a b i l i t y of the insiders to time t h e i r departure, to dictate the amount of compensation they are to receive and to - 2 - regulate the amount of disclosure which would otherwise enable them to judge the adequacy of the price at which each share i s to be surrendered, shareholders i n Canada(5) and the United S t a t e s ^ ) have sought to enjoin going private transactions on one of two grounds. On one hand, they have objected to being forced to give up t h e i r investment even at the f a i r e s t p r i c e, claiming i n e f f e c t a vested right to remain as shareholders of the i s s u e r . ^ ) A l t e r n a t i v e l y , when the applicable corporate s t a t u t e ( 8 ) or constating documents of the Company^) expressly permit squeezeouts, minority shareholders have complained of being deprived of the i n t r i n s i c or f a i r value of t h e i r shares and denied the procedural safeguards which would better enable them to make an informed investment decision. This paper analyzes both these c r i t i c i s m s voiced by minority shareholders. Although the f i r s t complaint i s rejected as untenable i n law and unsound from the point of view of commercial expediency, i t i s argued that minority shareholders must be given the opportunity to dispose of t h e i r shares for an amount - 3 - at least equal to t h e i r i n t r i n s i c value. In the absence of legal rules designed to a s s i s t shareholders i n commanding i n t r i n s i c value, Canadian Courts should enjoin squeezeout transactions only on the grounds that the minority has f a i l e d to vote as a separate class, or the c o n t r o l l i n g shareholders or directors of the issuer have committed a breach of a f i d u c i a r y duty owed to the Company or to the other shareholders. I I . The Dynamics of a Going Private Transaction Controlling shareholders of the issuer i n i t i a t e going private transactions. Tax(10) or non-tax(H) considerations, however, may prompt insiders to use a corporate a s s o c i a t e d 2 ) or a f f i l i a t e ( 1 3 ) # including the issuer(14)# as a vehicle through which to expropriate s u f f i c i e n t minority shares to e f f e c t the conversion into a "private company" as defined i n corporate(15), securities(16) and tax(1*7) l e g i s l a t i o n . Assuming that the c o n t r o l l i n g shareholders are unsuccessful i n purchasing the desired number of outstanding minority shares on a takeover bid(18) o r 4 - i n the open market^ 1 9), they may be able to acquire the remainder by passing a resolution authorizing (1) a statutory amalgamation( 20) as a r e s u l t of which minority shareholders of the issuer receive cash or redeemable preference shares of the amalgamated company; (2) the r e c l a s s i f i c a t i o n of the minority shares of the issuer as redeemable at the option of the Company(21); (3) the consolidation of the common shares of the issuer(2 2) # leaving the minority with f r a c t i o n a l shares which the Company may subsequently repurchasers). o r (4) the sale of a l l the a s s e t s ( 2 4 ) to a corporate a f f i l i a t e and the subsequent winding up of the issuer(25) # In certain jurisdictions,(26) a n a c q u i r o r ( 2 7 ) which owns 9/10 of the issued shares of one class of the issuer following a takeover bid, (28) - 5 - may compel the minority to s e l l the remainder i n pro- ceedings referred to as "compulsory acquisition".(29) Once successful in taking the company private, the insiders may enjoy s i g n i f i c a n t benefits only a v a i l - able to shareholders of non-reporting or c l o s e l y held companies. They alone w i l l share i n the increased retained earnings of the Company due to the lower rates of tax imposed on certain types of income(30) earned by a private corporation, decreased shareholder serv- i c i n g costs incurred only by reporting companies which must comply with extensive disclosure require- ments (31), enhanced economies of scale(32) an(~} increased corporate f l e x i b i l i t y . ( 3 3 ) The absence of public scrutiny w i l l also enable c o n t r o l l i n g shareholders to partake of tax advantages involving the use income s p l i t t i n g or estate freezing.(34) Insiders might also choose to use the private company as a holding company for s e c u r i t i e s purchased with t h e i r own funds and as a conduit through which to flow investment income when th e i r personal tax rate i s greater than the corporate rate.(3 5) This - 6 - w i l l r e s u l t i n a tax def e r r a l while earnings remain i n the company and an eventual small tax savings once the money i s paid to s h a r e h o l d e r s . ) I I I . The Regulation of a Going Private Transaction A. The Procedural Formalities A f f e c t i n g An Acquiror An acquiror which chooses to take an issuer private must observe various requirements i n d i f f e r e n t circumstances. 1. As an Offeror i n Takeover Bid, Issuer Bid or Compulsory Ac q u i s i t i o n Proceedings An acquiror must provide offerees with extensive disclosure to enable them to make an informed investment decision about the fairness of the o f f e r . Unless a bid i s c l a s s i f i e d as "exempt"(^7) f a takeover bid c i r c u l a r which accompanies the o f f e r must disclose, for example, the number of s e c u r i t i e s held by the offeror or related p a r t i e s ; the market price of the target company shares over the preceding 6 months; the terms of the o f f e r ; the p a r t i c u l a r s of the method and time of payment for shares of the target company; and - 7 - the p a r t i c u l a r s of any arrangement or agreements made or proposed to be made between the offeror and any of the directors or senior o f f i c e r s of the target company(3 8) m To properly evaluate t h i s information without pressure from the offeror to tender t h e i r shares, shareholders must also receive the benefit of a certain period of time within which to act. In a takeover or issuer bid, subject to a va r i a t i o n of extension of the off e r , any shares deposited may be withdrawn by or on behalf of an offeree at any time u n t i l the expiration of seven days from the date of the offer(39). U n t i l that period has elapsed, the shares may not be taken up and paid for.( 4°) In compulsory acqui s i t i o n proceedings, an offer o r i s only e n t i t l e d to purchase the shares of dissenting offerees once i t has acquired 9/10 of the shares i t or any related p a r t y ( 4 1 ) did not already own, within 4 months of the date of the b i d . ( 4 2 ) The offeror must then mail the dissenting offerees a - 8 - notice of compulsory a c q u i s i t i o n within two months afte r the termination of the bid.(43) If a dissenting offeree i s not s a t i s f i e d with the terms of the offer, he must seek j u d i c i a l redress within a short period of time thereafter or accept the consideration offered on the bid. (44) There are also a number of statutory provisions r e l a t i n g to the payment of consideration which an offeror must observe. For example, an offeror must pay for shares which have been tendered within 3 5 days of the date of the bid or a v a r i a t i o n or extension thereof.(45). i f the terms of the o f f e r are varied before the termination of the bid, a l l shareholders who have deposited t h e i r shares p r i o r to the date of v a r i a t i o n must be permitted to tender t h e i r shares on the same terms.(46) Moreover, i n certain j u r i s d i c t i o n s , an offeror i s required to make a "follow up offer"(47) to a l l shareholders of the target company when i t has agreed to pay the holders of a control block of shares a premium for t h e i r investment(48). - 9 - 2. As a Contr o l l i n g Shareholder of the Issuer Shareholders of the issuer may only approve an amalgamation,( 4^) an arrangement(50) r e s u l t i n g i n a reduction of capital(51), a share r e c l a s s i f ication(^2) o r c o n s o l i d a t i o n ^ 3 ) a n ( j a sale of assets (54) a n ( j winding up of the Company(55) by special resolution(56) . Even though c o n t r o l l i n g shareholders are subject to equitable restraints(^7) when voting t h e i r shares i n these transactions, shareholders of each l e g a l l y created class are also e n t i t l e d to block the passage of a special resolution by separate class vote(58) o r by court application^?-) i f the c o n t r o l l i n g group uses i t s voting powers i n a discriminatory fashion.(60) In certain j u r i s d i c t i o n s , c o n t r o l l i n g shareholders are required to f i l e reports i n d i c a t i n g increased ownership i n the equity of the issuer,(61) though the acq u i s i t i o n of minority shares with the aid of material i n f o r m a t i o n ^ 2 ) to which the other party to the transaction i s not privy, i s prohibited.(63) - 10 - 3. As a Director of the Issuer Acquirors(64) w n o a i s o serve as directors of the issuer are subject to various obligations. They must not authorize a purchase of the issuer's shares which would contravene statutory r e s t r i c t i o n s or provisions i n the constating documents.(65) f a i l u r e to dissent to such an action w i l l render the dir e c t o r l i a b l e to the extent of the amount paid to repurchase the shares.(66) In addition to approving squeezeout transactions(67) a n d providing shareholders with a c i r c u l a r i n takeover bid situations(68) f directors must prevent t h e i r s e l f - i n t e r e s t from c o n f l i c t i n g with t h e i r f i d u c i a r y duties to the company.(69) Directors are therefore not permitted to vote on resolutions authorizing transactions i n which they have a material interest.(70) They must also not use t h e i r powers for an improper purpose(71) by reacquiring shares i n order to strengthen t h e i r position as c o n t r o l l i n g shareholders. - 11 - B. Prohibition i n the Face of F u l l Procedural Compliance Minority shareholders have been successful i n enjoining transactions i n which they have not been afforded the benefit of these safeguards^ 7 2), because courts have always i n s i s t e d on s t r i c t compliance with procedural formalities when private property i s being expropriated.( 7 3) However, they have sought injunctive r e l i e f on two additional grounds, even when the acquiror has complied s t r i c t l y with a l l statutory requirements. 1. Expropriation i n the Absence of Express Statutory Authority Minority shareholders have argued that insiders should not be permitted to use amalgamations or arrangements as squeezeout mechanisms i n the absence of express statutory language permitting the corporate repurchase of shares or compulsory a c q u i s i t i o n . ( 7 4 ) Unfortunately, courts i n d i f f e r e n t j u r i s d i c - tions have reached apparently opposite conclusions on th i s issue, leaving companies hoping to go private - 12 - uncertain of the chances of a successful s u i t by disgruntled minority shareholders, and t h e i r s o l i c i t o r s unable to provide an unqualified opinion on the state of the law in t h i s area. On one hand, the courts have la b e l l e d the work of the Legislature as "redundant" (75) for enacting more than one statutory provision which f a c i l i t a t e s a minority squeezeout and have suggested that the p r i n c i p l e s of statutory construction(76) render compulsory a c q u i s i t i o n as the exclusive technique for expropriating minority shares.(77) on the other hand, they have endorsed amalgamations( 7 8) and arrangements(79) as legitimate forceout mechanisms whether or not the companies l e g i s l a t i o n of the j u r i s d i c t i o n contains a compulsory acqui s i t i o n provision. For example, i n Ontario, the High Court was prepared to sanction the arrangement i n Re Ripley Inter- national (80), provided the minority shareholders were given a larger sum of cash for t h e i r consolidated shares.(81) However, i n Carlton Realty et a l v. Maple Leaf M i l l s et al(82) / Steele, J. issued an injunction restraining the c o n t r o l l i n g shareholders of - 13 - Maple Leaf M i l l s from proceeding with a meeting at which the amalgamation forceout was to be approved.( 8 3) In response to the claim by the p l a i n t i f f s that a transaction which resulted i n t h e i r receiving redeemable preference shares rather than common shares of the amalgamated corporation was unlawful and contrary to the Ontario Business Corporations Act, the Court commented that: "The ef f e c t of the amalgamation would be to deprive the Applicants of t h e i r common shares in a company and replace them with preference shares that could be redeemed at the w i l l of the corporation. There i s no power for t h i s Corporation to redeem i t s common shares d i r e c t l y and there i s no section of the Business Corporations Act (Ont.) that s p e c i f i c a l l y provides for the squeezing-out of minority shareholders. There i s a power i n certain circumstances for a corporation to buy i t s own shares i n the open market, but t h i s denotes a voluntariness on the part of the shareholder to be w i l l i n g to s e l l . A person i s e n t i t l e d to retain his property i f he so wishes, except where there i s a right held by another to f o r c i b l y take i t . It matters not for t h i s purpose what price the taker i s w i l l i n g to pay. I see no clear right under the Act to permit the taking of the applicants' common shares by the means proposed. It may be that there i s such a right by implication under other s e c t i o n s . . . . " ( 8 4 ) - 14 - The positions adopted by Courts interpreting the Canada Business Corporations Act are no less confusing. For example, i n Neonex International Ltd. v. Kolasa et al.(85) and Jepson et al.v. The Canadian S a l t Company(86)# the Courts expressed t h e i r approval of amalgamation sqeezeouts. To quote Bouck, J . in Neonex; "Parliament decided to grant a c o n t r o l l i n g shareholder an easier way to force out the minority than was perviously the case.... The l e g a l i t y of the amalgamation i s not i n question. Its morality i s for others to a s s e s s . " ( 8 7 ) In contrast, i n Alexander et al.v. Westeel-Rosco Ltd. et al.(88)) Montgomery, J. enjoined an amalgamation designed to eliminate p a r t i c i p a t i o n by the minority i n the amalgamated company.(89) He concluded that: "If the Legislature intended t h i s section to encompass expropriatory powers, they should have said so i n clear, unambiguous words. In my view, the section should not be construed to import such powers. They purport to do i n d i r e c t l y what they f a i l e d to accomplish d i r e c t l y on the takeover bid."( 9°) This too was the decision of the English Court i n Re Hellenic and General Trust Ltd.(9!) Templeman, - 15 - J. held that an arrangement under section 206 of the U.K. Companies Act could not be used to expropriate minority shares when compulsory a c q u i s i t i o n pursuant to section 209 was unavailable to the acquiror.(92) j n reaching t h i s conclusion, the Court rejected the e a r l i e r decision of Plowman, J. i n Re National Bank L t d . ( 9 3 ) and i m p l i c i t l y indicated that compulsory a c q u i s i t i o n i s the exclusive statutory technique for expropriating minority shares.(94) The ambivalence of the courts i s understandable. On the one hand, most public shareholders may not deserve protection because they are an uninterested and distant l o t of investors who desire the greatest return on t h e i r c a p i t a l and care l i t t l e about the e f f e c t i v e management of the company.(95) On the other hand, going private transactions may create problems warranting t h e i r prohibition.(96) A l l freezeout techniques are coercive. On an amalgamation, a sale of assets or an amendment of the constating documents, minority shareholders are bound by "majority rule" to accept cash or debt i n exchange for - 16 - th e i r common shares. Although i t appears that share- holders have the a b i l i t y to make a ra t i o n a l decision whether they wish to s e l l t h e i r shares v o l u n t a r i l y when shares are purchased pursuant to a tender offer or by way of the open market, the threat of an impending amalgamation or the p o s s i b i l i t y of material diminution i n market l i q u i d i t y may prompt them to surrender the shares without proper consideration of the fairness of an offer.(97) Moreover, c o n t r o l l i n g shareholders can dictate the terms of the freezeout. They can decide the time at which the transaction should take place, the amount of compensation and disclosure minority shareholders are to receive upon surrendering t h e i r shares and the manner i n which the transaction i s to be financed.(98) j n effect, the investment expectations of public share- holders are defeated by actions taken by the insiders rather than by t h e i r own judgments or the general oper- ation of the market place. However, i n seeking to enjoin a going private transaction, majority shareholders must accept the p r i n c i p l e of "majority rule" as the recognized manner of governance i n corporate affairs.(99) They have no vested right to remain as shareholders of the issuer.(100) This p r i n c i p l e i s expressly acknow- ledged i n new corporate l e g i s l a t i o n modelled on the Canada Business Corporations Act(-*-0-*-) which favours greater f l e x i b i l i t y and s i m p l i c i t y i n i n s t i t u t i n g funda- mental corporate changes over corporate democracy.(102) p o r example, these statutes contain provisions authorizing: (a) the compulsory a c q u i s i t i o n of shares(-*-03 ) . (b) the corporate repurchase of shares at the behest of either the company(104) o r a shareholder who objects to p a r t i c u l a r changes i n the a f f a i r s or structure of the Company ("the dissent right")(105) ; and (c) an amalgamation of companies r e s u l t i n g i n minority shareholders of the Amalgamating Companies receiving cash rather than s h a r e s ^ 1 0 6 ) . They indicate that a shareholder has a right only in the value of h i s investment and not i t s form.(107) - 18 - Contrary to the suggestions by the Courts i n Maple Leaf Miils_(108) a n d W e s t e e j J 1 0 9 ) , i t i s i r r e l e v a n t that the forms of consideration given to shareholders of an amalgamated company are d i f f e r e n t provided that, e.g. the redeemable shares or cash received by one shareholder are equal i n value to the common shares given to another.(110) In addition, minority shareholders may welcome the prospect of a squeezeout. It w i l l provide them with either cash or redeemable s e c u r i t i e s of the issuer rather than shares which may be no longer marketable because of l i t t l e or no demand by broker-dealers or i n s t i t u t i o n a l investors. Moreover, the acquiror might use a squeezeout technique which furnishes minority shareholders with tax treatment more favourably suited to t h e i r marginal rates than they would have received had they disposed of t h e i r shares without coercion. (1 H ) - 19 - 2. The Payment of Less Than I n t r i n s i c Value for Minority Shares What may damage investor confidence in the operation of the s e c u r i t i e s markets and impair the a b i l i t y of companies to raise c a p i t a l ( 1 I 2 ) ± s the temptation for insiders to force minority shareholders to surrender t h e i r s e c u r i t i e s for an amount less than t h e i r i n t r i n s i c value.(113) If s e c u r i t i e s markets operated p e r f e c t l y ( l 14) a n ( j a n investor were able to make f u l l y informed and r a t i o n a l investment decisions, then the price a w i l l i n g buyer would pay would i n a l l l i k e l i h o o d represent the i n t r i n s i c value of h i s shares.(115) Any purchaser wanting to pay less than t h i s amount would not l i k e l y succeed i n acquiring the shares because of competition from other buyers who might choose to o f f e r more.(116) Imperfections in Canadian public s e c u r i t i e s markets, however, do not enable shareholders of many reporting companies to command the appropriate price for t h e i r shares. Market prices are not always i n d i c a t i v e - 20 - of i n t r i n s i c value and i n recent years have often lagged behind.(117) This may be caused by f a i l u r e of the company to pay dividends because of a substantial reduction i n retained earnings for the f i s c a l year; i n e f f i c i e n t use of the assets of the company; unawareness of the i n t r i n s i c value of the company's assets by the directors; an i n e f f i c i e n t corporate c a p i t a l structure; the existence of substantial tax losses; or l i t t l e or no demand by i n s t i t u t i o n a l investors or broker-dealers for s e c u r i t i e s of the company dis t r i b u t e d to the public.(118) A purchaser i n an active and e f f i c i e n t market may recognize that the shares of a public company are undervalued r e l a t i v e to t h e i r i n t r i n s i c value and decide to acquire them at a premium i n excess of market p r i c e . Consequently, minority shareholders who choose to tender t h e i r shares i n a takeover b i d w i l l receive compensation more closely r e f l e c t i n g the i n t r i n s i c value of t h e i r shares. The size of the premium paid w i l l depend i n part on the number of r i v a l bidders in the market place; the intention of the acquiror to liq u i d a t e the target company or maintain i t as a going concern; the manner i n which he w i l l put the assets of the company to use i f run as a going concern; and the benefits the acquiror ex- - 21 - pects to receive as a r e s u l t of the transaction.(119) Public shareholders faced with the prospect of a squeezeout, however, are ra r e l y able to r e l y on the operation of the market place for assistance. Many companies deciding to go private (120) ^ 0 n o-(- have a large enough f l o a t of s e c u r i t i e s in the hands of a s u f f i c i e n t number of public shareholders to support a true market. In fact, they often issued shares to the public even though i t was un l i k e l y that a reasonable active market would ever exist.(121) In these circumstances, the market place i s unable to perform i t s function and set an appropriate price for minority shares. Moreover, the c o n t r o l l i n g shareholders w i l l not pay a premium i n excess of market price in the absence of competitive bidding; the less money spent on the expropriation of minority shares, the more that w i l l be available for personal use once the issuer has gone private. - 22 - The i n e f f i c i e n t operation of Canadian se c u r i t i e s markets should not enable insiders to use coercion to acquire the property of the minority for less than t h e i r i n t r i n s i c value, i . e . what a hypothetical purchaser would pay i n a f u l l y e f f i c i e n t and l i q u i d market with adequate information.(122) Where minority shareholders must submit to the w i l l of the majority i n corporate a f f a i r s , they also must be given the opportunity to contest the unfairness of the terms of the squeezeout and the fact that only insiders may have access to v i t a l information r e l a t i n g to the i n t r i n s i c value of t h e i r shares. C. The Path to I n t r i n s i c Value: The Enactment of Rules Creating A r t i f i c i a l Market Conditions Lawmakers have been continuously concerned with preventing the perpetration of fraud on^23) minority shareholders. Companies l e g i s l a t i o n contains rules which ensure that the s e l f - i n t e r e s t of corporate management w i l l not dominate concerns for the welfare of the company and i t s remaining shareholders.(124) Transactions are only prohibited i f - 23 - (1) minority shareholders are unable to look to the operation of Canadian s e c u r i t i e s markets or existing legal rules for e f f e c t i v e r e l i e f from the p r e j u d i c i a l conduct of management; and (2) the consequent abuse to the minority shareholders i s believed to be greater than the r e s u l t i n g socio-economic benefits i n which they share. Going private transactions, therefore, should be permitted i n j u r i s d i c t i o n s which have enacted rules creating a r t i f i c i a l market conditions for minority shareholders, thereby enabling them to command payment of an amount at least approximating the i n t r i n s i c value of t h e i r expropriated shares. Currently i n Canada there are two d i f f e r e n t approaches to achieving t h i s end. 1. Statutory Remedies Companies l e g i s l a t i o n of certain j u r i s d i c t i o n s gives shareholders the opportunity to s e l l t h e i r shares for " f a i r value" i n various circumstances. The dissent or appraisal right permits a shareholder who refuses to - 24 - p a r t i c i p a t e i n a venture beyond i t s i n i t i a l contemplation^25) to dispose of h i s shares to the issuer for " f a i r value", even though there i s l i t t l e or no trading done i n the company's s e c u r i t i e s or where the market price of the shares has dropped i n reaction to the transaction which the shareholder finds objectionable before he has a chance to sell.(126) Shareholders(127) m a v also use the oppression remedy(128) to obtain a court order(129) d i r e c t i n g the purchase of t h e i r shares by the issuer or i t s c o n t r o l l i n g shareholders(13°) when they believe themselves to be suffering from an actual(131) course of conduct by management which i s oppressive(132) o r u n f a i r l y prejudical.d33) In certain j u r i s d i c t i o n s , courts may be required to approve an amalgamation,(134) reduction of capital,(135) o r a n arrangement(136) to ensure that minority shareholders are being expropriated on f a i r terms. - 25 - Lastly, shareholders who refuse to tender t h e i r shares i n compulsory acqu i s i t i o n proceedings for the amount of consideration offered on the preceding takeover bid may p e t i t i o n the court to "order o t h e r w i s e " 3 7 ) or f i x the " f a i r value" of t h e i r s h a r e s . d 3 8 ) (a) The Problems Inherent i n J u d i c i a l Evaluation Shareholders may not always receive optimum protection i n proceedings which charge the courts with the r e s p o n s i b i l i t y of assessing the fairness of a transaction. Courts have scarcely gained the reputation as defenders of d i s s e n t i e n t s . ^ ) TOO often they have tended to rubber stamp the decisions of the majority without f i r s t assessing the fairness of the transaction.(140) TO quote Lord Cooper: "Nothing could be clearer and more reassuring than these formulations of the duties of the Court. Nothing could be more disappointing than the reported instances of t h e i r subsequent exercise. Examples abound of the refusal of the Courts to entertain the plea that a scheme was not f a i r or equitable, but i t i s very hard to find i n recent times any - 26 - clear and i n s t r u c t i v e instance of the acceptance of such an objection. " (141) The most courts usually have done i s ensure that the prescribed formalities have been s t r i c t l y observed and that decisions have been reached af t e r f u l l and f a i r d isc- losure. (142) While paying homage to the "business judgment" rule(1^3) a n ( j acknow- ledging that the inter n a l a f f a i r s of the corporation are within the purview of the majority and outside t h e i r j u r i s - d i c t i o n , (144) courts have generally refrained from assessing the fairness of a scheme. They have concluded that j u d i c i a l procedures are i l l - s u i t e d to assess properly the economic merits of a transaction, to make accounting investigations and to take valuations necessary for reaching a sound judgment.(145) It i s therefore d i f f i c u l t to imagine how a court w i l l reach any precise c a l c u l a t i o n of i n t r i n s i c value. With respect, i t i s - 27 - submitted that judges have neither the expertise nor the s t a f f to make t h i s complex determination properly.(146) conventional valuation model of s e c u r i t i e s analysts, both p r a c t i c a l and academic(147), operates on the assumption that the enterprise w i l l continue as a going concern(-*• 48) and i d e n t i f i e s i t s "value" as the present value of i t s expected earnings.(!49) How might the court reach any accurate conclusions about i n t r i n s i c value, when there i s argument among finance experts about how to define the "earnings" to be ca p i t a l i z e d , (1-50) a n ( j -how to compute those earnings(151) a s well as how to take growth and ri s k into account i n t r a n s l a t i n g expected earnings into present value? Furthermore, the c a l c u l a t i o n of any premium above market value may prove even more complex i f the courts must take into account additional imponderables such as: any unfavourable tax consequences suffered by minority shareholders as a r e s u l t of the - 28 - a b i l i t y of c o n t r o l l i n g shareholders to dictate the manner in and time at which the squeezeout w i l l occur(152). a n v benefits received by co n t r o l l i n g shareholders incidental to the ownership of shares i n a private company (1 53 ) . a n d a n v savings accruing to the c o n t r o l l i n g shareholders from the purchase of minority shares out of the funds of the company i n which they represent equity.d54) Assuming that the court w i l l be able to perform the analysis required and compute one true figure for the i n t r i n s i c value of minority shares, i t may not receive the benefit of a l l the information i t may need. What compounds problems i s the adversary process where "truth" i s not the focal point of the pa r t i e s . Whereas the issuer w i l l only put forward information which j u s t i f i e s i t s valuation and to which i t alone has access, i t i s unlikely that minority shareholders w i l l be able to afford or even be successful i n obtaining material about such intangibles as - 29 - sales figures, research and development results and cost reductions, which are essential components of the firm's future earnings.(155) Even i f the parties reveal a l l the information available to them,(1 5 6) i t w i l l indeed be d i f f i c u l t for the Court to conclude which valuation i s correct because two or more sets of statements about the past and future worth of the company w i l l be presented by experts of the l i t i g a t i n g parties who w i l l d i f f e r about the quantity and d i r e c t i o n of information and w i l l seek.to destroy each other's c r e d i b i l i t y . ^ 5 7 ) F i n a l l y , resort to the courts for c a l c u l a t i o n of the i n t r i n s i c value of shares w i l l only be worthwhile for wealthy shareholders or those with a large sum of money at r i s k . Mounting legal and accounting fees and the lengthy delay i n the receipt of funds(!58) w m not often j u s t i f y shareholders challenging the fairness of the compensation offered i n a squeezeout, i n spite of statutory provisions designed to encourage - 30 - access to the courts i n these circumstances.d59) I n addition, the mechanics of the processes intended to f a c i l i t a t e claims for " f a i r value" by shareholders are complex and technical. For example, shareholders must f i l e properly drawn notices of dissent(160) w i t h i n short lim i t a t i o n s periods or lose the opportunity to dispute the adequacy of any amount offered by the issuer.(161) Moreover, the onus of proving the unfairness of the off e r i s generally thrust on minority shareholders i n these proceedings.(162) (b) The Response of the Courts to date In spite of these problems, courts over the l a s t f i v e years have demonstrated t h e i r willingness to a s s i s t shareholders i n challenging the inadequacy of any compensation offered i n a squeezeout(163) and obtaining payment of an amount at least equal to the i n t r i n s i c value of t h e i r shares. For example, shareholders involved i n dissent(164) f - 31 - o p p r e s s i o n 5 ) , compulsory a c q u i s i t i o n (166) and court approval(167) pro- ceedings have been successful recently i n arguing that the market price of p u b l i c l y l i s t e d shares i s not always an accurate deter- minant of value because of th i n trading and a r e l a t i v e l y low public f l o a t . Courts have also recognized that i n t r i n s i c value should r e f l e c t any increased tax burden for the minority because minority shareholders are often deprived of the opportunity to dispose of t h e i r shares i n the manner or at a time which would best s u i t t h e i r tax position.(168) One case s p e c i f i c a l l y worthy of mention i s Re Whitehorse Copper Mines Ltd.: Hudson Bay Mining and Smelting Co. Limited v. Lueck and Weinstein.(!69) After acquiring 90.97% of the Whitehorse shares not already held by i t or a f f i l i a t e d companies, Hudson Bay chose to exercise i t s right to expropriate the outstanding shares by compulsory a c q u i s i t i o n pursuant to the provisions of the Canada Business Corporations Act. Rather than accepting the takeover bid price of - 32 - $4.00,59 shareholders applied to court, seeking a determination of the f a i r value of t h e i r shares. After considering complex evidence r e l a t i n g to wil d l y fluctuating market prices of copper and molybdenum and reviewing c o n f l i c t i n g valuations of the minority shares presented by the l i t i g a t i n g p a rties, McEachern C.J. challenged the accuracy of the appraisals put forward by two reputable investment houses and concluded that $6.50 more accurately re f l e c t e d the i n t r i n s i c value of each of the shares.(170) Nonetheless, some courts may have been too zealous i n t h e i r c a l c u l a t i o n of " f a i r value". For example, i n Re Ripley International( 171) southey, J. refused to approve an arrangement resu l t i n g i n the expropriation of minority shares because i t s terms were unfair. He stated that: "The small shareholders who would not be permitted to continue under the proposed arrangement were invited o r i g i n a l l y to invest i n a public organization. If t h e i r shareholdings are now to be eliminated against t h e i r wishes i n order to permit the applicant - and that means the few continuing shareholders and the applicant - to enjoy tax savings as a private corporation, then the - 33 - price to be paid for t h e i r shareholdings would not be f a i r and reasonable, i n my judgment, unless i t r e f l e c t e d a pro rata p a r t i c i p a t i o n in the anticipated tax savings. In other words, t h e i r shareholdings should be valued as i f they would have been able to remain as shareholders i n the newly constituted private corporation."(172) With respect, i t i s submitted that a determination of the i n t r i n s i c value of minority shares should not include an amount equaling any portion of the benefits in c i d e n t a l to the ownership of shares i n private company of which c o n t r o l l i n g shareholders may partake following a going private transaction. The problems caused by the imperfections of the market place are i r r e l e v a n t i n th i s context. The c o n t r o l l i n g shareholders or the acquiring company which they control are "special p u r c h a s e r s " ^ 1 7 3 ' who are w i l l i n g to pay a higher price for minority shares than other purchasers would be. Purchasers i n the market place would not benefit from the ownership of any outstanding shares of a reporting company i n the same fashion as a c o n t r o l l i n g shareholder who held a l l the remaining shares. While the w i l l i n g purchaser i n the market place might pay a premium in excess of market value for minority shares because he has concluded that the shares are a sound - 34 - investment given t h e i r i n t r i n s i c value, i t i s only the co n t r o l l i n g shareholders who would consider paying the minority any amount for private company benefits such as tax advantages.(1 7 4) It therefore seems unreasonable to force insiders to pay the minority shareholders an additional amount for t h e i r shares which they would not otherwise command i n a f u l l y e f f i c i e n t market. In fact, valuation p r i n c i p l e s suggest that i f there i s only one special purchaser for a p a r t i c u l a r asset, i t i s assumed that he w i l l pay only s l i g h t l y more than ordinary purchasers would pay to ensure that he i s the successful bidder. The fact that a special purchaser may be w i l l i n g to pay a substantial amount more i s ir r e l e v a n t i n the determination of i n t r i n s i c value.(175) 2. The Ontario Proposals(1 7 6) Ontario Policy #3-37, section 163 of the Ontario Securities Act Regulations and section 188 of the Draft Ontario Business Corporations Act ( c o l l e c t i v e l y , "the Ontario Proposals") neither cast the r e s p o n s i b i l i t y of cal c u l a t i n g the i n t r i n s i c value of - 35 - minority shares on the courts nor set some generalized proxy to be added as a premium to the market price of these s h a r e s . ( I 7 7 ) They protect the minority by requiring the issuer to provide shareholders with extensive information r e l a t i n g to the i n t r i n s i c value of t h e i r sharesd78) (including a valuation)(179) and any benefits accruing or p o t e n t i a l l y accruing to the co n t r o l l i n g g r o u p . d 8 0 ) Consequently, minority shareholders may obtain equal access to material information about the a f f a i r s of the issuer and the conduct of i t s management, without having to i n i t i a t e expensive proceedings to acquire t h i s protection. Furthermore, the Ontario Proposals enable shareholders to make th e i r own investment decisions. They require approval of every transaction by at least a m a j o r i t y d 8 1 ) of the minority to negative the element of coercion which almost invariably forces a great majority of shareholders and even d i s s e n t i e n t s d 8 2 ) to accept an of f e r made at a premium above market value. The Ontario Securities Commission i s therefore not charged with the r e s p o n s i b i l i t y of assessing the fairness of every - 36 - transaction, even though i t i s possessed with far greater expertise and administrative c a p a b i l i t i e s than the courts.(183) It i s not the intention of these provisions to create e f f i c i e n t market conditions where information flows freely, there are many participants and no i n s t i t u t i o n a l imperfections or corrupt market practices exist. They merely attempt to ensure that the imperfections of Canadian s e c u r i t i e s markets often r e s u l t i n g i n the lack of an active market for shares do not prevent shareholders from making an informed decision about the suf f i c i e n c y of the consideration they are offered. Drafters of the Ontario Proposals, however, were also sensitive to the fact that the application of these rules would not be appropriate in a l l circumstances. The Ontario Securities Commission i s prepared to grant exemptions, s p e c i f i c a l l y where: 1. the costs of valuation would be onerous to the issuer when there are minimal Ontario shareholdings or a minimal minority p o s i t i o n exists and a statutory or contractual appraisal right i s available to the minority(184). minority shareholders are persons who are generally contemplated by s e c u r i t i e s l e g i s l a t o r s to have "close bonds of association" with the issuer or who have l i t t l e "need to know" further information about the a f f a i r s of the issuer i n order to make a r a t i o n a l investment decisional85). the disclosure of the required information to security holders would cause a detriment to the issuer that would outweigh the benefit of information to prospective recipients (186); where the market price of minority shares may be considered a substantial r e f l e c t i o n of the i n t r i n s i c value because i t was arrived at i n a genuine arms length transaction (for example, i n a takeover bid resu l t i n g i n control of the corporation changing hands)(187). - 38 - 5. the issuer has been forced to comply i n other j u r i s d i c t i o n with more stringent disclosure requirements than the Ontario Proposals. (188) In spite of t h e i r providing shareholders with the potential to command the i n t r i n s i c value of t h e i r shares at no cost, the Ontario Proposals have not escaped c r i t i c i s m . The problems have arisen c h i e f l y i n connection with c a l c u l a t i o n of the "majority" and "minority" groups.(189) For example, minority shareholders may accept a tender o f f e r even though they may consider i t unfair because they fear the l i k e l y success of the o f f e r , adverse tax consequences and the p o s s i b i l i t y of being l e f t holding an i l l i q u i d security. It has also been argued that the majority of the minority test ought not to be applied where one large minority shareholder can control the vote of the minority for i t s own interest(190) o r where there are so few minority shareholders that approval by a majority may prove d i f f i c u l t to obtain. - 39 - In answer to these c r i t i c i s m s , the Ontario Securities Commission has stated that i t w i l l not require approval by a majority of the minority where the c o n t r o l l i n g shareholder already holds i n excess of ninety percent of the outstanding and issued shares and a statutory or contractual appraisal right i s available to the m i n o r i t y . d 9 1 ) The Commission has also set out the following guidelines to c l a r i f y who constitutes a majority or two- thirds of the minority: 1. In a two-stage transaction i n which an o f f e r to purchase i s followed by a going private reorganization, those who accept the o f f e r at stage one may be included i n the c a l c u l a t i o n of the majority test, i f the intention to e f f e c t the going private transaction was c l e a r l y disclosed at the time of the stage one transaction and a f u l l valuation was also provided at the time of the stage one transaction.(192) - 40 - I f , however, i n a two-stage transaction, the income tax consequences to the shareholder d i f f e r s i g n i f i c a n t l y between the acceptance of the stage one o f f e r and p a r t i c i p a t i o n in the stage two going private transaction, those who accept the o f f e r at stage one should be included i n the c a l c u l a t i o n of the minority only i f the stage one off e r i s kept open u n t i l at least 7 days a f t e r the vote on the stage two transaction.(193) The shareholdings of directors and senior o f f i c e r s of the corporation w i l l generally be aggregated with those of the c o n t r o l l i n g shareholder on the assumption that t h e i r respective interests are common. However, where evidence indicates that the directors or senior o f f i c e r s are independent of the c o n t r o l l i n g shareholder and the transaction has the same consequences for them as for the public shareholders, they w i l l be considered to be minority shareholders for the purposes of t h i s test A 1 9 4 ) - 41 - 4. A majority or two-thirds of the minority refers to a majority or two-thirds of the minority held shares represented i n person or by proxy at the general meeting,(195) 5. Separate majority of the minority tests may be required in the same transaction where the minority i s seen to include two d i s t i n c t i n t e r e s t groups.(196) The Draft OBCA states that a determination of the t o t a l number of votes cast i n favour of or against the transaction, for the purposes of the majority of the minority test, should disregard: " i . s e c u r i t i e s held by a f f i l i a t e s of the corporation; i i s e c u r i t i e s , the b e n e f i c i a l owners of which w i l l receive, consequent upon the going private transaction, a per security consideration greater than that available to other holders of affected s e c u r i t i e s of the same class; i i i s e c u r i t i e s the b e n e f i c i a l owners of which, along or i n combination with others, a f f e c t materially the control of the corporation and who, p r i o r to d i s t r i b u t i o n of the information c i r c u l a r , entered into an understanding that they would support the going private transaction."(197; - 42 - D. Enjoining a Going Private Transaction i n the Absence of Rules Creating A r t i f i c i a l Market Conditions Provided an acquiror has complied s t r i c t l y with a l l statutory procedural requirements, squeezeout transactions should only be prohibited i n j u r i s d i c t i o n s where the preceding rules creating a r t i f i c i a l market conditions are unavailable to minority shareholders. It i s only i n the Maritimes or Quebec(198)^ therefore, where shareholders should be successful in obtaining the assistance of a j u d i c i a l or administrative body to enjoin a transaction i f the terms are unfair. 1. J u d i c i a l R e l i e f A court may order the issuance of an injunction rather than the payment of damages 0 / 9) when: (a) the minority shareholders have not been given the opportunity to vote on a transaction as a separate class ("Majority of the Minority Test"); (b) the transaction lacks a proper corporate purpose ("the Proper Corporate Purpose Test"); - 43 - either the c o n t r o l l i n g shareholders or directors of the issuer have committed a breach of a f i d u c i a r y duty owed to the company and to the minority shareholders. ("Fiduciary Duties"). Majority of the Minority Test The "majority of the minority" test f i r s t attracted attention when the decision of Tempieman, J. i n Re Hellenic & General Trust(200) expressly recognized that a l l companies are no longer operated as quasi- partnerships and that c o n t r o l l i n g shareholders do not always have a community of inte r e s t with the minority. Based on these commercial p r i n c i p l e s the Court refused to sanction a scheme of arrangement involving the expropriation of minority shares because a majority of the independent(201) minority shareholders had not approved the transaction - even though the company had only issued one class of common shares.(202) - 44 - The Hellenic test has not been adopted by- Canadian courts( 203) even though there has been opportunity for i t s application. For example, i n Re Simco Ltee(204) f Dugas J. approved an arrangement involving the elimination of cumulative dividends on the preferred shares of the company provided that the sole dissenting shareholder surrendered his shares for an amount equal to th e i r par value and the accumulated dividends thereon.(205) The court chose not to enjoin the transaction on the grounds that the sole dissenting shareholder had no opportunity to vote at the general meeting as a member of a separate class, even though he was the only preference shareholder who was not also a common shareholder and who thereby stood to receive a substantial amount more on li q u i d a t i o n following elimination of the dividends i n arrears.(206) - 45 - The Proper Corporate Purpose Test(207) The "proper corporate purpose" test was formulated by American courts to prevent insiders from engaging in a naked grab for power without further j u r i s d i c t i o n . It i m p l i c i t l y accepts the proposition that a shareholder has a right to continued equity p a r t i c i p a t i o n which may be abrogated only when there i s a proper corporate purpose for a squeezeout transaction. Unfortunately, there i s no j u d i c i a l consensus as to what constitutes a "proper corporate purpose". The views of American state( 208) court judges have d i f f e r e d considerably, r e s u l t i n g i n the following l i s t of legitimate business reasons for a squeezeout: substantial savings i n housekeeping and shareholder servicing costs(209) f the d a n g e r of f i n a n c i a l collapse(210). elimination of former employees(211); elimination of c o n f l i c t s of interest(212). operating eff i c i e n c i e s ( 2 1 3 ) . tax savings(214). - 46 - and the f a c i l i t a t i o n of long term debt financing.(215) Some courts however, have decided that the elimination of the minority- i s not a proper corporate purpose.(216) There i s some indication that Canadian courts may require the demonstration of a proper corporate purpose i n squeezeout transactions. In Westeel, Montgomery, J. rejected the argument of the defendants that an a f f i l i a t e of the acquiror took part i n the transaction i n order to reduce the tax impact of the transaction on the minority shareholders and concluded that the elimination of p u b l i c l y held shares was the sole reason for the amalgamation.(217) In reaching his decision, to enjoin the transaction Montgomery, J. r e l i e d on two e a r l i e r decisions i n which courts refused to permit the compulsory a c q u i s i t i o n of minority shares. In Re Bugle Press(2l8), two shareholders of a publishing company, who each owned 45% of the issued c a p i t a l , incorporated - 47 - a new company i n which they each held 50% of the issued shares. The new company subsequently made a takeover b i d for a l l outstanding and issued shares of the publishing company at L 10 per share, a figure based on an independent valuation of the share c a p i t a l . Unlike the two c o n t r o l l i n g shareholders, the person who held the remaining 10% of the issued c a p i t a l of the offeree company declined the o f f e r and sought a declaration to prevent the new company from acquiring his shares pursuant to the compulsory a c q u i s i t i o n provisions contained i n section 209 of the U.K. Companies Act. At T r i a l , Buckley, J. held that the offeror had f a i l e d to discharge the onus of proving that the price at L 10 per share was f a i r and ordered that the minority shareholder was e n t i t l e d to the r e l i e f he sou g h t . ( 2 1 9 ) - 48 - On appeal, Lord Evershed stated that the minority shareholder had demonstrated that the court should "order otherwise" and not permit the expropriation of h i s shares. He viewed the transaction as a sham intended s o l e l y to eliminate the minority shareholder because there was substantial i d e n t i t y of intere s t between the c o n t r o l l i n g shareholders and the offeror.(220) The c o n t r o l l i n g shareholders had only proposed that t h e i r wholly owned associate company expropriate the minority shares of the publishing company because section 209 could not be used by individuals to acquire the oustanding 10% of the shares.(221) Similarly, i n Esso Standard (Inter-Amer) v. J.W. Enterprises Inc.(222) f the Supreme Court of Canada upheld the decision of the Ontario Court of Appeal to "order otherwise" i n compulsory a c q u i s i t i o n proceedings under section 136 of the Canada Corporations Act.(223) - 49 - The facts of the decision resemble those i n Bugle Press. Esso, a wholly owned subsidiary of Standard O i l ("Standard") made a takeover bid for a l l the outstanding shares of International Petroleum Corporation Limited (International) which was incorporated under the Canada Corporations Act. Esso expected to compulsorily acquire any outstanding minority shares of International following the takeover bid because Standard, which was also the owner of 90 per cent of the issued share c a p i t a l of International, indicated i t s intention to the accept the o f f e r . A number of dissenting shareholders sought a declaration that Esso was not e n t i t l e d to acquire the remaining shares because holders of less than 90 per cent of the shares, otherwise held by Standard, had accepted the o f f e r . Judson, J. held that the whole proceeding was a sham intended s o l e l y for the purpose of - 50 - expropriating minority shares on terms set by the majority because of the substantial i d e n t i t y of inte r e s t between Standard and Esso. (224) With respect, i t i s submitted that Canadian courts should not adopt the "proper corporate purpose" test for a number of reasons: 1. The motives for a squeezeout are irrelevant so long as shareholders are adequately compensated for t h e i r shares. Contrary to the decision i n Singer v.Magnavox( 2 25), a shareholder's r i g h t i s exclusively i n the value of h i s investment and not i t s form. 2. The investing public i s r a r e l y concerned with the economic j u s t i f i c a t i o n s of going private transactions. At the r i s k of sounding cynica l , i t i s submitted that most public shareholders are merely interested i n the greatest return on t h e i r - 51 - investment and do not care whether they have obtained t h e i r y i e l d from the ownership of shares i n one company rather than another.(2 26) 3. Commonwealth courts have already imposed equitable r e s t r a i n t s on the voting powers of c o n t r o l l i n g shareholders. For example, amendments to the corporate constitution must be made "bona fide i n the best interests of the company".(227) TO require c o n t r o l l i n g shareholders to demonstrate a proper corporate purpose i s redundant. 4. Minority shareholders have c r i t i c i z e d going private transactions because the actions taken by c o n t r o l l i n g shareholders deprive them of t h e i r a b i l i t y to make investment decisions. It i s no less objectionable that courts w i l l be able to make investment decisions on behalf of the minority in determining whether a transaction has a proper corporate - 52 - purpose. Minority shareholders may welcome the purchase of t h e i r shares when there i s l i t t l e or no market for them. 5. The adoption of a "proper corporate purpose" test w i l l lead to the creation of a large body of case law defining that phrase and w i l l force Canadian courts to make a case by case determination of the economic merits of many squeezeout transactions. In the past, Canadian courts have tended not to scrutinize the v a l i d i t y of decisions made by directors of the company because they have assumed that management can better assess what transactions are i n the best interests of the company.(228) 6. The Bugle Press and Esso Standard decisions do not stand for the leg a l p r i n c i p l e that squeezeouts may not take place i n the absence of a proper corporate purpose. In reaching his conclusion i n - 53 - Esso Standard to "order otherwise", Judson, J. stated that the transaction was not a "true takeover(229) because Esso had not acquired 90 per cent of the independently held shares and not because the transaction lacked a business purpose. Many statutes which contain compulsory acquis i t i o n provisions now expressly state that 90% of the shares must be held by persons other than the offeror or parties dealing at non-arm's length with the of f e r o r . (230) (c) Fiduciary Duties (i) Directors' Duties Directors owe fid u c i a r y duties to the company alone and not to the ind i v i d u a l members or to a person who has not yet become a member, such as a poten t i a l purchaser of shares.(2 31) The breach of such a duty e n t i t l e s the shareholders or, i n certain j u r i s d i c t i o n s , a wider - 54 - class of persons,( 232) to sue derivatively(233) o n behalf of the company. Access to court for aggrieved parties i s far easier and less costly now thanks to the statutory s i m p l i f i c a t i o n of the "procedural thicket"( 234) surrounding the rule i n Foss v. Harbottle(2 35) a n ( j the equitable j u r i s d i c t i o n of the Court to indemnify a p l a i n t i f f against the costs of a derivative action.(236) Minority shareholders who are forced to surrender t h e i r shares for less than i n t r i n s i c value without the benefit of s u f f i c i e n t disclosure may attempt to enjoin a going private transaction because the c o n t r o l l i n g shareholders, i n t h e i r capacity as directors, have violated a number of statutory and common law rules designed to prevent management from diverting corporate opportunities to themselves. - 55 - (A) Duty to Act Honestly and In Good Fait h A number of j u r i s d i c t i o n s contain statutory provisions which require directors to act honestly and in good f a i t h with a view to the best interests of the company.(2 37) Even though the established case law focuses on p r o f i t maximization as what constitutes the "best interests of the company", (2 38 ) directors are also required to consider the interests of a l l the shareholders who have elected them. Consequently, while the directors may authorize a going private transaction to eliminate shreholder servicing costs, they must also endeavour to f i x a " f a i r p r i c e " for any minority shares which w i l l be expropriated. - 56 - (B) Duty to Exercise Power for a Proper Purpose (239 ) A common law incident of a director's f i d u c i a r y duty i s the requirement that he must exercise his powers only for those purposes for which they were conferred.(240) Directors, therefore, must not authorize a reduction of c a p i t a l or an amalgamation primarily to increase t h e i r equity p a r t i c i p a t i o n i n the issuer, even though they believe that such transactions are i n the best interests of the company.(241) Unfortunately, minority shareholders w i l l be hard pressed to prove that the motives of the directors were improper. The case law i l l u s t r a t e s that the actions of the directors w i l l not be impugned, notwithstanding that the court may - 57 - suspect that the directors have abused t h e i r powers, unless i t can be shown that the directors have i n fact acted for an improper purpose.(242) (C) Duty of Loyalty Directors must not put themselves in a position where t h e i r personal interests c o n f l i c t with a duty of loy a l t y to the company.(243) Moreover, they must not p r o f i t from t h e i r position as fiduciaries.(244) Directors of the issuer, therefore, must r e f r a i n from authorizing an amalgamation squeezeout between the issuer and a company of which they are also the directors. As f i d u c i a r i e s of the shareholders of the issuer, the directors must endeavour to secure the most pr o f i t a b l e share-cash/debt - 58 - exchange r a t i o for the minority. However, these same directors must also maximize the p r o f i t of the other amalgamating company and offer as l i t t l e as possible to those persons whose shares of the issuer w i l l be expropriated.(245) j n fact, there i s recent case law which suggests that directors must not s i t on the boards of interlocking companies, l e t alone exercise t h e i r voting powers in these circumstances.(246) ( i i ) The Majority-Minority Duty It has long been recognized as an equitable p r i n c i p l e i n American corporate law that c o n t r o l l i n g shareholders stand i n the position of absolute dominance over the interests of the minority and are required to demonstrate good f a i t h and fairness when exercise t h e i r voting r i g h t s . ( 2 4 7 ) While Commonwealth - 59 - courts permit minority shareholders to sue the insiders or the directors of the issuer personally for the infringement of t h e i r rights as members(248)t they have never accepted the notion that the co n t r o l l i n g shareholders owe a f i d u c i a r y duty to the Company. ( 2 4 9 ) Although they have imposed equitable r e s t r a i n t s on the r i g h t of insiders to vote t h e i r shares with abandon at the general meeting,(250) the Courts have i n s i s t e d that a share i s an item of property which shareholders may use to maximize t h e i r own interests.(2 51) Recent decisions, however, indicate that courts are beginning to acknowledge the absence of any community of int e r e s t among shareholders of a public company and the need to r e s t r i c t insiders from authorizing transactions from which they w i l l benefit personally to the detriment of the Company or the minority shareholders. For example, i n Goldex - 60 - Mines Ltd. v. R e v i l l ^ 2 5 2 ) , the Ontario Court of Appeal held that directors owe a f i d u c i a r y duty to shareholders of a company not to furnish false information i n a disclosure document and stated that " i t has long been the law that the minority may sue personally i n respect of an oppressive and unjust exercise of power".( 2^3) j n Farnham v. F i n g o l d ( 2 54) f the p l a i n t i f f sued for damages alleging that he should share i n the premium paid to the defendants on the sale of t h e i r control block of shares.- Morand, J. stated that the action was premised on the existence of a f i d u c i a r y obligation i n the control group towards the minority, and dismissed a motion brought by the defendants who argued that the p l a i n t i f f had no cause of a c t i o n . ( 2 55) Recognition of a f i d u c i a r y duty owed by c o n t r o l l i n g shareholders to minority - 61 - shareholders i s p o t e n t i a l l y ripe for development i n squeezeout transactions because the lack of any community of interest between shareholders i s quite apparent. Insiders can use t h e i r voting power to determine the length of time minority shareholders may remain as investors i n the issuer's s e c u r i t i e s . They can dictate the amount of consideration offered to the minority and often use corporate funds to i n d i r e c t l y increase t h e i r ownership i n the issuer. I t i s therefore hardly surprising that the courts i n both Maple Leaf Mills(256) and Westeel {257) queried whether "the majority shareholders i n promoting and approving the scheme "were committing a breach of a f i d u c i a r y duty owed to the m i n o r i t y 2 5 8 ) 2. Administrative R e l i e f Minority shareholders may p e t i t i o n an administrative body rather than the courts to enjoin a - 62 - squeezeout transaction because t h e i r application w i l l be processed with greater e f f i c i e n c y and expertise and at less expense. In addition, to t h e i r other enforcement powers,(259) p r o v i n c i a l s e c u r i t i e s regulatory agencies have the authority to issue a cease trading order(260) o r d e n v a n issuer exemptions from r e g i s t r a t i o n or prospectus requirements(261) f w h i l e a Stock Exchange may suspend the trading i n l i s t e d s e c u r i t i e s through i t s f a c i l i t i e s . ( 2 6 2 ) (a) The Cease Trading Order(263) The cease trading order i s a "blunt instrument" which may i n f l i c t great harm.(264) It may damage the reputation of the issuer and depress the price of i t s s e c u r i t i e s even though the reason for the cessation of trading has no connection with any event, which object i v e l y considered, would reduce the pri c e of the stock.(265) Moreover, the cease trading order prevents many investors who hold s e c u r i t i e s of the issuer from disposing of them, even though the - 63 - order i s intended to r e s t r a i n the a c t i v i t i e s of a few. Recognizing the seriousness of t h i s remedy( 266), the Ontario Securities Commission has indicated i n a p o l i c y statement(267) and two recent decisions( 268) that i t w i l l only order the sec u r i t i e s of an issuer going private to cease trading when the terms of a squeezeout transaction which involves s i g n i f i c a n t v i o l a t i o n s of s e c u r i t i e s l e g i s l a t i o n are manifestly unfair and there i s no other s u f f i c i e n t remedy available to protect shareholders.(269) (b) The Denial of Exemptions( 2 7 0' An issuer which dis t r i b u t e s i t s redeem- able s e c u r i t i e s to minority shareholders i n exchange for t h e i r common shares on a takeover bid ( 2 "71), an amalgamation ( 2 7 2 ), share r e c l a s s i f i c a t i o n ^ 7 3 ' or consolida- t i o n ^ 7 4 ' squeezeout i s not required to - 64 - comply with registration^ 275 ) a n c j prospectus( 276) provisions contained i n p r o v i n c i a l s e c u r i t i e s l e g i s l a t i o n . Securities regulatory bodies, however, may deny such exemptions to any person or company i f , in i t s opinion, such action i s i n the public i n t e r e s t ( 2 7 7 ) , thereby prohibiting these parties from trading t h e i r s e c u r i t i e s anywhere i n the Province. For example, the Ontario Securities Commission has exercised i t s d i s c r e t i o n to deny prospectus, takeover bid or issuer bid exemptions( 278) in circumstances where they concluded that there has been an abuse of exemptions( 279) # contravention of se c u r i t i e s l e g i s l a t i o n , regulations or p o l i c y - statements ( 2 8 <-*), contravention of an Exchange's requirements( 2 8^), or the commission of a breach of other s t a t u t e s . ( 2 8 2 ) Although there are no reported decisions of any denial of the exemptions otherwise - 65 - available to an issuer i n any squeezeout transaction, the broad and sweeping language i n the LoebexJ 2 8 3) a n ( j Cable- c a s t i n g ^ 8 4 ) decision, regarding what constitutes " p r e j u d i c i a l to the public i n t e r e s t " may signal a movement by s e c u r i t i e s agencies i n t h i s direction.(285) IV. Conclusion; Towards a Rational Scheme of Regulating Going Private Transactions A. The Regulatory Framework Proposed for Canada (286) Insiders should be permitted to expropriate minority shares using any squeezeout technique regardless of whether a statutory compulsory a c q u i s i t i o n right exists, provided that the minority shareholders are given the opportunity to command payment of an amount at least equal to the i n t r i n s i c value of t h e i r shares. Residents of Ontario who are shareholders of "offering c o r p o r a t i o n s ' ^ 2 8 7 ) incorporated i n the province are protected i n two ways.(2 8 8) They may - 66 - either make t h e i r own decisions about the fairness of an o f f e r a f t e r f i r s t reviewing extensive information provided by the acquiror about the a f f a i r s of the Company or they may obtain a j u d i c i a l determination of the i n t r i n s i c value of t h e i r shares i n dissent, oppression or compulsory acqui s i t i o n proceedings, as do shareholders of federal< 2 8 9)> Manitoba, Saskatchewan or B r i t i s h Columbia companies. Minority shareholders of Alberta companies may seek the protection of the Court following arrangement, amalgamation, reduction of c a p i t a l or compulsory a c q u i s i t i o n proceedings. It i s only i n the Maritimes or Quebec that shareholders should be successful i n enjoining a going private transaction when they consider the consideration offered to be u n f a i r ^ 2 9 ^ ) i . e . less than i n t r i n s i c value. Courts i n these j u r i s d i c t i o n s should then only order the issuance of an injunction assuming s t r i c t compliance with statutory procedural formalities on the grounds that the directors or c o n t r o l l i n g shareholders of the issuer have committed a breach of f i d u c i a r y obligations to the company or the minority has f a i l e d to vote as a separate class, even though the company has - 67 - authorized and issued only one class of shares. B. A Similar Alternative: The Brudney- C h i r e l s t e i n Analysis The foregoing analysis d i f f e r s s l i g h t l y from the c l a s s i f i c a t i o n of freezeouts suggested by Professors Brudney and Chirelstein.( 291) They argue that a l l freezeouts are not al i k e and that shareholders require varying degrees of protection i n (1) the two-step merger; (2) the pure going private transaction; and (3) the merger of long held a f f i l i a t e s . The "two step merger" involves an integrated squeezeout plan carried out by an arm's length acquiror. Following a tender o f f e r for a l l the minority shares, an amalgamation i s used to eliminate any outstanding shares of those persons who f a i l e d to accept the terms of the takeover bid. Brudney and C h i r e l s t e i n have concluded that the extensive negotiations which take place i n an arm's length transaction and the operation of the market place w i l l ensure that the takeover bid price w i l l r e f l e c t the i n t r i n s i c value of minority shares and that - 68 - shareholders i n t h i s transaction only require protection from "whipsaw".92) TO prevent shareholders rushing to accept a tender o f f e r because they fear being frozen out at a lower price on the amalgamation i f the bid for control succeeds, the authors propose that tender of f e r o r s who contemplate a second step merger be required to announce t h e i r future intentions at the time the takeover bid i s made and o f f e r to pay a price for shares equal to the amount offered on the i n i t i a l tender.(293) Brudney and C h i r e l s t e i n , however, argue for the p r o h i b i t i o n of the pure going private transaction i n which c o n t r o l l i n g shareholders use an associate or a f f i l i a t e to expropriate minority shares often at less than t h e i r i n t r i n s i c value, in order to partake of those benefits only available to shareholders of a private company.(2 9 4) "The absence of s o c i a l benefit, the strength of fid u c i a r y obligation [owed by the c o n t r o l l i n g shareholders to the minority] and the danger of unpoliceable abuse"(2 95) i n the transaction form the basis of t h e i r conclusions. - 69 - A proposed merger between a parent and subsidiary i t has controlled for an extended period of time i s to be distinguished from a "pure going private transaction" because of the "private and s o c i a l benefits" i t o f f e r s . Quite often, the fact that an amalgamation of two companies can resu l t i n a larger o v e r a l l value for the two firms than the sum of t h e i r value as separate e n t i t l e s makes i t d i f f i c u l t to deny that a business purpose for the transaction does exist.(2 96) T 0 f o r e s t a l l s e l f - d e a l i n g by co n t r o l l i n g shareholders, however, the authors propose that t h i s transaction should be subject to a rigorous "fairness" test which dictates that the recipients of receive common stock of the parent or s u f f i c i e n t l y valuable consideration to enable them to reacquire the same proportionate interest i n the parent that they would have possessed had the consideration received been common stock alone.(2 97) There i s considerable merit to the Brudney- C h i r e l s t e i n analysis. It seeks to i s o l a t e and weight the socio-economic benefits present i n each type of transaction against the costs of regulation and - 70 - acknowledges that motive i s generally an ir r e l e v a n t consideration in the determination of the degree of regulation required. Moreover, i t recognizes that squeezeout transactions should not be prohibited when minority shareholders are given the opportunity to command payment of at least an amount approximating the i n t r i n s i c value of t h e i r shares. However, i n spite of i t s merits, t h i s a n a l y t i c a l framework should not be adopted i n Canada. Brudney & C h i r e l s t e i n base t h e i r argument for pro h i b i t i o n of pure going private transactions on the i n a b i l i t y of c o n t r o l l i n g shareholders to determine the i n t r i n s i c value of minority shares and the consequent i n a b i l i t y to compensate the minority f a i r l y for i t s investments: "If taking the firm private increases i t s value by reducing accounting and legal fees and the cost of r e l a t i n g to public shareholders, determining the displaced shareholders' f a i r share of the increment thus expected to r e s u l t from t h e i r displacement presents intractable problems. To quantify the benefits embodied i n the e x p l i c i t j u s t i f i c a t i o n s offered for going private would be d i f f i c u l t enought. But i f account must also be taken of the unspoken benefits, such as tax advantages and other perquisites that would accrue to the co n t r o l l i n g shareholders as a re s u l t of being - 71 - freed of public accountability, the problem of implementing a fairness standard becomes close to being insurmountable."(298) With respect, in spite of the valuation problems reviewed e a r l i e r i n th i s paper, i t i s submitted that the complex ca l c u l a t i o n of i n t r i n s i c value w i l l not be as d i f f i c u l t for the courts as the authors suggest because " f a i r value" should not include any valuation of the "unspoken benefits" available to insiders following a going private transaction.(299) More importantly, to prohibit pure going private transactions would deny many minority shareholders the chance to gladly surrender t h e i r shares in an otherwise i l l i q u i d market and to reinvest the proceeds i n an investment promising a greater y i e l d . At least the two Canadian alternatives which create a r t i f i c i a l market conditions provide the shareholders with t h i s opportunity. C. The Prospect of Successful Regulation Once i t i s apparent to c o n t r o l l i n g shareholders that the minority i s e f f e c t i v e l y protected, going private transactions on unfair terms should abate. Insiders w i l l then be quick to ensure that minority shareholders receive consideration at least equal i n - 72 - value to the i n t r i n s i c worth of t h e i r shares or s u f f i c i e n t information to make an informed investment decision.(300) A going private transaction, however, constitutes only one example of techniques enabling the majority to act contrary to the best interest of the minority. As the community of interests between shareholders has decreased, the ingenuity of c o n t r o l l i n g shareholders i n using t h e i r voting strength to t h e i r own advantage has grown. Unfortunately, j u d i c i a l , l e g i s l a t i v e and administrative bodies have not responded very quickly to the c a l l s by minority shareholders for assistance.(301) i t i s hoped that the abuses suffered by the minority i n going private transactions w i l l prompt lawmakers to be more v i g i l a n t of minority rights in future and to l e g i s l a t e against pot e n t i a l c o n f l i c t s of in t e r e s t before any further problems a r i s e . FOOTNOTES Al b o i n i , Ontario Securities Law (Toronto: Richard DeBoo, 1980) at 631-646; Kroft, "The Going Private Transaction: Some Corporate and Income Tax Consequences of a Public Company Becoming Private", 12 Ottawa L. Rev. 49 (1980); Al a i n , "Le d r o i t des valeurs mobilieres et l e retour des compagnies publiques au statut de compagnie privee," 20 Les Cahiers de Droit 539 (1979); Hansen & Iacobucci, "Acquisition of Minority Shares Under the CBCA", 4 Can. Bus. L.J. (1980) [forthcoming]; Taves, "Corporate Buy- Backs", i n P r a i r i e Provinces Tax Conference 93 (1979); Lange, "Freeze Out Amalgamations: The Federal and Ontario Positions", 27 Chitty's Law Journal 217 (1979); Glover & Schwartz, "Going Private i n Canada", 3 Can. Bus. L.J. 3 (1978); Glover & Schwartz, "Going Private" Fever Cools Off," Financial Post, November 11, 1978, at 40, c o l . 1; Pitch, "Going Private: The Sile n t Minority i s No Longer S i l e n t , " 3 Can. Lawyer 1 (February, 1979) at 12; Campbell & Steele, "What Price Minority Shares?," I l l CA Magazine, Oct. 1978 at 28; Potter, "Acquisition of Minority Held Shares Through Arrangements," L.E.S.A. Banff Conference Papers (1977); Hansen, "Minority Squeeze-outs", i n Report - 74 - of the T h i r t i e t h Tax Conference 408 (1980) [hereinafter cited as [year] Conference Report]; Dey, "Protecting Minority Shareholders i n Public Corporations," Can. B. Assoc. Update '79, 1 (1979); Palmer, "Amalgamations - Winding Up," 1978 Conference Report 469; Magnet, "Shareholders' Appraisal Rights i n Canada", 11 Ottawa L. Rev. 98 (1979); Coleman, "Securities L e g i s l a t i o n — Where We have Been and Where We are Going", i n New Securities L e g i s l a t i o n 237 (1979); Scace; "Going Private and Deconglomeration", 1977 Conference Report 569 (1978); Ward, "Arm's Length Acquisitions Relating to Shares i n a Public Corporation", i n 1978 Corporate Management Tax Conference 108 (C. Frost ed. 1978); B a i l l i e , "Developments i n Securities Regulation A f f e c t i n g Corporate Acquisitions", i n 1978 Corporate Management Tax Conference 1978 at 177 (C. Frost ed. 1978). 2. A. Sommer, "Going Private: A Lesson i n Corporate Responsibility" Law Advisory Council Lecture, Notre Dame Law School, November 14, 1974; Sommer, "Further Thoughts on "Going Private", "Second Annual Securities Seminar, Detroit Institute for Continuing Legal Education, March 14, 1975; B a i l l i e , supra note 1; Securities and Exchange Commission - 75 - [hereinafter c i t e d as SEC], Matter of B e n e f i c i a l Ownership, Takeovers and Acquisitions by Foreign and Domestic Persons, 39 Fed. Reg. 33,385 (1974) as amended by 39 Fed. Reg. 41,223 (1974). See also Salter, "Going Private" Issuer Bids — Insider Bids —Squeeze-Outs (memorandum to 0.S.C. May 17, 1978) and "Notice: 'Going Private' Transactions, including Comments as to Other Issuer Bids and Insider Bids" B u l l O.S.C. 149 (July, 1978). 3. Shareholders who control the company may hold either greater than 50% of the voting equity or have de facto control through control of the proxy machinery of the Company. The Draft Ontario Business Corporations Act, s. 188 [hereinafter c i t e d as Draft OBCA], s. 163 of the Regulations under The Securities Act, 1978, S.O. 1978, c. 47 as amended [hereinafter cited as OSA], and SEC, "Going Private" Rule 13e-3 (42 Fed. Reg. 60,090 (1977) (now adopted by Release 33-6100, August 6, 1979) a l l contain d e f i n i t i o n s of a "going private transaction". Section 163 of the OSA Regulations states that: "going private transaction" means an amalgamation, arrangement, consolidation or other transaction proposed to be carried out by an insider of an issuer as a consequence of which the inter e s t of the holder of a p a r t i c i p a t i n g security of the issuer in that - 76 - security may be terminated without the consent of that holder and without the substitution therefor of an interes t of equivalent value i n a p a r t i c i p a t i n g security of the issuer or of a successor to the business of that issuer or of another issuer that controls the issuer but does not include the purchase of p a r t i c i p a t i n g s e c u r i t i e s pursuant to a statutory r i g h t of a c q u i s i t i o n ; " Section 188(l)(b) of the Draft OBCA states that a "(b) 'going private transaction' means an amalgamation, arrangement, consolidation or other transaction carried out under t h i s Act by a corporation that would cause any p a r t i c i p a t i n g security of the corporation to be an affected security, but does not include a redemption, or other compulsory termination of the interest of the holder in a security, i f the security i s redeemed or otherwise acquired, (i) in accordance with the terms and conditions attaching thereto, or ( i i ) under a requirement of the a r t i c l e s r e l a t i n g to the class of s e c u r i t i e s or of t h i s Act; " Section 188(1)(c) of the Draft OBCA states that a "(c) 'participating security' means a security issued by a corporation other than a security that i s , in a l l circumstances, limited i n the extent of i t s p a r t i c i p a t i o n i n earnings and includes, (i) a security currently convertible into such a security, and ( i i ) currently exercisable options and rights issued by the corporation and e n t i t l i n g the holder to acquire such a security or such a convertible security." - 77 - An "affected security" i s defined i n s. 188(1)(a) as "(a) a p a r t i c i p a t i n g security of a corporation i n which the i n t e r e s t of the holder would be terminated by reason of a proposed transaction without the consent of the holder other than an a c q u i s i t i o n under section 186, and without the substitution therefor of an i n t e r e s t of equivalent value in a security that i s , (i) a p a r t i c i p a t i n g security and has no r e s t r i c t i o n s on i t s p a r t i c i p a t i o n rights, and ( i i ) issued by the corportion, an a f f i l i a t e of the corporation or a successor corporation;" SEC Rule, s. 13e-3(a)(4) terms the "going private trans- action" as a "Rule 13e-3 transaction which has a reasonable l i k e l i h o o d or a purpose of producing, either d i r e c t l y or i n d i r e c t l y , such effects as the d e l i s t i n g of shares from a National Exchange or termination of the r e g i s t r a t i o n of the issuer...". For a l i s t of the e f f e c t s , see s. 13e-3(a)(4) ( i i ) . The specified transactions are: (a) a purchase of any equity security by the issuer of such security or by an a f f i l i a t e of such issuer; (b) a tender off e r or request or i n v i t a t i o n for tenders of any equity security made by the issuer of such class of s e c u r i t i e s or by an a f f i l i a t e of such issuer; or (c) a s o l i c i t a t i o n or d i s t r i b u t i o n subject to Regulation 14A [ss. 240.14a-l to 240.14a-103] or - 78 - Regulation 14C [ss. 240.14c-l to 14c-101] i n connection with cert a i n corporate events. The corporate events include a merger, consolidation, r e c l a s s i f i c a t i o n , r e c a p i t a l i z a t i o n , reorganization or similar corporate transaction by an issuer or between an issuer (or i t s subsidiaries) and i t s a f f i l i a t e s ; a sale by the issuer of substa n t i a l l y a l l of i t s assets to i t s a f f i l i a t e ; or a reverse stock s p l i t of any class of equity s e c u r i t i e s of the issuer involving the purchase of f r a c t i o n a l i n t e r e s t s . 5. See Carlton Realty Ltd. v. Maple Leaf M i l l s , 22 O.R. (2d) 198, 4 Bus. L.R. 300 (H.C. 1978); Alexander v. Westeel- Rosco Ltd., 22 O.R. (2d) 211, 4 Bus. L.R. 313 (H.C. 1978); Neonex I n t ' l Ltd. v. Kolasa, 3 Bus. L.R. 1, 84 D.L.R. (3d) 446 (B.C.S.C. 1978); In the Matter of Cablecasting Ltd., [Feb., 1978] B u l l , O.S.C. 37; In Re The Acquisi t i o n of Quegroup Inv. Ltd. of a l l the common shares of Queenswear (Canada) Ltd.; Quegroup Inv. Ltd. and Robert S. Vineberg, [1976] C.S. 1458; Gregory v. Canadian A l l i e d Property 11 B.C.L.R. 253, [1979] 3 W.W.R. 612; Nasgovitz v. Canadian M e r r i l Ltd. (unreported, Que. S.C., Dec. 1979); Jepson v. The Canadian Salt Co., 17 A.R. 460, [1979] 4 W.W.R. 35 (S.C.); Re Canadian Hidrogas Resources Ltd.; [1979] 6 - 79 - W.W.R. 705 (B.C.S.C.); Ruskin v. A l l Canada News Radio, 7 Bus. L.R. 142 (Ont. H.C. 1979); Re Ripley I n t ' l Ltd., 1 Bus. L.R. 269 (H.C. 1977); In Re The Matter of the Application of Domglas Inc. Pursuant to Section 184(15) of the Canada Business Corporations Act (Que. S.C. July 18, 1980) . 6. S p e c i f i c a l l y , see Singer v. Magnavox 380 A.2d 969 (Del 1977). For a review of the case law on the subject, see Borden and Messmar, "Going Private: A Review of Relevant Considerations" i n Eleventh Annual I n s t i t u t e on Securities Regulation (Practicing Law I n s t i t u t e , 1979) at 427 - 550. 7. In Maple Leaf M i l l s , supra, note 5, at 205 Steele, J. suggested that shareholders are e n t i t l e d to retain t h e i r property, i f they so wish except where there i s a r i g h t held by another to forcably take i t : "It matters not for t h i s purpose what pr i c e the taker i s w i l l i n g to pay". The "vested r i g h t s " theory i s not now recognized, i n Canadian corporate law as evidenced for example, by the need for approval of corporate transactions by special resolution and not by unanimity. See i n f r a , text at 16-17 and the comments of Greenberg, J. i n Domglas, supra, Note 5 at 26. - 80 - For further discussion, see Gibson, "How Fixed are Class Shareholder Rights?" 23 Law & Contemp. Prob. 283 (1958) and Johnson, "Delaware Reverses i t s Trend i n Going Private Transactions: The Forgotten Majority", 11 Loyola of Los Angeles L. Rev. 567 at 601 (1978). 8. Companies l e g i s l a t i o n may contain a provision authorizing compulsory acqui s i t i o n of less than 10% of the shares of a class outstanding following a takeover b i d i n order to prevent "oppression of the majority by the minority". See i n f r a , text, at 5 and 25. Note that the d e f i n i t i o n s of "going private transaction", supra, note 4 do not include "the purchase of p a r t i c i p a t i n g s e c u r i t i e s pursuant to a statutory right of ac q u i s i t i o n . " 9. The constating documents may expressly provide for the expropriation of minority shares. See P h i l l i p s v. Manufacturers Sec. 116 L.T. 290 (1917). If so, the shareholders should not be permitted to complain about expropriation because i t i s assumed that they have accepted a l l terms of the share "contract" when purchasing t h e i r shares. To quote Middleton, J.A. i n Re Jury Gold Mine Development Co., [1928] 4 D.L.R. 735 at 736: - 81 - "He i s a minority shareholder and must endure the unpleasantness incident to that s i t u a t i o n . If he chooses to r i s k h i s money by subscribing for shares, i t i s part of his bargain that he w i l l submit to the w i l l of the majority." The d e f i n i t i o n s of "going private transaction", supra, note 4 do not therefore include "purchases, redemptions or acquisitions required by the instrument creating or governing the class of s e c u r i t i e s " . 10. For example: 1. A corporate a s s o c i a t e / a f f i l i a t e may s t r i p the issuer of i t s retained earnings without tax l i a b i l i t y . These funds may then be used to pay o f f loans to i n s t i t u t i o n s which financed the squeezeout. 2. A corporate a s s o c i a t e / a f f i l i a t e may be able to make better use of the interest expense incurred when borrowing funds to finance the transaction than the co n t r o l l i n g shareholders. 3. A corporate a s s o c i a t e / a f f i l i a t e may be better able to provide alternate and more favourable tax treatment to - 82 - minority shareholders who are squeezed out than c o n t r o l l i n g shareholders. Assuming the insiders are individuals, only a corporate associate may issue shares with a high or low paid up c a p i t a l to the minority shareholders, whose proceeds of d i s p o s i t i o n w i l l be treated as a c a p i t a l gain or dividend upon redemption. For further d e t a i l s , see Kroft, supra, Note 1 at 111-114. 11. For example: 1. Certain j u r i s d i c t i o n s only permit an "acquiring company" to part i c i p a t e i n compulsory a c q u i s i t i o n proceedings. Infra, Notes 27 and 221. 2. A corporate associate w i l l have a greater number of acqui s i t i o n techniques such as amalgamation or share r e c l a s s i f i c a t i o n at i t s disposal than c o n t r o l l i n g shareholders who are i n d i v i d u a l s . Insiders who are individuals may not have s u f f i c i e n t funds or the security required to borrow money i n order to purchase minority shares. An issuer i s prohibited from providing i n d i r e c t or dir e c t f i n a n c i a l assistance to i t s shareholders. See The Business Corporations Act R.S.O. 1970 c. 53, s. 17 [hereinafter cited as OBCA]; The Companies Act R.S.A. 1970, c.60, s.14 [hereinafter c i t e d as ACA]; The Company Act, R.S.B.C. 1979 c.59, s.127 [hereinafter c i t e d as the BCCA]; The Canada Business Corporations Act S.C. 1974-75, c.33, s.42 [hereinafter c i t e d as CBCA]; The Business Corporations Act, 1977, R.S.S. 1978, c. C-23, s.42 [hereinafter c i t e d as the SBCA]; The Corporations Act, S.M. 1976, c.40, s.42 [hereinafter c i t e d as the MCA]; The Companies Act, R.S.N.B. 1973, c. 13, s.38 [hereinafter c i t e d as NBCA]; Draft OBCA s.20; The Companies Act, R.S.P.E.I. 1974, c. C-15, s.69 [hereinafter c i t e d as the PEICA]; Loi Sur les compagnies, R.S.Q. 1964 c.C-38, s.110 [hereinafter c i t e d as QCA]; The Companies Act R.S.N. 1970 c.54 s.16 [hereinafter cited as NCA] - 84 - However, f i n a n c i a l assistance may be given to or for the benefit of a wholly-owned subsidiary by i t s holding company. "associate" i s generally defined as: any company i n which a person b e n e f i c i a l l y owns, d i r e c t l y or i n d i r e c t l y shares carrying more than 10% of the voting rights attached to a l l outstanding and exercisable voting shares of the Company; a partner of that person; a t r u s t or estate i n which that person has a substantial b e n e f i c i a l interest or for which that person serves as a trustee or i n a similar capacity; a spouse, son or daughter of that person; or a r e l a t i v e of that person or of h i s spouse, other than a r e l a t i v e referred to i n paragraph (d) who has the same home as that person. - 85 - See CBCA s . 2 ( l ) ; BCCA s . l ( l ) ; SBCA s.2 ( l ) ( d ) ; MCA s . l ( l ) ( d ) ; Draft OBCA s . l ( l ) ( 4 ) ; ACA s.81(1)(b); Securities Act, R.S.B.C. 1979 c.380 s . l ( l ) [hereinafter c i t e d as BCSA]; Securities Act R.S.A. 1970 c.333 s.2(1)(1)1 [hereinafter c i t e d as ASA]; Securities Act, 1978 (Alberta, B i l l 76, November 1, 1978 1st reading) s . l ( l ) ( a . l ) [hereinafter c i t e d as B i l l 76]; Securities Act, 1967, R.S.S. 1978 c. S-42, s.2(l)(a) [hereinafter c i t e d as SSA]; Securities Act. R.S.M. 1970, c.250 s.1(1)1 [hereinafter c i t e d as MSA]; The Securities Act, 1979 (Manitoba B i l l 72, 1st reading May 29, 1980) s.1(1)2 [hereinafter c i t e d as B i l l 72]; Securities Act, S.O. 1978 c.47 s. 1(1)2 [hereinafter c i t e d as OSA]. Definitions of " A f f i l i a t e " are drafted i n a complex manner to catch transactions which would otherwise circumvent provisions of companies and s e c u r i t i e s l e g i s l a t i o n through the use of a network of companies. One company i s deemed to be a f f i l i a t e d with another i f one of them i s the subsidiary of the other, both are subsidiaries of the same company or i f each i s controlled by the same person. See - 86 - CBCA ss. 2(1) - 2(5); BCCA ss. 1(1) - 1(4); ACA ss. 2(4) - 2(5); SBCA ss. 2 ( l ) ( b ) , 2(2) - 2(5); MCA ss. l ( l ) ( b ) , 1(2) - (5); OBCA ss. 1(2) - (5); Draft OBCA ss. 1(4) - 1(5); BCSA s . l ( l ) - 1(4); ASA s.2(2) - 2(4); MSA ss.l(2) - 1(4); B i l l 72 ss. 1(2) - 1(4); B i l l 76 ss. 1(2) - 1(4); OSA s s . l (1)2, 1(2) - (4); Securities Act L.R.Q. 1964 c.V-1 as amended [hereinafter c i t e d as QSA] ss. 2.2, 2.3, 2.6. The issuer might conduct a "domestic going private transaction" when": 1. Most of i t s shareholders are resident i n a province whose s e c u r i t i e s l e g i s l a t i o n does not contain provisions regulating the conduct of offerors i n an issuer bid. Infra, notes 38-41 and text at 7. 2. Most of i t s shareholders are earning less than approximately $59,000 of taxable income and prefer the proceeds of d i s p o s i t i o n which they w i l l receive for th e i r expropriated shares to be treated as dividend income. See i n f r a , Note 111 and Kroft, supra, Note 1 at 80. - 87 - Very few statutes use the terms "public" or "private" company. See ACA s.2(1)(26), (28); PEICA s . l ( e ) , ( f ) ; NBCA s.38(2); NCA s.265(h). Other terms for a "public" company include a "reporting company" (BCCA s . l ( l ) ; B i l l 72, B i l l 76, OSA s.1(1)38; BCSA s . l ( l ) ) ; "corporation o f f e r i n g i t s shares to the public" (OBCA s . l ( 9 ) ) ; " d i s t r i b u t i n g corporation" (CBCA s . l 2 1 ( l ) ) ; "security issuer" (QSA s . l ( l ) ) ; Securities Act RSPEI 1974, c.S-4 s . l ( j ) , [hereinafter c i t e d as PEISA]; Security Frauds Prevention Act RSNB 1973 c.S-6 s . l [hereinafter c i t e d as NBSPFPA]); "offering corporation" (Draft OBCA s. 1(1)(26)). No matter what term i s used, a company ceases to be "public" when i t s s e c u r i t i e s are no longer held by shareholders who have no "close bonds of association" with the issuer or who have so l i t t l e knowledge of the operating a f f a i r s of the issuer that they are unable to make an informed investment decision about the s e c u r i t i e s of the issuer. For a discussion of who constitutes the "public", see R. v. Piepgrass (1959), 29 W.W.R. 218; Nash v. Lynde [1929] A.C. 158; 98 L.J.K.B. 127 (H.L. 1928). See also L. Loss Securities Regulation 655-56 (2d ed.1961, Supp. 1969); Al b o i n i , supra, Note 1 at 285-301; Johnston, Canadian - 88 - Securities Regulation (Toronto: Canada Law Book, 1977) at 148-55. It may also be necessary for a company to obtain approval of an administrative body or o f f i c i a l before "going private". For example, under ACA ss. 46, 47, the conversion of a company from "public" or "private" occurs when the Registrar issues the appropriate c e r t i f i c a t e and not upon the f i l i n g of the conversion resolution. Under BCCA s . l ( l ) the Registrar of Companies may designate a company as a "reporting company" according to the guidelines set out i n B.C. Corp. L. Guide (CCH) 583. See also QSA s.20(i) regarding the discretionary powers of the Quebec Securities Commission. Id. An offeror w i l l not be required to comply with various disclosure requirements i f i t makes an issuer or takeover bid for shares of a "private company". This term i s defined as a company, with (1) fewer than 50 shareholders, and (2) share transfer r e s t r i c t i o n s i n i t s constating documents, which does not i n v i t e the public to subscribe for i t s s e c u r i t i e s . See OSA s . l ( l ) 31, SSA s.2(l)(p); MSA s.1(1)17; B i l l 72 s.1(1)34; B i l l 76 s.1(1) (0.1); NBSFPA, s . l ; S ecurities Act RSNS 1967 c.280, s . l ( l ) i . - 89 - 17. The Income Tax Act S.C. 1970-71-72, c.63, ss.89(l)(f) and (g) [hereinafter c i t e d as ITA] and Part XLVIII of the Regulations thereto define the terms "private corporation" and "public corporation". A "public corporation" must be resident i n Canada and have a class or classes of shares l i s t e d on a prescribed stock exchange in Canada. A corporation continues to be a public corporation u n t i l i t elects to be otherwise by complying with provisions of the Regulations. The Minister of National Revenue may also designate a corporation "not to be public" i f he f i r s t gives at least 30 days written notice to the corporation and the corporation meets those conditions prescribed by the Regulations. A "private corporation" i s a Canadian resident corporation which i s not a public corporation. It cannot also be controlled d i r e c t l y or i n d i r e c t l y by a public corporation. 18. On the takeover bid, the o f f e r o r formally requests shareholders to tender t h e i r shares for consideration i n form of cash or redeemable s e c u r i t i e s . Whereas the term "takeover bid" implies that the a c q u i s i t i o n of shares w i l l provide an o f f e r o r with control of the target company, i t - 90 - generally refers to an o f f e r made by an offe r o r to shareholders at approximately the same time to acquire voting shares, that, i f combined with the voting shares already b e n e f i c i a l l y owned or controlled, d i r e c t l y or i n d i r e c t l y , by the offe r o r or an a f f i l i a t e or associate of the offeror, on the date of the takeover bid, would exceed 20% of the issued voting shares of the target company. See BCSA s.79; ASA s.80(g); B i l l 76 s.86; SSA s.87(g); MSA s.80(g); B i l l 72 s.89; OSA s.88(l)(k). The CBCA s.187 states that only greater than 10% i s required. Provided that the issuer has the power pursuant to statute and i t s constating documents to repurchase i t s own shares, i t may make an "issuer bid". See CBCA s.187, 37(1), (5); BCCA ss. 259-261; ACA s.41.1; SBCA s.37(5), 187; MCA ss. 37(5) 187; OBCA s.39(2); Draft OBCA s.30; QCA ss.48, 58; NBCA ss. 59(2)-(3); 60(l)-(2); NSCA s s . 4 7 ( l ) ( f ) , 47(4) and 48; NCA s.101. The actual term "issuer bid" i s used i n B i l l 72, s.89; B i l l 76, s.87 and OSA s.88(l)(d). 19. An associate or a f f i l i a t e may acquire minority shares i n the manner they would normally be purchased by any member of the public instead of by tender o f f e r . While the most - 91 - common forum for the open market purchase i s the stock exchange, i t may also be transacted in the over the counter market provided there i s an independent middleman who acts between two parties unknown to each other. 20. CBCA ss.175-180; BCCA ss.271-275; ACA s.156; SBCA ss.175- 180; MCA ss.175-180; OBCA ss.196-197; Draft OBCA ss.172- 177; QCA s.18; NBCA s.31; PEICA s. 77; NCA s.30; Companies Act R.S.N.S. 1967 c.42 s.120 [hereinafter c i t e d as NSCA]. The PEICA, NBCA and NCA only permit the amalgamation of companies with the same or- similar objects. Examples of amalgamation squeezeouts include Maple Leaf M i l l s , supra, Note 5; Westeel, supra, Note 5; Jepson v. Canadian Salt, supra, Note 5; Ruskin v. All-Canada News Radio, supra, Note 5; Neonex International, supra, Note 5; Canadian M e r r i l l , supra, Note 5; and Domglas, supra, Note 5. 21. Share r e c l a s s i f i c a t i o n requires the a l t e r a t i o n of the attributes of the issuer's shares. See CBCA ss.37(4), (7), 167 ( l ) ( f ) ; BCCA ss.249, 255; ACA s.38(l)(a); SBCA ss.167(1)(f), Draft OBCA s . l 6 6 ( l ) ( f ) ; QCA ss.48(5)-(8); - 92 - NBCA ss.62(3), 65; PEICA ss.34(6), 86; NCA ss.39-40, 131(2), NSCA ss . 4 7 ( l ) ( c ) , (g), ( j ) . To ensure that a l l minority shares are acquired, c o n t r o l l i n g shareholders sometimes employ schemes more elaborate than simply passing a resolution which appends the attribute of redeemability to the shares. For example, Company X has an existing class of shares (Class A). The shareholders of the Company f i r s t authorize the creation of a new class of shares (Class B) and then pass a resolution providing for the redeemability of the ex i s t i n g class by the issuer at any time. Afterwards, the c o n t r o l l i n g shareholders exercise the conversion r i g h t while most of the minority shareholders do not. Subsequently, the issuer redeems the Class A minority shares. If any of the minority convert to Class B to escape redemption, the insiders convert back to Class A and r e c l a s s i f y the shares of the new class as redeemable. Before the minority can convert back to Class A, i t s shares are redeemed by the issuer. For example, see Re Cablecasting Ltd., supra, Note 5; Re Canadian Hidrogas Resources Ltd., supra, Note 5; and Ferguson v. Imax Systems Corporation (July 28, 1980 Ont. S . C. ) . - 93 - 22. Shares are said to be consolidated when they are replaced by a lesser number of shares i n the same class in the same proportion for a l l shareholders. For example, an issuer may consolidate i t s shares i n the r a t i o of 1 to 5,000. A shareholder i s then e n t i t l e d to 1/500 of a share i f he owns just one share. See CBCA s,167(l)(g); MCA s . l 6 7 ( l ) ( f ) ; SBCA s . l 6 7 ( l ) ( g ) ; OBCA S.1 8 9 ( l ) ( f ) ; QCA s.55(2); NBCA s.62(l); PEICA s.34; NCA s.131(2); NSCA s.42(l)(b); ACA s.38(1)(a)(i); BCCA s.255(l)(d). Note that QCA s.55(2) and NBCA s.62(l) permit consolidation only when the par value of the existing shares i s less than $100 each and no share i s consolidated over a par value of $100. For further discussion of the consolidation or "reverse stock s p l i t " process, see Dykstra, "The Reserve Stock Split-That Other Means of Going Private" 53 Chicago-Kent L. Rev. 1 (1976); Lawson, "Reverse Stock S p l i t s : The Fiduciary's Obligation Under State Law" 63 C a l i f . L. Rev. 1226 (1975); Magnet, supra, Note 1 at 157. - 94 - Examples of a consolidation squeezeout include Re Ripley International Ltd., supra, Note 5 and Re P.L. Robertson Mfg. Co., 7 O.R. (2d) 98, 54 D.L.R. (3d) 354 (H.C. 1974) 23. CBCA 33(l)(b); MCA s.33(l)(b); SBCA s.33(l)(b); BCCA s.265(2); OBCA s.39(l); Draft OBCA s.31(l)(b); QCA s.52(3); NBCA s.62(2) . 24. CBCA s.183; BCCA s.150; SBCA s.183(2)-(9); MCA S.183(2)- (7); OBCA SS.15(2), 17; Draft OBCA 182(7)-(8); NCA s.l31(4). Generally, the sale of assets i s made to a related party which i s usually a wholly owned corporate a f f i l i a t e or associate of the in s i d e r s . 25. CBCA s.204(3); BCCA S.291, ACA S.237; SBCA s.204(3); MCA s.204(3); OBCA s.203(1); Draft OBCA s.191(1); Winding Up Act R.S.Q. 1964 c.281 s.3; Winding-up Act RSNB 1973 c.W-10 s.3(a); Winding Up Act RSPEI 1974 c.W-7 s.4( l ) ( b ) ; NCA s.244(b); Winding Up Act RSNS 1967 ss.3(b), 1(e). - 95 - Examples of the sale of the assets-winding up squeezeout include Costello v. London General Omnibus Co. Ltd. (1912), 107 L.T. 575 (C.A.); Ritchie v. Vermillion Mining Co. (1902), 4 O.L.R. 588 (C.A.); and Re United Fuel Investments Ltd. [1962] O.R. 162 (Ont. C.A.). 26. CBCA s.199(2); BCCA s.279(1); SBCA s.188; ACA s.153; QCA s.48; NSCA s.119; Draft OBCA ss. 185-187. 27. In certa i n j u r i s d i c t i o n s an "offeror" includes two or more persons who, d i r e c t l y , make takeover bids j o i n t l y or i n concert, or intend to exercise j o i n t l y or i n concert voting rights attached to shares for which a takeover bid i s made". See CBCA s.187; OSA s.88(l)(h); B i l l 72 s.88(l)(h); B i l l 76 s.86(l)(h); ASA s.80(e); SSA s.88(e); MSA 80(e); QSA s.113(e); BCSA s.79. Cf. Blue Metal Industries v. D i l l e y , [1969] 3 W.L.R. 357. See also note 221, i n f r a which discusses whether an off e r o r may be an in d i v i d u a l as well as an "acquiring company". 28. The BCCA, for example, refers to a "scheme or contract" and not a "takeover bid". For a d e f i n i t i o n of t h i s phrase, see - 96 - Gregory v. Canadian A l l i e d Property, supra, Note 5 and Rathie v. Montreal Trust, [1953] 2 S.C.R. 204. 29. An acquiring company may compel the remaining minority shareholders to surrender t h e i r shares within 5 months aft e r the date of takeover bid for the same consideration. For d e t a i l s of the dissent process available to the minority shareholders see text and notes 47-49, 139-140 i n f r a ; See also Halperin, "The Statutory Elimination of Minority Shareholders i n Canada" i n Advanced Corporate Law Studies (forthcoming) (L. Sarna, ed.,) (Toronto: Carswell Co. Ltd., 1980); McNamara, "Note on Compulsory A c q u i s i t i o n of Shares" 10 U.W.O.L. Rev. 141 (1971); F l i s f e d e r , "Compulsory Acquis i t i o n of the Interest of a Dissenting Minority Shareholder" 11 A l t a . L. Rev. 87 (1973); English, "Corporate Acquisitions - General Considerations", i n Studies i n Canadian Company Law, 603 (J. Ziegel ed. 1967); Hansen, supra, Note 1; Anisman, Takeover Bid L e g i s l a t i o n i n Canada (Toronto: CCH Canadian Ltd., 1974) Note 108; Weinberg and Blank, Takeovers and Mergers (4th ed.) (London: Sweet and Maxwell, 1979) Chapter 14. - 97 - 30. Whereas public corporations may be taxed at a combined federal - p r o v i n c i a l rate of up to 51% on a l l types of income earned, the "active business income" and investment income of a "Canadian controlled private corporation" w i l l be taxed at a sub s t a n t i a l l y lower rate, assuming the q u a l i f i c a t i o n s for certain tax credits are met. For further discussion, see Kroft, supra, Note 1 at 62-63. 31. The requirements include the provisions of a prospectus to prospective investors; information c i r c u l a r s , proxies and audited f i n a n c i a l statements to shareholders; and insid e r trading reports to s e c u r i t i e s regulatory a u t h o r i t i e s . An issuer may be s t i l l required to make public f i l i n g s even i f i t has gone private. For example, CBCA s.154 requires corporations whose gross revenues exceed ten m i l l i o n d o l l a r s or whose assets exceed f i v e m i l l i o n d o l l a r s to send copies of t h e i r f i n a n c i a l statements to the Director. In addition, the amalgamation of a "private" company with a "public" company does not enable the l a t t e r to shirk i t s statutory obligations to disclose material information. BCCA s . l ( l ) , BCSA s . l ( l ) , OSA s . l ( l ) 3 8 ( v ) , B i l l 72, s . l ( l ) 41(v), and B i l l 76 s.1(1)(t)(iv) state that a "reporting - 98 - issuer" includes companies continuing from a statutory amalgamation, provided one of the amalgamating companies has been a "reporting issuer" for at least 12 months. Companies may, however, obtain exemptions from these disclosure requirements. See CBCA s.154(2) and Regulation 50; OSA s.79; B i l l 72 s.79; B i l l 76 s.77. See also Note 34, i n f r a , concerning exemptions from takeover bid or issuer bid requirements. Economies of scale could r e s u l t from the administrative savings associated with shareholder servicing costs. See Weinberg - Blank, supra, Note 29 at 35-37. The private corporation i s able to make business decisions on the basis of long range objectives and opportunities without concern for the possible adverse e f f e c t on the trading price of i t s shares. Its o f f i c e r s and directors are able to manage without fear of sanctions imposed at the instance of minority shareholders over c o n f l i c t s of int e r e s t . Certain corporate formalities such as the appointment of auditors, the election of a minimum number - 99 - of directors and the use of a t r u s t indenture are not required. 34. For example, i n an income s p l i t , a spouse may receive salary or dividends but w i l l choose remuneration i n the form of dividends because he/she may receive up to approximately $33,000 of dividends tax free ( i f earning no other income) as a result of the operation of the dividend tax c r e d i t . See Eddy, "The Incorporation of Business Income and the 1977 Budget Changes, 1977 Conference Report 114. In an estate freeze, any future growth i n the value of the shares of the company might be passed on to family members by means of a reorganization of c a p i t a l . 35. This i s due to the imperfections i n the present tax system resulting primarily from the application of p r o v i n c i a l tax rates to the operation of the dividend tax c r e d i t . See Fenwick, "Incorporation of Investment Income", 1977 Conference Report 141. - 100 - See Levine & Graham, "Incorporation and Taxation of a Private Corporation" 1980 B r i t i s h Columbia Tax Conference Report (Canadian Tax Foundation, forthcoming). A takeover bid i s c l a s s i f i e d as an "exempt bid" when (a) an of f e r i s made through the f a c i l i t i e s of the stock exchange or i n the over the counter market. CBCA s.187(b); BCSA s.79(b); B i l l 72, s.88(2)(a); B i l l 76 s.86(2)(a); OSA s.88(2)(a); ASA s . 8 0 ( b ) ( i i ) ; MSA s. 8 0 ( b ) ( i i ) . (b) an of f e r i s made to purchase shares i n "private company". OSA s.88(2)(b); BCSA s.79(c); MSA s. 8 0 ( 1 ) ( b ) ( i i i ) ; QSA s . 1 1 3 ( 1 ) ( f ) ( i i i ) ; SSA s. 8 7 ( b ) ( i i i ) ; ASA s. 8 0 ( b ) ( i i i ) ; B i l l 76 s. 88(2)(b); B i l l 72 s. 88(2)(b). (c) an of f e r i s made to purchase shares by private agreement with individual shareholders and i s not made to shareholders generally. CBCA s.187(a); BCSA s.79(a); ASA s.80(b)(i); SSA s.88(b)(i); MSA s . 8 0 ( l ) ( i ) ; B i l l 72 s.88(2)(c); B i l l 76 s.86(2)(c); OSA s.88(2)(c); QSA s . H 3 ( l ) ( f ) . - 101 - (d) i t involves the a c q u i s i t i o n of not more than 5 percent of the voting shares of the target company within any period of 12 consecutive months; OSA s.88(2)(d); B i l l 72 s.88(2)(d), B i l l 76 s.86(2)(d). (e) an off e r i s made by the holder of a control block of shares. OSA s.88(2)(e); B i l l 76 s.86(2)(e); B i l l 72 s.88(2)(e). (f) an exemption order i s made by a court or a s e c u r i t i e s regulatory agency. CBCA s.187 (court); BCSA s.88 (court); ASA s.89 (securities commission); B i l l 76 s.97 (securities commission); SSA s. 96 (court); MSA s.89 (securities commission) B i l l 72 s.99 (securities commission); OSA s.99 (commission); QSA s.136 (Commission). An issuer bid w i l l be c l a s s i f i e d as an "exempt bid" under OSA s.88(3) B i l l 76 s.86(3), B i l l 72 s.88(3) when: (a) the s e c u r i t i e s are purchased, redeemed or otherwise acquired in accordance with the terms and conditions agreed to at the time they were issued or subsequently varied by amendment of the documents setting out those - 102 - terms and conditions, or are acquired to meet sinking fund requirements or from an employee of the issuer or an employee of an a f f i l i a t e ; the purchases, redemptions or other acquisitions are required by the instrument creating or governing the class of sec u r i t i e s or by the statute under which the issuer was incorporated or organized; the issuer bid i s made through the f a c i l i t i e s of a stock exchange recognized by the Commission for the purpose of t h i s Part according to the by-laws, regulations or p o l i c i e s of the stock exchange; following the publication of a notice of intention i n the form and i n the manner prescribed by the regulations, the issuer purchases s e c u r i t i e s of the issuer, but the aggregate number, or i n the case of convertible debt s e c u r i t i e s , the aggregate p r i n c i p a l amount, of sec u r i t i e s purchased by the issuer i n reliance on the exemption provided by th i s clause during any period of twelve consecutive months s h a l l - 103 - not exceed 5 per cent of the s e c u r i t i e s of the class sought outstanding at the commencement of the period; or (e) the issuer i s made by a private company. CBCA s.187-189 and Part VIII of the Regulations; OSA s.94 and Regs. Form 31; BCSA s.89; ASA s.90; B i l l 76 s.92; MSA s.85(4), s.90; B i l l 72, s. 94; SSA s. 97; QSA s.125 and ss 35-36 of Regulations (Division V). When a Stock Exchange takeover bid i s being made, the c i r c u l a r must disclose s i g n i f i c a n t information concerning the a f f a i r s of the company whose se c u r i t i e s are being offered i n exchange for the shares of the target company. See also Ontario Policy 3-37, O.S.C. Weekly Summary, Week Ending December 2, 1977 at 1, which regulates issuer and insider bids, as well as the disclosure requirements prescribed by the Exchanges when a stock market takeover bid i s made: - 104 - See Toronto Stock Exchange By-laws, Part XXIII i n Can. Sec. L. Rep. 17,181-27 (CCH); Vancouver Stock Exchange Rule 975, in Can. Sec. L. Rep. 17,737 (CCH); Montreal Stock Exchange Rule VIII, i n Can. Sec. L. Rep. 16,825(CCH). See also "Re: Current Procedure for Take-Over Bids, Issuer Bids and Insider Bids through the F a c i l i t i e s of the Toronto Stock Exchange", TSE Notice to Members No. 1999, November 7, 1979, i n Can. Sec. L. Rep. 70,123(CCH). 39. BCSA s.80(c); ASA s.81(c); MSA s.81(4); SSA s.88(c); QSA s.116. In OSA s.89(1)4, CBCA s.190(a); B i l l 72 s.89(1)4 and B i l l 76 s.87(1)4, the r e c i s s i o n period i s ten days. 40. BCSA s.80(b); ASA s.81(b); MSA s.81(3); SSA s.88(b); QSA s.115. In OSA s.89(1)3; B i l l 76 s.87(1)3, and B i l l 72 s.89(1)3, the period i s 10 days. CBCA s.190(b) allows 14 days. 41. The shares of an associate or a f f i l i a t e of the offeror must not be included i n the computation of the 90%. The BCCA s.279 makes no reference to the term "associate" but uses the word "nominee". For a discussion of the term, see Sammel v. President Brand Gold Mining Co. [1969] 3 S.A. - 105 - 629; Gregory v. Canadian A l l i e d Property Inv., supra, Note 5 and Jefferson v. Omnitron Inv. 18 B.C.L.R. 188 (S.C. 1979). See also, i n f r a , Note 230. 42. BCCA s.279(1); ACA s.153(1); QCA s.48(l); CBCA s.199(2); SBCA s.188; NSCA s.119(1); Draft OBCA s.186(1). The CBCA, Draft OBCA and SBCA use the phrase "120 days" rather than 4 months. 43. BCCA s.2 79(2); ACA s . l 5 3 ( l ) ; QCA s.48(2); CBCA S.199(3); SBCA s.189; NSCA s.119(1); Draft OBCA s.l86(2). The CBCA, Draft OBCA and SBCA state that the notice must be mailed within 180 days after the day of the takeover bid. Under the B.C. l e g i s l a t i o n , notice must be given during the month immediately following the expiry of the o f f e r ("within 5 months of the making of the o f f e r " ) , while i n Nova Scotia, the notice may be given during the four months following the expiry of the four months afte r the o f f e r . 44. BCCA s.279(3) (the court must make an order otherwise within 2 months from the day of the Notice); QCA s.48(2) (6 months from the making of the Offer); ACA s.153(1) (1 month from the date of the Notice); NSCA s.H9(2) (1 month from - 106 - the date of the Notice); CBCA s.199(9)-(10) (within 20 days after receipt of the Notice); SBCA ss. 189(c)(ii) and 195 (within 20 days aft e r receipt of the Notice); Draft OBCA s.186(4)-(5) (within 20 days aft e r receipt of the Notice). Under the l a t t e r 3 statutes, the offeror i s obliged to pay or give the offeree corporation, within the 20 days, money or other consideration s u f f i c i e n t to discharge the claims of a l l dissenting offerees had they elected to transfer t h e i r shares on the terms contained i n the takeover bid. If a dissenting offeree has elected to demand the f a i r value of his shares, an application to Court to f i x the f a i r value may be made by the offeror within 20 days aft e r t h i s date. F a i l i n g t h i s , the dissenting offeree has a further 20 days to seek j u d i c i a l redress. For further d e t a i l s , see Halperin, supra, Note 29. 45. CBCA s.188(a)(60 days); BCSA; ASA; B i l l 76 s.86(1)13; SSA; B i l l 72 s.89(1)13; MSA s.81(3); OSA s.89(l) 13; QSA s.117. 46. CBCA s.190(d); BCSA s.82; ASA s.83; B i l l 76 s.88; SSA s.90; MSA s.83; B i l l 72 s.90; OSA s.90; QSA s.121. - 107 - 47. OSA s.91; B i l l 49 s.91; B i l l 76 s.89. For further d e t a i l s , see A l b o i n i , supra, Note 1 715-732. 48. The Ontario Securities Commission has issued guidelines i n Ontario Po l i c y 3-41 O.S.C. Weekly Summary, Week Ending August 17, 1979, Supplement C, indicating that i t " w i l l be favourably disposed to granting an exemption from the "follow-up" obligation i n certain circumstances. 49. CBCA S.177(5); SBCA s.l77(5); MCA s,177(5); OBCA s.l96(4); Draft OBCA S.174(4); QCA S.18(4); ACA S.156(4); NBCA s.31(3); NSCA s.120(4); PEICA s.77(3); NCA S.30(3); BCCA s.271. 50. An arrangement i s a scheme through which the rights of shareholders may be adjusted or modified. It i s used primarily under extraordinary circumstances; e.g., i t may be used either where the c a p i t a l structure of the corporation i s inconvenient, or where new c a p i t a l i s required and i s only obtainable on condition that the existing rights of the shareholders are modified or t h e i r interest in the corporation reduced. The procedure for a f f e c t i n g an arrangement involves the submission of a - 108 - scheme at the meeting of the shareholders, or, where the holders of more than one class are affected, at separate meetings of the classes of shareholders concerned. Once shareholder approval i s obtained, the court must determine whether the scheme was f a i r and equitable to the shareholders and whether the position of the creditors has been adequately considered. When the court has approved a scheme, the corporation must delive r documents evidencing amendments to the constating documents to a governmental regulatory agency which issues a c e r t i f i c a t e , the ef f e c t of which i s to amend the constating documents i n accordance with the provisions of the arrangement. See; CBCA, s.185.1; BCCA, ss. 276-78; ACA, S.154; SBCA, s.186; MCA, s.185.1; Draft OBCA, ss. 180-81; QCA, ss. 49-50; NBCA s.48; NSCA, ss. 117-18; NCA, ss. 131-33. The companies l e g i s l a t i o n of most j u r i s d i c t i o n s i n Canada permits the reduction of a company's issued c a p i t a l by special resolution, CBCA s.36(l); BCCA s.2 57; ACA s.38(l)(b); SBCA s.36(l); MCA s.36(l); OBCA, ss. 189(1) (d), 189(2); Draft OBCA s.34(l); QCA s.63; NCA s.86; NBCA s.65; NSCA s.52(l); PEICA s.34(l). - 109 - One example of a reduction of c a p i t a l squeezeout i s In the Matter of Campeau Corporation Limited, Ontario Corporations Law Guide CCH Reporter Para 50-014 (H.C. 1972). See also B r i t i s h & American Trustee Corp. v. Couper, [1894] A.C. 399, 63 L.J. Ch. 425 (H.L.); Re Fraser, [1951] S.C. 394 (Ct. Sess.); Ex parte Westburn Sugar Refineries Ltd., [1951] S.C. 190, rev'd [1951] A.C. 625; In re Saltdean Estate Co., [1968] 3 A l l E.R. 829, [1968] 1 W.L.R. 1844 (Ch. D.); In re Fowlers Vacola Mfg. Co., [1966] V.R. 97 (S.C. 1965); Cf. In re Holders Inv. Trust Ltd., [1971] 2 A l l E.R. 289, [1971] 1 W.L.R. 583 (Ch. D. 1970). 52. Supra, Note 21. 53. Supra, Note 22. 54. Supra, Note 24. 55. Supra, Note 25. 56. The requirements for the passage of a special resolution vary from j u r i s d i c t i o n to j u r i s d i c t i o n . CBCA s . 2 ( l ) , SBCA s . 2 ( l ) ( f f ) , MCA s . l ( l ) ( g g ) , OBCA s . l ( l ) 27; and Draft OBCA - 110 - s.1(1)42 require the favourable vote of not less than two- thirds majority of shareholders who voted i n respect of the resolution. QCA SS.18(4), 60 require 2/3 i n value. Other j u r i s d i c t i o n require 3/4 of the votes cast: NBCA ss. 31(3); 48(3); NSCA s.75; PEICA s.77(3); NCA s . l l l ; BCCA s . l ( l ) . 57. See: Brown v. B r i t i s h Abrasive Wheel Co., [1919] 1 Ch. 390, [1918-19] A l l E.R. Rep. 309 (Ch. D.); Greenhalgh v. Arderne Cinemas Ltd., [1951] Ch. 286, [1950] 2 A l l E.R. 1120 (C.A.); A l l e n v. Gold Reefs of West A f r i c a Ltd., [1900] 1 Ch. 656, [1900-03] A l l E.R. Rep. 746 (C.A.); Shuttlesworth v. Cox Bros., [1927] 2 K.B. 9, [1926] A l l E.R. Rep. 498 (C.A.); Dafen Tinplate Co. v. L l a n e l l y Steel Co., [1920] 2 Ch. 124, 89 L.J. Ch. 113 (C.A.); Peter's American Delicacy Co. Ltd. v. Heath (1938-39), 61 C.L.R. 457 (Aust. H.C.) and Rights and Issues Investment Trust v. Stylo Shoes, [1964] 3 A l l E.R. 628 (Ch. D.). For further discussion, see Gower, The P r i n c i p l e s of Modern Company Law (4th ed. 1979) at 620-630; Weinberg, supra, Note 29 at 112-114. - I l l - 58. Amalgamation CBCA s. 177(4); BCCA s.273(4); ACA; SBCA S.177(4); MCA 8.177(4); OBCA s.l96(5); QCA; NBCA; NCA; NBCA; PEICA; Draft OBCA s. 174(3). Amendment of the Corporate Constitution CBCA s.170; BCCA s.250; ACA ss. 38, 69; SBCA s.170; MCA s.170; OBCA s.189(4); Draft OBCA s.168; QCA; NBCA s.48(3); NCA s.131; PEICA; NSCA. Sale of Assets CBCA s.183(6); SBCA s.183(6); MCA s.183(6); Draft OBCA s.183(7). Winding Up CBCA s.204(3); MCA s.204(3); SBCA s.204(3). - 112 - 59. For example, see section 251 of the BCCA. 60. For example, see Re Trend Management, 3 B.C.L.R. 186 (H.C. 1977); See generally concerning the va r i a t i o n or abrogation of class r i g h t s , Rice, "Class Rights and Their V a r i a t i o n in Company" J . Bus. L. 39 (1960); Baxt, "The Variation of Class Rights", 41 Aust. L.J. 290 (1968); Trebilcock, "The Effect of Alterations to A r t i c l e s of Association", 31 Conv. 95 (1967). 61. CBCA s.122-122.1; BCSA S.108; ASA s.82; SSA s.117; MSA ss.109-109.1; OSA ss.102-103; B i l l 76 ss.100-101; B i l l 72 ss.102-103; QSA s.141. An issuer may also be an insider of i t s e l f . For a d e f i n i t i o n of "insider", see CBCA, s.121(1); BCSA, s.107(1); ACA, s.41.31; SBCA, s.121(1)(b); MSA, s . l 0 8 ( l ) ( c ) ; B i l l 72, s . l ( l ) l 8 ( v ) ; OSA, l ( l ) 1 7 ( i v ) ; Draft OBCA, 8.137(1)(b)(i); B i l l 76, s.1(1)(h.1)(iv); SSA s . H 6 ( l ) ( c ) ; ASA s.81. There i s no requirement for f i l i n g under the BCCA, MCA, SBCA or Draft OBCA. Under these acts an issuer, who i s deemed to be an insider of i t s e l f , w i l l be l i a b l e for damages only i f i t misuses inside information. The term used i n many statutes i s " s p e c i f i c c o n f i d e n t i a l information". For discussion of the phrase, see Green v. Charterhouse Group Canada Ltd., 12 O.R. (2d) 280, 68 D.L.R. (3d) 592 (C.A. 1976); In the Matter of Harold P. Connor, [June 1976] B u l l O.S.C. 149. Note that OSA, s. 131, B i l l 72, s. 131, and B i l l 76, s.129, use the phrase "knowledge of a material fact...that has not been generally disclosed". See Buckley, "How to do Things with Inside Information", 2 Can. Bus. L.J. 343 (1977). See also Anisman, "Insider Trading Under the Canadian Business Corporations Act", i n Meredith Memorial Lectures 151 (1975); Iacobucci, Pilkington & Prichard, Canadian Business Corporations (Toronto: Canada Law Book, 1977), at 341 et seq., Yontef, "Insider Trading", i n Proposals for a Securities Law for Canada Vol. 3, 625 (1979); A l b o i n i , supra, Note 1 at Chapter XX. CBCA, s.125(5); BCCA, s.153; ACA, s.85; SBCA, s.124; MCA, s.125(5); Draft OBCA, s.139(5); BCSA, s.112; SSA, s.120; MSA, s . I l l ; ASA, s.112; QSA, s.169. - 114 - 64. This assumes that the acquiror i s an in d i v i d u a l and may well include the individual c o n t r o l l i n g shareholders of a corporate acquiror. For example, the purchase or redemption of shares must not render the issuer insolvent. See CBCA ss.32(2), 33(3), 34(2), 36(3); BCCA s.260; MCA ss.32(2), 33(3), 34(2), 36(3); OBCA s.39(3); Draft OBCA s.30(2), 31(3), 32(2), 34(4); QCA; NBCA; PEICA; NCA; NSCA; 66. CBCA, s.H3(2)(a); BCCA, s . l 5 1 ( l ) ( a ) ; ACA, s.41.21(1); SBCA, s.113(2) (a); MCA, s.H3(2)(a); OBCA, s.135(1); Draft OBCA, s.129(2)(a). 67. Amalgamations CBCA s.177(1); SBCA s. 177(1); Draft OBCA s.174(1); BCCA s.140; OBCA; QCA s.88; ACA Table A; MCA S.177(l); NBCA s.96; PEICA s.28; NSCA Table A s.128; NCA Table A para.55. - 115 - Amendment of the Corporate Constitution CBCA s.169; SBCA S.169; Draft OBCA s.170; BCCA s.140; OBCA s.189(3); QCA s.88 ss.52-4; ACA Table A; MCA s.169; NBCA ss.58; 62-64; PEICA ss.32-33; NSCA Table A ss.56, 128; NCA Table A, para. 26, 55. Sale of Assets CBCA; SBCA; Draft OBCA; BCCA s.140; OBCA; QCA s.88; ACA Table A; MCA; NBCA s.96; PEICA s.28; NSCA Table A s.28; NCA Table A para. 55 Winding Up CBCA s.204; SBCA s.204; Draft OBCA; BCCA s.289; OBCA; Que Winding Up Act ss. 2-3; ACA; MCA s.204; N.B. Winding Up Act; PEI Winding Up Act; NSCA Table A s.128; NCA Table A para 5. 68. BCSA ss.85 and 94; ASA ss. 86(4), 88(2), 95; SSA ss. 93 and 102; MSA ss. 86 and 95; B i l l 76 s.94; B i l l 72, s.96; OSA s.96 and Form 32 i n the Regulations; QSA s.132 and Regs. - 116 - s.38; CBCA ss.194, 196 and Regs. s.68. For discussion, see Al b o i n i , supra, Note 1 at 743-747. 69. See Iacobucci, Pilkington and Prichard, supra. Note 62 at 286-318 and i n f r a text, at 54-58. 70. CBCA, s.115; BCCA, s.144; ACA, s.78; SBCA, s.115; MCA, s.115; OBCA, s.134; Draft OBCA, s.131; QCA (no provision); NBCA (no provision); NSCA (no provision); NCA, Table A, s.57. Even i f the directors do commit a breach of a fi d u c i a r y duty, they are permitted to r a t i f y the wrong i n th e i r capacity as shareholders absent fraud and oppressive conduct. See North W. Trans. Co. v. Beatty, 12 App. Cas. 589, 56 L.J.P.C. 102 (P.C. 1887). For further discussion, see text, i n f r a at 55-58. 71. See i n f r a , text at 56-57. 72. Amalgamations Norcan O i l s Ltd. and G r i d o i l Freehold Leases v. Fogler [1965] S.C.R. 36; Westeel, supra, Note 5. Cf. Re Ardiem - 117 - Holdings, 67 D.L.R. (3d) 253 (S.C.C.) Rev'g (1976), 61 D.L.R. (3d) 725. Arrangements Re Dorman Long & Co. [1934] Ch. 635, 103 L.J. Ch. 316 (Ch.); Re Upper Canada Resources, 20 O.R. (2d) 100 (H.C. 1978); Re N. Slayer Co. [1947] 2 D.L.R. 311 (Ont. H.C.). Compulsory Acquis i t i o n Re John Labatt Ltd. v. Lucky Lager Breweries Ltd. (1959), 20 D.L.R. (2d) 159 (BCSC); Rathie v. Montreal Trust supra, Note 28. c f . Mofmac Investments Ltd. v.' Andres Wines Ltd. et a l . (N.S.S.C. May 30, 1980) Generally, see Halperin, supra, Note 29. 73. A shareholder may enforce his rights as a member and obtain injunctive r e l i e f by means of a personal action ( i n f r a , Note 248) or a derivative action ( i n f r a , Note 233) when directors have committed a breach of a duty owed to the company, and the company has chosen not to sue for r e l i e f . The companies and se c u r i t i e s l e g i s l a t i o n of certa i n - 118 - j u r i s d i c t i o n s also permit a shareholder or a wider class of persons ( i n f r a , Note 231) to seek compliance by the corporation or a director or o f f i c e r of the corporation with statutory provisions or the constating documents of the Company. See CBCA ss.198, 240; ASA s.147; B i l l 76, s.120; SBCA s.240; SSA s.150; MCA s.240; MSA s.147; B i l l 72 s.122; OBCA s.261; Draft OBCA s.251; OSA s.122; For discussion of the limi t a t i o n s of the compliance remedy, see Re Goldhar and Quebec Manitou Mines, 9 O.R. (2d) 740,61 D.L.R. (3d) 612, (H.C. 1976), i n which Reid, J. held that the obligations enforceable under OBCA s.261 must be owed d i r e c t l y to the shareholders, and consequently, s.261 cannot be used as a vehicle for enforcing derivative ri g h t s . For commentary, see Campbell, "Summary Enforcement of Directors' Duties: Re Goldhar and Quebec Manitou Mines Ltd." 2 Can. Bus. L.J. 92 (1977). Shareholders also have recourse to sue for damages pursuant to the c i v i l l i a b i l i t y provisions i n the s e c u r i t i e s l e g i s l a t i o n of certain j u r i s d i c t i o n s i f they can prove that they have been misled by misrepresentations i n takeover bid or proxy materials. See ASA s.140.1; B i l l 76 s.125; SSA; - 119 - MSA s.141.1; B i l l 72 s.127; QSA s.137; OSA s.127. See also Paterson, "A Role for C i v i l L i a b i l i t y i n Canadian Securities Regulation? - Remedies for Breach of The Takeover Bid Disclosure Requirements of the Securities Act 1967" 12 U.B.C. L. Rev. 32 (1978) and Leigh, Securities Regulation Problems i n Relation to Sanctions" Volume 3 Proposals for a Securities Market Law for Canada 510 (1978). 74. Maple Leaf M i l l s , supra, Note 5. 75. See the comments of Bouck J. i n Neonex International, supra, Note 5 and Laycraft, J. i n Jepson v. Canadian Salt, supra, Note 5 at 42 (W.W.R. c i t e followed): "the use of the Amalgamation provisions of the Canada Business Corporations Act as a "forceout" mechanism against minority shareholders has made v i r t u a l l y redundant the sections of the Act designed to cover the "forceout" s i t u a t i o n . Section 199 of the Act provides a much more elaborate procedure to safeguard the minority than does section 184 governing amalgamation, for example, the "forceout" procedure i n s.199 requires that the takeover o f f e r be accepted by holders of 90 per cent of the shares apart from those owned by the offeror, while an amalgamation may be achieved by a two-thirds majority without any requirement that the majority comes from independently held shares." - 120 - "Expressions Unius Est Inclusio A l t e r i u s " i s the canon of statutory construction referred to. See Driedger, The Construction of Statutes (Toronto: Butterworths, 1974) at 95. See Re Hellenic and General Trust Ltd [1975] 3 A l l E.R. 382, [1976] 1 W.L.R. 123 (Ch. D) (per.Templeman, J . ) ; Westeel, supra, Note 5. The catch phrase which the courts use i s "you cannot do something i n d i r e c t l y which you f a i l e d to accomplish d i r e c t l y . " See also Gower, supra, Note 57 at 622-623 and Pitch, supra, Note 1 at 13. Gower suggests that compulsory a c q u i s i t i o n i s now the appropriate means of expropriating minority shares, and that U.K. Courts w i l l follow the decision of the English Court of Appeal i n Sidebottom v. Kershaw Lease & Co. [1920] 1 Ch. 154 and permit the use of the a l t e r a t i o n of the constating documents as a squeezeout technique only i n circumstances which are prima facie b e n e f i c i a l to the Company as a whole. In J u r i s d i c t i o n s with a Compulsory A c q u i s i t i o n Provision: CBCA: Neonex International, supra, Note 5; Canadian Salt, - 121 - supra, Note 5; Ruskin v. All-Canada News Radio, supra, Note 5 and Domglas, supra, Note 5. In J u r i s d i c t i o n s Without Compulsory Acquis i t i o n Provisions: OBCA: Wingold v. The Minister of Consumer and Commercial Relations (Ontario) (Ont. H.C. July 9, 1979) MCA: Triad O i l Holdings Ltd. v. The Pr o v i n c i a l Secretary for Manitoba, 59 W.W.R. 1 (Man C.A. 1967). For Commentary, see Lange, supra, Note 1. 79. In J u r i s i d c t i o n s with a Compulsory A c q u i s i t i o n Provision U.K. Companies Act: Re National Bank Ltd. [1960] 1 A l l E.R. 1006; [1960] 1 W.L.R. 819 (Ch.). In J u r i s d i c t i o n s without a Compulsory Ac q u i s i t i o n Provision OBCA: Re P.L. Robertson Mfg. Co., supra, Note 19. Some j u r i s d i c t i o n s outside Canada are faced with eliminating the problem of having corporations circumvent take-over bid rules by means of c a p i t a l reorganization techniques i n order to eliminate shareholders. For - 122 - discussion of the s i t u a t i o n i n A u s t r a l i a and South A f r i c a respectively, see Macgregor, "Take-overs Revisited", 95 S. Af. L.J. 329 (1978); Pli n e r , "Arranging a Take-over — A Scheme Around the Code?" 7 Aust. Bus. L.J. 51 (1979). 80. Supra, Note 5. 81. Id. at 273-274. 82. Supra, Note 5 (The Ontario Reports c i t a t i o n w i l l be followed). 83. Id. at 207. 84. Id. at 204-205. 85. Supra, Note 5. 86. Supra, Note 5. 87. Neonex International, supra, Note 5 at 451 (D.L.R.). This too was the conclusion of Greenberg, J. i n Domglas at 70. - 123 - 88. Supra, Note 5. 89. Id at 223. In short, the facts are as follows: After f a i l i n g to obtain the r e q u i s i t e 90% to exercise i t s right to compulsory a c q u i s i t i o n following a takeover bid for Westeel shares, Jannock caused Westeel to propose an amalgamation among i t s e l f and two Jannock wholly-owned subsidiaries. As a r e s u l t of the amalgamation Jannock was to receive common shares of the amalgamated corporation, whereas the minority shareholders of Westeel were to be given non-voting preference shares which the amalgamated corporation would redeem for cash immediately following the transaction. 90. Id at 218. 91. Supra, Note 77. (The A l l E.R. c i t a t i o n w i l l be followed). 92. Id at 387. 93. Supra, Note 79. - 124 - 94. Id at 829: "...I cannot accede to that proposition. In the f i r s t place i t seems to me to involve imposing a l i m i t a t i o n or q u a l i f i c a t i o n either on the generality of the word "arrangement" i n s.206 or else on the d i s c r e t i o n of the court under that section. The l e g i s l a t u r e has not seen f i t to impose any such l i m i t a t i o n i n terms and I see no reason for implying any. Moreover, the two sections, s.206 and s.209, involve quite d i f f e r e n t considerations and d i f f e r e n t approaches. Under s.206 an arrangement can only be sanctioned i f the question of i t s fairness has f i r s t of a l l been submitted to the court. Under s.209, on the other hand, the matter may never come to the court at a l l . If i t does come to the court then the onus i s cast on the dissenting minority to demonstrate the fairness of the scheme. There are, therefore, good reasons for requiring a smaller majority in favour of a scheme under s. 206 than the majority which i s required under s.209 i f the minority i s to be expropriated." 95. For a discussion of the c h a r a c t e r i s t i c s of the " t y p i c a l shareholder", see Joseph, "Management's Labour Relations Perogatives and the Unproductive Debate: S t i l l the C l a s s i c a l Economics and the Entrepreneur's Lot" 14 U.B.C. L. Rev. 75 (1980). The author refers to a New Zealand study on investments and states that: (footnotes omitted) "Although non-financial motives such as sheer i n t e r e s t i n business a f f a i r s may be of some importance i n explaining the widespread interest i n the share market, i t remains true that the basic motive i s the desire to make a monetary return on accumulated funds. - 125 - This motive alternated between the expectation to receive dividends on the shares and a c a p i t a l gain on share appreciation, seventy-three per cent of the sample indicating the l a t t e r to be more imporant. On t h i s survey then, the " t y p i c a l shareholder" has a small p o r t f o l i o , i s a member of the group contributing the greatest portion of c a p i t a l , and "neither expects nor has an incentive to p a r t i c i p a t e i n the management of the firm." His membership i n the company i s purely f i n a n c i a l . His legal status as stockholder, correlated by the duty i n management to conduct the enterprise i n the best interests of the owners as a group, i s an i n d e f i n i t e one. I f h i s expectations a r i s i n g from membership i n the company are frustrated, whether as a r e s u l t of economic cycles, the state of the industry or the malpractice of management, i t i s not to any legal mechanism that the shareholder looks. It i s to the public market that he looks both for an appraisal of h i s ownership interest and the chance to r e a l i z e that interest." See also Peterson, Canadian Directorate Practices: A C r i t i c a l Self-Examination (1977) at 116; Berle & Means, The Modern Corporation and Private Property (1932); Eisenberg, "The Legal Roles of Shareholders and Management i n Modern Corporate Decision Making", 57 C a l i f . L. Rev 1 [1969] Manning, Rubner, The Enshared Shareholder (1965); The Shareholder Appraisal Remedy, An Essay for Frank Coker" 72 Yale L.J. 223 (1962). 96. For a review of the c r i t i c a l features of a going private transaction, see Brudney & C h i r e l s t e i n , "A Restatement of Corporate Freezeouts", 87 Yale L.J. 1354 (1978); Brudney, - 126 - "A Note on Going Private," 61 Va. L. Rev. 1019 (1975); Note, "Going Private", 84 Yale L.J. 703 (1975); Borden, "Going Private - Old Tort, New Tort or No Tort", 49 N.Y.U. L. Rev. 987 (1974); Salter, supra, note 2. 97. To quote former SEC Commissioner Sommer i n Notre Dame, supra, Note 2: "Faced with the prospect of a merger or a market reduced to " g l a c i a l a c t i v i t y and the l i q u i d i t y of the Mojave Desert, how real i s the choice of the shareholder confronting the of f e r of Management to acquire h i s shares? 1" 98. Minority shareholders have argued that the c o n t r o l l i n g shareholders should not be permitted to acquire t h e i r shares using the l i q u i d resources of the company i n which th e i r shares represent equity. The issuer may provide insiders with d i r e c t or i n d i r e c t f i n a n c i a l assistance by 1. Loaning funds; 2. Guaranteeing a loan or providing security to a lending i n s t i t u t i o n for funds borrowed; 3. Passing on retained earnings i n the form of tax-free or taxable dividends. - 127 - The mode of financing w i l l depend on a number of factors: 1. Whether the method of financing assistance w i l l v i o l a t e any statutory provisions. Supra, Note 11. 2. Whether the issuer or the c o n t r o l l i n g shareholders are better able to deduct any interest expense incurred. 3. Whether the payment of dividends would v i o l a t e any statutory solvency provisions. 4. Whether the c o n t r o l l i n g shareholders are earning l i t t l e or no income and therefore are i n a low marginal tax bracket or are companies, each of which holds greater than 10% i n value and 10% of the voting rights of the shares of the issuer. See Kroft, supra, Note 1 at 111-114. For a discussion of what i s known as a "leveraged buyout", see Lederman, "Leveraged Buyouts" i n Eleventh Annual Insti t u t e on Securities Regulation, supra, Note 6 at 405. See also Coleman v. Myers. [1977] 2 N.Z.L.R. 298 (C.A.), rev'g [1977] 2 N.Z.L.R. 225 (S.C. 1976). For commentary on the t r i a l judgment, see Rider, "Percival v. Wright-per - 128 - Incuriam", 40 Mod. L. Rev. 471 (1977); Hetherington, "Financing an Insider Take-over", 4 Aust. Bus. L. Rev. 220 (1976); Hansen, "Corporations Law" 11 Ottawa L. Rev. 617 at 671 (1978). 99. For a succinct discussion of "majority rule", see Beck, "An Analysis of Foss v. Harbottle" Studies i n Canadian Company Law (J. Ziegel, ed.) Chapter XVIII at 548-552. 100. Supra, Note 7. 101. The MCA, SBCA and Draft OBCA. 102. For example, the CBCA s.185.1 now permits an arrangement without automatic shareholder consideration of a scheme p r i o r to court approval and Section 170 of the CBCA has been amended to permit class voting rights i n s p e c i f i c situations only when "the a r t i c l e s do not provide otherwise". 103. Supra, Note 29 and text, i n f r a at 25. 104. Supra, Note 23. See also P h i l l i p s , "The Concept of a - 129 - Corporation's Purchase of Its Own Shares", 15 A l t a . L. Rev. 324 (1977); Getz, "Some Aspects of Corporate Share Repurchases", 9 U.B.C.L. Rev 9 (1974). 105. CBCA, s.184; BCCA, s.231; ACA, s.249; SBCA, s.184; MCA, s.184; OBCA, s.100; Draft OBCA, s.183. For further d e t a i l s , see text, i n f r a at 24. See also Magnet, supra, Note 1; Manning, "The Shareholders' Appraisal Remedy: An Essay for Frank Coker" 72 Yale L.J. 233 (1962-63); Bruun & Lansky, "The Appraisal Remedy for Dissenting Shareholders i n Canada: Is It Eff e c t i v e ? " , 8 Man. L.J. 583 (1978). 106. Whereas i n most j u r i s d i c t i o n s parties to an amalgamation agreement must d e t a i l the manner i n which the issued and unissued shares of each amalgamating company w i l l be exchanged for shares i n the amalgamated company, CBCA s.176(1), MCA S.176(1); SBCA s.l76(l) and Draft OBCA s. 173(1) permit the use of cash or redeemable preference shares i n the exchange. 107. For example, see the comments of the Courts i n Singer v. Magnavox, supra, Note 6; i n Gregory v. Canadian A l l i e d - 130 - Property, supra, Note 5 at 620 (W.W.R.) and i n Jepson v. Canadian Salt, supra, Note 5 at 43-44 (W.W.R.). 108. Supra, Note 7. 109. Westeel, supra, Note 5 at 218 (O.R.): "If the Legislature intended t h i s section to encompass expropriatory powers, they should have said so i n clear, unambiguous words. In my view the section should not be construed to import such powers. They now purport to do i n d i r e c t l y what they f a i l e d to accomplish d i r e c t l y on a takeover bid. At common law the majority could not expropriate the minority." 110. To quote Evershed M.R. i n Greenhalgh v. Arderne Cinemas Ltd. supra, Note 57 at 291 (Ch. c i t a t i o n ) : "A special resolution...would be l i a b l e to be impeached i f the ef f e c t of i t were to discriminate between the majority shareholders and the minority shareholders, so as to give the former an advantage of which the l a t t e r were deprived." See also Lange, supra, Note 1 for a discussion of t h i s aspect of the case law. 111. Capital gains treatment i s preferable only to investors who earn taxable income i n excess of approximately $59,000 because they w i l l pay a combined federal and p r o v i n c i a l tax of only 30% on c a p i t a l gains as compared to 39% on - 131 - dividends they receive. An issuer may therefore structure a transaction so that shareholders have a choice of the form that the proceeds of d i s p o s i t i o n w i l l assume. See Kroft, supra, Note 1. 112. There i s no empirical data which suggests that squeezeouts have dampened investor confidence. However, many shareholders may f e e l the same as Mr. Kolasa whose comments were quoted by Bouck, J. i n Neonex International, supra, Note 5 at 451: "The leaders of t h i s country have asked us a l l to invest i n Canada as good c i t i z e n s . My wife and I took our savings and bought shares i n Neonex for over $5.00 each. Now we are t o l d we must s e l l them for $3.00. We seem to have l i t t l e choice. Why i s t h i s so?" 113. What also angers minority shareholders i s the fact that the price which they paid for t h e i r shares was higher than the squeezeout p r i c e . Many companies now "going private" attracted c a p i t a l i n the late S i x t i e s by "going public" was in vogue. For s t a t i s t i c a l d e t a i l s and p r a c t i c a l t i p s about how to "go public", see Berman, Going Public: A P r a c t i c a l Handbook of Procedures and Forms (1974); Robinson & Eppler, Going Public (1971); Israels & Duff, When Corporations Go Public (1979); Going Public -- Advanced Techniques - 132 - (Sargent ed. 1979); Going Public Workshop (Sommer & Friedman eds. 1970); Shaw, The Costs of Going Public i n Canada, U.W.O. School of Business Administration, June 6, 1974; Address by D.H. Brown, Going Public, OICA, 1970; McQuillan, Going Public i n Canada: The Facts and Fads (1971). 114. In such a market, information flows freely, there are many participants and there are no i n s t i t u t i o n a l imperfections or corrupt, manipulative influences. See Brudney, " E f f i c i e n t Markets and Fai r Values i n Parent Subsidiary Mergers", 4 Journal of Corporation Law" 63 (1978). 115. To quote Brudney, supra, Note 114 at 64: "Competition among the many eager participants in the market ferrets out a l l relevant information about the prospects of an enterprise and therefore the value of i t s s e c u r i t i e s and causes that information to be refle c t e d i n the price of the security 'instantaneously*. Each stock i s thus 'priced f a i r l y with respect to i t s value'." 116. See Manne, "Mergers and The Market for Corporate Control" 73 J . Pol. Eco 110 (1965); Manne, "Cash Tender Offers - A Reply to Chairman Cohen" (1967) Duke Law Journal 231. - 133 - 117. See Campbell & Steele, supra, Note 1; Salter, supra, Note 2 for examples. In Re Quegroup Investments, supra, Note 5, the o f f e r i n g price for minority shares on the issuer bid was less than one h a l f of the price at which they had been dist r i b u t e d to the public. 118. Weinberg & Blank, supra, Note 29, Chapter 3; Salter, supra, Note 2; Notice, supra, Note 2; Brudney, supra, Note 114 at 66. See also the detailed analysis of the Court in Domglas supra, Not 5 regarding these factors. 119. For a discussion of the c a l c u l a t i o n of the premium, see Campbell, Canada Valuation Service (Toronto: Richard De Boo), Chapter 5; and Chazen, "Acquisition Premiums and Liquidation Values: How Do they Affect the Fairness of the Fi n a n c i a l Terms of an Acquisition?" Eleventh Annual Inst, of Sec. Reg., supra, Note 6 at 377. 120. For example, Neonex, Hidrogas, Maple Leaf M i l l s , the Keg (B.C. Business Week, p.38 May 9/79); Reed Paper Ltd. (Vancouver Sun, July 10, 1980, p.D7). See also Salter, supra, Note 2 and Campbell & Steele, supra, Note 1 for further examples. - 134 - 121. Notice, supra, Note 2. 122. Cf. the comments of Greenberg, J. i n Domglas, supra, Note 5 at 119-120 regarding the differences between ' f a i r value' and ' f a i r market value' and the fact that ' i n t r i n s i c value' means only ' f a i r market value. Brudney, supra, Note 114 at 79 states that the test for i n t r i n s i c value might be "what a bidder would pay for a c o n t r o l l i n g block of stock", thereby eliminating the need to discount the value of shares because they are held by the minority. It seems proper to discount the value of minority shares, though, because an arm's length purchaser may have a distaste for holding them and w i l l therefore pay le s s . No discount factor should be applied, however, to r e f l e c t the infrequent trading or lack of marketability of shares, because i n t r i n s i c value should r e f l e c t the price a purchaser would pay i n a perfect market. Cf. the analysis of the Court i n Domglas supra, Note 5 at 43-45 as to the appropriateness of applying a minority discount. 123. To quote Gower, supra, Note 57 at 616: "There need not be any actual deceit...'Fraud' here - 135 - connotes an abuse of power analogous to i t s meaning i n a court of equity to describe a misuse of a f i d u c i a r y p o s i t i o n . Nor i s i t necessary that those who are injured should be a minority, indeed, the injured party w i l l normally be the company i t s e l f , though sometimes those who have r e a l l y suffered w i l l be a class or section of members, not necessarily a numerical minority who are outvoted by the c o n t r o l l e r s . It covers certain "acts of a fraudulent character"...of which "familiar examples are when the majority are endeavouring d i r e c t l y or i n d i r e c t l y to appropriate to themselves money, property or advantages which belong to the company or i n which the other shareholders are e n t i t l e d to p a r t i c i p a t e . " 124. For example, insiders may trade t h e i r shares i n a company provided they do not p r o f i t f i n a n c i a l l y from t h e i r access to material information. Supra, Note 63; Directors must declare t h e i r interest i n a transaction to which the company i s a party and r e f r a i n from voting at a meeting during which the merits of the transaction are to be considered. Supra, Note 70. 125. Changes which may trigger a dissent application include sale of a l l or substantially a l l the assets of the Company, amalgamation, a l t e r a t i o n of any r e s t r i c t i o n upon the business which may be carried on, continuance by a company into or out of the j u r i s d i c t i o n , a l t e r a t i o n or removal of any r e s t r i c t i o n or constraint on the issue or transfer of shares, amendment of the constating documents to convert a - 136 - company with share c a p i t a l into one without share c a p i t a l and vice versa; a going private transaction and the provision of f i n a n c i a l assistance. The "triggering transactions" are not the same in every j u r i s d i c t i o n s , so one must examine the pertinent l e g i s l a t i o n . See supra, Note 105. In McConnell v. Newco Financial Corp. 8 Bus. L.R. 180 (1980), Esson J. held that a consolidation of shares did not r e s u l t i n "the amendment of the a r t i c l e s to add, change or remove any provisions r e s t r i c t i n g or constraining the issue or transfer of shares". The shareholder was therefore not e n t i t l e d to bring a dissent application under s.184 of the CBCA. 126. The mechanics of the appraisal right are discussed i n Bruun & Lansky, supra, Note 105 and i n the Domglas decision, supra, Note 5 at 11-15. B r i e f l y , following delivery of share c e r t i f i c a t e s and a notice of dissent to the company, shareholders may apply to court for a determination of the f a i r value of t h e i r shares, at which price the Company must purchase them. 127. Under the CBCA, SBCA, MCA and Draft OBCA, a "complainant" may make an application for r e l i e f . "Complainant" i s - 137 - defined i n CBCA s.2 31; MCA s.2 31; SBCA s.2 31 and Draft OBCA s.243 as: "(a) a registered holder or b e n e f i c i a l owner, and a former registered holder or b e n e f i c i a l owner, of a security of the corporation or any of i t s a f f i l i a t e s ; (b) a director or an o f f i c e r or a former dire c t o r or o f f i c e r of a corporation or any of i t s a f f i l i a t e s ; (c) the Director; or (d) any other person who i n the d i s c r e t i o n of the court, i s , a proper person to make an application under t h i s Part." It has been suggested that the Ontario Securities Commission may be considered a "proper person". See Vie t s , "Interaction of the New Ontario Securities Act with the Canada Business Corporations Act" 3 CCH Securities Law Reporter 12699-3. 128. CBCA s.234; SBCA s.234; MCA s.234; BCCA s.224; Draft OBCA s.246; and s.13.11 of the Draft Federal Securities Act (Proposals for a Securities Market Law for Canada, 1979). For commentary on the sections, see Iacobucci, Pilkington and Prichard, supra, Note 62. - 138 - 129. An interim or f i n a l order. 130. Other orders a court may make include: 1. restraining improper conduct; 2. appointing a receiver manager; 3. amending the constating documents; 4. d i r e c t i n g an issue or exchange of s e c u r i t i e s ; 5. d i r e c t i n g changes in directors; 6. varying or setting aside a transaction to which the corporation i s a party and compensating any other parties; 7. d i r e c t i n g payment to a securityholder; 8. d i r e c t i n g production of any f i n a n c i a l statement or accounting; - 139 - 9. compensating any aggrieved person; 10. d i r e c t i n g r e c t i f i c a t i o n of the corporate records or regi s t r y ; 11. l i q u i d a t i n g or dissol v i n g the corporation; 12. d i r e c t i n g an investigation; or 13. requiring any t r i a l of the matter. 131. The BCCA s.2 24 i s broader than the other statutes i n that i t may be used to prevent threatened and not just actual oppressive or u n f a i r l y p r e j u d i c i a l conduct. 132. The term "oppressive conduct" has been defined as: "burdensome, harsh and wrongful" (Scottish Cooperative Wholesale Society Ltd. v. Meyer et a l [1959] A.C. 324); "A lack of probity and f a i r dealing i n the a f f a i r s of the company to the prejudice of some portion of i t s members" (Elder v. Elder and Watson [1952] S.C. 49 at 60). See also Re B.C. A i r c r a f t Propeller and Engine Co. Ltd, 66 D.L.R. (2d) 628 (B.C.S.C. 1968); Re National Building Maintenance - 140 - Ltd. [1971] 1 W.W.R. 8; Re Van-Tel T.V. Ltd. 44 D.L.R. (3d) B.C.S.C. 1974) 146, Re Sabex International Ltee 6 Bus. L.R. 65 (Que. S.C. 1979); Re B r i t i s h Columbia E l e c t r i c Company Ltd. 47 D.L.R. (2d) 754 (B.C.S.C. 1964); O'Neill v. Dunsmuir Holdings (New Westminster) Ltd. et a l . (B.C.S.C. February 30, 1980). 133. In D i l i g e n t i v. RWMD Operations, Kelowna et a l , 1 B.C.L.R. 36 (B.C.S.C. 1976 per Fulton, J . ) , the Court stated that there i s unfair prejudice i f considerations "make i t unjust or inequitable, to i n s i s t on legal rights or to exercise them i n a p a r t i c u l a r way". See also Jackman v. Jackets Enterprises Ltd. 4 B.C.L.R. 358 (B.C.S.C. 1977) and Redekop v. Robco Construction 5 Bus. L.R. 58 (B.C.S.C. 1979) . Unlike i t s /American counterpart, Rule 10b-5 of the Securities Exchange Act of 1934, the oppression remedy w i l l also be available to shareholders where fraud or manipulative conduct do not e x i s t . For recent applications of the oppression remedy, see Ruskin v. A l l Canada News Radio, supra, Note 5; Westeel, supra, Note 5; N.I.R. O i l Limited v. Canadian Hidrogas Resources Ltd. (unreported, - 141 - Feb. 22, 1979 B.C.S.C. per Legg, J. A790417); Extensive discussion of Rule 10b-5 and i t s limited use i n squeezeouts may be found i n Roberts, "Rule 10b-5 and Corporate Mismanagement Problems with Shareholders' Oppression" 8 Memphis State U.L. Rev 501 (1979), Jacobs, "How Santa Fe affects lOb-5's Proscriptions Against Corporate Mismanagement" 6 Sec. Reg. L.J. 3 (1978). 134. BCCA s.2 70; ACA s,156(6), (7). In Newfoundland (NCA s.30(4)) and Nova Scotia (NSCA s.l20(5)), the amalgamating companies may apply for a court order. In some acts such as OBCA ss. 196-197, a government o f f i c i a l may have the d i s c r e t i o n to refuse to issue a c e r t i f i c a t e of amalgamation when the constating documents of the amalgamated company are f i l e d . However, see Wingold, supra, Note 78 which indicates that the c e r t i f i c a t e w i l l issue i f a l l documents are i n order and that no assessment of the morality of any transaction w i l l be made. Compare section^179 of the CBCA which states that the "Director s h a l l issue a c e r t i f i c a t e of amalgamation" upon receipt of the a r t i c l e s of amalgamation and once s a t i s f i e d that the transaction w i l l not prejudice the rights of creditors. - 142 - For a discussion of the guidelines used by the Court, see Triad O i l , supra, Note 78 and Norcan v. Fogler, supra, Note 72. 135. BCCA s.257; OBCA s.190(3); ACA s.38(l); NCA s.89; NSCA ss.52-53. See supra, Note 51 for a l i s t of cases o u t l i n i n g the p r i n c i p l e s followed by the courts. 136. Supra, Note 50. NCA s.39 requires every company that has consolidated i t s shares to give notice thereof to the Registrar of Companies. If an amalgamation or arrangement squeezeout eliminate s u f f i c i e n t p u b l i c l y held shares to warrant the d e l i s t i n g of the issuer, any Exchange upon which the shares are traded must also be n o t i f i e d . See Toronto Stock Exchange Bylaws, s.19.16; r.912 of the Vancouver Stock Exchange; Alberta Stock Exchange Bylaws, s.19.16; Montreal Stock Exchange Rules, s.9155. 137. If a shareholder i s a member of a Nova Scotia, Alberta, Quebec or B.C. Company, he may p e t i t i o n the court to "order otherwise" and not permit the acquiring company to purchase his shares on the same terms as the takeover bid was made. He may be successful i f the court agrees that: - 143 - The company has f a i l e d to comply s t r i c t l y with a l l statutory procedural requirements. See supra, Note 72. The 90% required consisted of shares held by parties related to the offeror. Esso Standard (Inter-Am) v. J.W. Enterprises, [1963] S.C.R. 144. Re Bugle Press, [1960] 1 A l l E.R. 766. Supra, Note 41. There has been i n s u f f i c i e n t or inaccurate disclosure of material facts. See Re Hoare & Co., [1933] 1 A l l E.R. Rep. 105, 150 L.T. 374 (Ch. D.); Re E v e r t i t e Locknuts Ltd., [1945] Ch. 220, [1945] 1.A11 E.R. 40 (Ch. D.); Re Press Caps Ltd., [1949] Ch. 434, [1949] 1 A l l E.R. 1013; Rathie v. Montreal Trust Company, supra, Note 28; Re John Labatt Ltd. and Lucky Lager Breweries, supra, Note 72, Gregory v. Canadian A l l i e d Property Investments Ltd., supra, Note 5. - 144 - The Canadian cases indicate that an "order otherwise" in these circumstances i s only appropriate where the minority can demonstrate that i n spite of reasonable attempts to obtain information, i t was unable to do so. 4. The price offered was unfair. See Re Hoare, supra, "Re Eve r t i t e Locknuts, supra; Re Press Caps, supra; Re Western Mfg. (Reading) Ltd., [1956] Ch. 436, [1955] 3 A l l E.R. 733 (Ch. D.); Re Sussex Brick Co., [1961] Ch. 289, [1960] 1 A l l E.R. 772 (Ch. D.); Re Grierson, Oldham & Adams Ltd., [1968] Ch. 17, [1967] 1 A l l E.R. 192; Re Quegroup, supra, Note 5. For the B.C. position, see i n f r a , Note 138. 138. Shareholders of a federal; Saskatchewan, Manitoba, B r i t i s h Columbia or Ontario corporation w i l l not be permitted to enjoin compulsory a c q u i s i t i o n proceedings because of the inadequacy of the consideration offered. BCCA s.279 allows a court to f i x the price and terms of payment, make consequential orders or give directions IN ADDITION TO the power to "order otherwise". The other statutes permit either the corporation or the dissenting offeree to apply - 145 - to court to f i x the f a i r value of the shares of that recusant shareholder, once he has elected not to transfer h i s shares to the corporation on the terms pursuant to which the takeover bid off e r was made. Unlike any other existing Canadian statute, the BCCA (s.279(9)) also enables shareholders to "require the acquiring company to acquire h i s shares" i f they have not been given a notice of compulsory a c q u i s i t i o n within one month after the company became e n t i t l e d to do so. See also Draft OBCA s.187 and U.K. Companies Act s.209(2). 139. See Gower, supra, Note 57 at 708-218; Beck, supra. Note 99; MacKinnon, "The Protection of Dissenting Shareholders" Studies i n Canadian Company Law (Ziegel, ed.) (1967) 507; Gold, "Preference Shareholders i n the Reconstruction of English Companies" 5 U.T.L.J. (1943-44). 140. Id. 141. Scottish Insurance Corpn. v. Wilsons & Clydes Coal Co. [1948] S.C. 360 at 375; Aff'd [1949] A.C. 462. - 146 - 142. Supra, Note 72. supra, Note 139. 143. To quote Huberman, i n "Winding Up Business Corporations" i n Studies i n Canadian Company Law, Volume 2 (Ziegel ed., 1973) : "This reluctance to i n t e r f e r e i s based on several w e l l - known "rules", variously c a l l e d the "internal management" rule, the "business judgment" rule and the p r i n c i p l e of "majority rule". Simply put, these rules come down to nothing more than t h i s - the courts believe strongly that the majority of the corporation i s e n t i t l e d to govern the corporation as i t , and not the court, sees f i t and the majority w i l l not be allowed to do so free from court interference, unless i t s conduct i s so gross as to shock the conscience of the Court." 144. Beck, supra, Note 99 discusses "non-interference i n internal a f f a i r s " at 556-560. Generally speaking, the courts have refused to i n t e r f e r e i n such intra-corporate matters as the proper appointment and removal of d i r e c t o r r , managing directors and employers and i n such i n t e r - shareholder a f f a i r s as the making of c a l l s , the payment of dividends, the reduction of c a p i t a l or the creation of new classes of shares. - 147 - 145. Gower, supra, Note 57 at 717. 146. For example, see D i l i g e n t i v. RWMD Kelowna (No.2) 4 BCLR 134 (B.C.S.C. 1978). See also "The Problem of Determining the F a i r Value of GCOS Shares" Financial Times (Aug. 27, 1979); "A Slow Grind for Minority Shareholders" Financial Post (March 22, 1980) p.32 and "Shareholders' Hunt for Value Teaches a Lot About Appraisal". Globe & Mail (Feb. 4/80) p.B2. In dissent proceedings, the Court does have the power to appoint an appraiser to a s s i s t i t i n determining " f a i r value". CBCA s.184(21); MCA S.184(21); SBCA s.l84(21); Draft OBCA s.183(23). See also In the Matter of VCS Holdings Ltd. et a l [1978] 5 W.W.R. 659 (B.C.S.C.) for a decision i n which the court accepted a referee's determination of " f a i r value". Query whether a specialized "Companies Court" be established to deal with s i m i l a r l y complex corporate problems. See Gower, supra, Note 57 at 718; MacKinnon, supra, Note 130 at 543; Ontario Select Committee on Company Law (The Lawrence Report, 1967) at 115-116. - 148 - 147. Brudney, supra, Note 114 at fn.56. 148. An enterprise may be worth more i n l i q u i d a t i o n than as a going concern and any valuation provided to shareholders should express the value of shares on t h i s basis, i f i t i s the intention of the acquiror to l i q u i d a t e . 149. Brudney, supra, Note 114 at 75. 150. Id. at 75 fn. 58. 151. There i s considerable dispute among accountants as to the items to be taken into account i n computing the earnings which corporations report i n accordance with Generally Accepted Accounting P r i n c i p l e s . See Canadian In s t i t u t e of Chartered Accountants Handbook section 3500 "Earnings Per Share". 152. The a b i l i t y of the c o n t r o l l i n g shareholders to set the terms of a squeezeout deprives minority shareholders of the opportunity to dispose of t h e i r shares i n the manner or at a time which would best s u i t t h e i r tax position. For example, persons who are taxed at high marginal rates would - 149 - prefer to receive the proceeds from the d i s p o s i t i o n of t h e i r shares as c a p i t a l gains rather than as dividends. Supra, Note 118. On an amalgamation squeezeout, however, they may be given preferred shares of the amalgamated company which would immediately exercise the redemption p r i v i l e g e attached to the shares, r e s u l t i n g i n dividend treatment for shareholders. S i m i l a r l y , a shareholder who has earned an extraordinary amount of income i n 1980, for example, may not wish the inclusion of any further amounts in his income as a res u l t of the redemption of the shares i n that year. Had he the choice, and assuming the market price remained constant, he probably would prefer to s e l l h i s shares i n a year i n which h i s taxable income was lower. Calculation of " f a i r value" should take into account the increased tax burden of minority shareholders r e s u l t i n g from a squeezeout. Had they not been forced to s e l l t h e i r shaes, the minority shareholders would have been better able to dispose of t h e i r shares whenever and however i t suited them. If, as a r e s u l t of the d i s p o s i t i o n , they perceived that they would suffer increased tax l i a b i l i t y , - 150 - they could then have demanded a higher price for t h e i r shares in the market place to o f f s e t any taxes payable. To avoid having a court make a determination of the amount of tax l i a b i l i t y for which a shareholder should be compensated when calcul a t i n g " f a i r value", Companies, such as International Land Corporation (Oct. 5, 1978 c i r c u l a r ) enabled shareholders to choose the time at which the expropriation of shares w i l l take place and the tax treatment the proceeds of disp o s i t i o n w i l l assume. For example, the squeezeout might be structured so that each step of the transaction consisting of a takeover bid followed by an amalgamation occurs i n a d i f f e r e n t taxation year. The amalgamation company might then issue two classes of redeemable shares, from which a minority shareholder could elect to receive those providing him with c a p i t a l gains or dividend treatment. For further d e t a i l s , see Kroft, supra, Note 1 at 91. 153. The wording i n the dissent provisions appears broad enough to enable a court charged with f i x i n g " f a i r value" to take account of the "private company benefits" enjoyed by insiders of the issuer. The B r i t i s h Columbia Companies Act - 151 - s.231 requires consideration of any appreciation or depreciation i n an t i c i p a t i o n of the vote upon the resolution". U n t i l March 1979, the appraisal provisions i n the CBCA s.184, MCA s.184 and SBCA s.184 stipulated that "any change i n value reasonably attributable to the anticipated adoption of the resolution must be excluded". This phrase has since been removed and a dissentient i s e n t i t l e d to be paid the " f a i r value of the shares held by him...determined as of the close of business on the day before the resolution was adopted." The D i l i g e n t i case (No. 1))# supra, Note 133 raises the question whether a minority shareholder may obtain any payment r e f l e c t i n g private company benefits i n oppression proceedings. Fulton, J. stated that "changes i n value occasioned by or as a consequence of oppressive or u n f a i r l y p r e j u d i c i a l conduct are to be excluded." For further discussion, see text i n f r a at 32; See, also Brudney & C h i r e l s t e i n , "Fair Shares i n Corporate Takeovers and Mergers", 88 Harv. L. Rev. 297 (1974); Contra, see Lome, "A Reappraisal of Fa i r Shares i n Controlled Mergers" 126 Penn L. Rev. 955 (1978); Toms, "Compensating Shareholders Frozen Out i n Two Step Mergers" 78 Col. L. Rev. 546 (1978); - 152 - C h i r e l s t e i n , Sargeant and Lipton, "'Fairness' In Mergers Between Parents and Party-Owned Subsidiaries" Eighth Annual Securities Regulation Conference (New York: PLI, 1977) 273. 154. Supra, Note 98. Minority shareholders have argued that the " f a i r value" paid by the c o n t r o l l i n g shareholders should r e f l e c t a portion of the savings obtained by insiders who have not spent any of t h e i r own after-tax dollars to enhance the value of t h e i r own shareholdings. See i n f r a , text accompanying Note 174 for further discussion. 155. Brudney, supra, Note 114 at 76. 156. An important statutory provision for a s s i s t i n g shareholders to acquire relevant background information i s a court- ordered investigation of the company's a f f a i r s which i s available where the applicant can s a t i s f y the court that there are circumstances suggesting wrong doing. See CBCA S.222; BCCA s.233; ACA s.100; SBCA s.222; MCA s.222; OBCA s.186; Draft OBCA s.159; QCA s.107; NSCA s.101; NBCA ss. 107-109; NCA 116-119; PEICA. The court has the broad d i s c r e t i o n to refuse an order to investigate i n the absence - 153 - of "bona fid e s " . This i s to prevent the use of an investigation as a tool to blackmail management because the process i s certain to be time-consuming and inconvenient and may generate bad p u b l i c i t y for the company. Unfortunately, access to and use of the investigation r i g h t are hampered by a requirement for percentage ownership and costs. For further d e t a i l s , see Iacobucci, Pilkington & Prichard, supra, Note 62 at 214-26. Securities regulatory bodies may also a s s i s t shareholders i n gathering information about an issuer. See BCSA s.21; ASA s.21; NBSFPA s.21; B i l l 76 s . l l ; SSA s.27; NSA s.23; B i l l 72 s.10; MSA s.21; NSSA s.22; OSA s . l l ; QSA ss.36, 82A; PEISA s.16. See also A l b o i n i , supra, Note 1, Chapter VI. 157. For example, see Re Whitehorse Copper Mines; Hudson Bay Mining and Smelting Co. Limited v. Lueck and Weinstein (unreported, July 3, 1980 B.C.S.C. per McEachern, C.J.) i n f r a , text at 31 and Domglas, supra, Note 5 at 111-115. - 154 - 158. The protracted determination of " f a i r value" and the p o s s i b i l i t y of insolvency (CBCA s.184(26); MCA s.184(26); SBCA s.184(26); Draft OBCA s.183(28); BCCA s.257) may delay a payment to recusant shareholders for a lengthy period of time. Moreover, there i s no guarantee that the court w i l l exercise i t s d i s c r e t i o n to allow a reasonable rate of interest on an amount payable to each dissentient from the date the action was approved by the resolution u n t i l the date of payment. Even i f dissentients choose to exercise t h e i r rights i n spite of the delay, unfavourable tax consequences and considerable expense may prompt them to elect otherwise. See Kroft, supra, Note 1 at 116 and Vivian, "Monetary Restraints on the Exercise of Rights of Dissenting Shareholders" 9 U.W.O.L. Rev. 101 (1970). 159. For example, i n oppression proceedings, (1) the applicant i s not required to give security for costs; (2) court approval i s required for any stay, discontinuance or dismissal of oppression proceedings; (3) the court may order a company to pay interim costs of an applicant, although the applicant may be accountable for these costs - 155 - upon the f i n a l d i s p o s i t i o n of the application; (4) approval of a transaction by a majority of shareholders i s but one factor courts w i l l consider when asked to dismiss an application. See CBCA s.235; SBCA s.235; MCA s.235; Draft OBCA s.246. 160. See Jepson v. Canadian Salt , supra, Note 5, as to what constitutes a proper dissent notice. 161. In Jepson v. Canadian Salt , supra, Note 5, Laycraft J. stated at 42, 43: "Section 184 of the Canada Business Corporations Act prescribes a remarkably r i g i d procedure which, moreover, seems to be slanted i n favour of the amalgamated corporation and against a dissenting shareholder. In several places i n s.184 there i s a requirement that s p e c i f i e d notices, containing s p e c i f i e d information, be sent within s p e c i f i c a l l y limited times. On the face of the sections, f a i l u r e by the corporation to meet the requirements of the section has no p a r t i c u l a r penalty. On the other hand, f a i l u r e by the shareholder to observe some provision of the section can r e s u l t i n the draconian penalty of complete loss of h i s investment i n the corporation. Indeed, i n t h i s case, i t i s urged by the corporation that that i s the r e s u l t I am l e f t to wonder at the l e g i s l a t i v e p o l i cy which produced t h i s procedural morass..." - 156 - See The Manitoba Sec. Comm'n v. V e r s a t i l e Cornat Corp., [1979] 2 W.W.R. 714, 97 D.L.R. (3d) 45 (Man. Q.B.), where Hewak, J. held that "shareholder" did not mean a shareholder who owned shares as of the date of the trigge r i n g transaction but who sold them before he received notice of the resolution advising him of his dissent r i g h t . See also Domglas, supra, Note 5 at 18 where Greenberg, J. stated that the s t r i c t compliance with procedural requirements i s essential to enable a d i s s a t i s f i e d shareholder to qu a l i f y as a dissentient. Query whether the dissent right should be an exclusive remedy for shareholders i n view of these problems. See Vorenberg, "Exclusive Ness of the Dissenting Shareholder's Appraisal Rights" 77 Harv. L. Rev. 1189 (1964). 162. It i s as yet unsettled whether the company should bear the burden of proof i n dissent proceedings. Contrary to t h i s view held by Bouck, J. i n Neonex International, supra, Note 5, the Court i n Robertson v. Canadian Canners Ltd. 4 Buss. L.R. 290 (Ont. H.C. 1978) held that neither party i s required to prove that an of f e r represents " f a i r value". - 157 - This view has recently been supported by the Court i n Domglas, supra, Note 5. To quote Greenberg, J. at 17: "If I were to decide otherwise and impose the burden of proof on the corporation, s o l e l y because i n t h i s instance i t i s the Petitioner, then a l l a corporation need do i s to r e f r a i n from applying subsection 15 [CBCA s.184(15)]. This would impose upon the dissenting shareholders the Obligation to apply pursuant to Subsection 16 thereof, thus s h i f t i n g the burden of proof to them." In compulsory a c q u i s i t i o n proceedings, the dissenting offence must demonstrate the unfairness of a takeover scheme i n spite of management's superior access to material information. See Canadian A l l i e d Property, supra, Note 5 and Re Whitehorse Copper, supra, Note 15 7. 163. For example, i n Re Canadian Hidrogas Resources Ltd., supra, Note 5, the applicant company had approximately 735 shareholders holding 3 m i l l i o n common shares. The company proposed to convert these shares into Class "A" non-voting redeemable shares i n the r a t i o of 5 to 1. The new shares could then be converted within 30 days of the f i r s t conversion, to Class "B" voting shares i n the r a t i o of 1 Class "A" share to 5 Class "B" shares. At the general meeting, only two shareholders, representing a majority of - 158 - the shares were present and approved the reorganization. Hutcheon, J. held that there were 73 3 persons who had no knowledge of the proposal and would receive no further information beyond the terms of conversion proposed once the arrangement was approved. He concluded that there "lurked the danger of the unfairness i n the arrangement" because i t was "obvious that those shareholders who f a i l to take advantage promptly of the arrangement w i l l see t h e i r investment decline i n value s i g n i f i c a n t l y with the decline r e f l e c t e d as an enhancement in the value of the shares which are altered i n accord with the arrangement." Id., at 709. See also Re Ripley International, supra, Note 5. 164. Re Wall and Redekop [1975] 1 W.W.R. 621, 50 D.L.R. (3d) 733 (B.C.S.C); Neonex International, supra, Note 5 and See also "Valuation of Dissenters" Stock Under Appraisal Statutes" 79 Harv. L. Rev. 1453 (1966) Contra, see Montgomery et a l v. S h e l l Canada Ltd. ( A p r i l 25, 1980, Sask. Q.B. unreported) where Estey, J. held that " f a i r value" was not net asset value so long as the corporation - 159 - continued to be a going concern, but was market value (which he concluded was not depressed). 165. D i l i g e n t i , supra, Note 146; Stewart v Cowan O f f i c e Supplier (Nov. 26, 1979 B.C.S.C, unreported); O'Neill, supra, Note 132. 166. Quegroup, supra, Note 5; Re Whitehorse Copper, supra, Note 157. Jefferson v. Omnitron Investments, supra, Note 41; In the Matter of P a c i f i c Enterprises 18 B.C.L.R. 14 (B.C.S.C. 1979) ; Redekop v. RobCo. (No. 2) (unreported, B.C.S.C, 1980) . 167. See Re Simco Ltee 3 Bus. L.R. 318 (Que. S.C, 1978) and text, i n f r a , at 44; Re Ripley International, supra, Note 5. 168. Re Hellenic , supra, Note 77; D i l i g e n t i , supra, notes 133 and 146; Westeel, supra, Note 5. 169. Supra, Note 157. 170. As the date on which " f a i r value" i s to be fixed was - 160 - neither set out by l e g i s l a t i o n nor previously determined by the Court, the Chief Justice set i t as the l a s t date on which the dissentients could elect to have the Court determine f a i r value. See supra, Note 44. 171. Supra, Note 5. 172. J_d at 273-274. In Neonex, supra, Note 5, at 452 Bouck, J. was also of the opinion that " f a i r value" should r e f l e c t the benefits available to shareholders of a private company" "... It i s at least arguable the f a i r value should r e f l e c t any benefit the majority might receive by reason of the takeover. However, where a Court i s c a l l e d upon to assess the f a i r value of a dissenter's shares on an amalgamation such as t h i s , the ca l c u l a t i o n must be determined at the close of business on the day before the amalgamation resolution was adopted (s. 184(3)). Any change i n value reasonably attributable to the anticipated adoption of the resolution must be excluded. This seems to mean that any benefits Pattison gained by the amalgamation cannot be taken into consideration when valuing the dissenter's shares." 173. Canada Valuation Service, supra, Note 119, Chapter V. 174. The same argument holds true for the rela t i o n s h i p between " f a i r value" and the use of corporate funds to repurchase - 161 - minority shares, supra, Notes 98 and 154. Whereas i n t r i n s i c value should r e f l e c t the worth of the Company based on the size of tax free accounts or the amount of retained earnings, i t i s only the c o n t r o l l i n g shareholders who would pay a premium for minority shares i n order to make use of corporate funds without fear of a derivative action. 175. For a recent application of t h i s p r i n c i p l e i n a squeezeout transaction, see National System of Baking of Alberta Ltd. v. The Queen [1980] CTC 237, 80 D.T.C. 6178 (FCA). The court held that market price was the best evidence of " f a i r market value" and i t was i r r e l e v a n t that a substantial number of shareholders held the view that the majority shareholder would seek to acquire minority shares at a price substantially i n excess of the quoted price on the exchange. Generally, see Wise, "The V-Day Value of Publicly Traded Shares" 28 Can Tax J. 253 (1980). 176. Whereas Poli c y 3-37 and OSA Regs, s.163 protect only shareholders resident i n Ontario, Draft OBCA s.188 safeguards shareholders of a l l "offering corporations" incorporated i n Ontario. OSA Regs s.163 applies only where - 162 - a "going private transaction" as defined, supra, Note 4 i s anticipated to follow a takeover bid or issuer bid. The OSC takes the view that certain transactions that are not "going private transactions" are nonetheless subject to Ontario Policy 3-37: (1) An issuer or insider takeover bid not followed by a going private transaction; (2) a transaction that i s designed to eliminate the intere s t of minority shareholders such as a cash amalgamation squeezeout, but i s not preceded by an issuer or takeover bid. See A l b o i n i , supra, Note 1, 633-639. There has been some dispute whether the rules contained i n Poli c y 3-37 and OSA s.163 "smack of company law" and should be imposed through corporations Acts. For discussion, see Salter, supra, Note 2; Notice, supra, Note 2; In Re Cablecasting, supra, Note 5; In the Matter of the Securities Act and In the Matter of Loeb and Loebex [Dec. 1978] B u l l OSC 333. It does not seem important that the " d i s t i n c t i o n between corporate law and s e c u r i t i e s law - 163 - . . ."has become increasingly blurred i n Canada during the past two decades", because, unlike the U.S., Canada does not have a co n s t i t u t i o n a l structure which only gives the Federal Government the power to create laws governing interstate trade and commerce. The c o n s t i t u t i o n a l framework i n the United States has led to the creation of rules by the Securities and Exchange Commission which require extensive disclosure by issuers i n going private transactions. See supra, Note 4 (Rule 13e-3) and Stumpf, "SEC Proposed 'Going Private' Rule" 4 Del. J . Corp. L. 184 (1978). 177. In "Minority Freezeouts Under Wisconsin Law" 32 Bus. Law 1501 at 1503-4, B a r t e l l suggests the payment of a "going private" premium over market price equal to the average or median premium paid i n contested takeover bids during the p r i o r year. Whereas the use of such a generalized figure avoids the d i f f i c u l t i e s inherent i n the c a l c u l a t i o n of i n t r i n s i c value, t h i s c a l c u l a t i o n involves d i f f e r e n t problems. For example, a premium derived by averaging the range of l a s t year's premiums may be a gross d i s t o r t i o n for - 164 - any p a r t i c u l a r case t h i s year. For further discussion, see Brudney, supra, Note 114 at 80. 1. A summary of the volume of trading and price range of the shares on any stock exchange within twelve months preceding the date of a squeezeout. 2. Any plans or proposals for material changes i n the issuer, including any contract or agreement under negotiation which i f successfully completed would be material; and any proposal to liquidate the issuer, to s e l l , lease or exchange a l l or substantial part of i t s assets, to amalgamate i t with any other business organization or to make any material changes i n i t s business, corporate structure (debt or equity), management or personnel. 3. The number and designation of any s e c u r i t i e s of the issuer purchased or sold by the issuer/acquiror during the 12 months preceding the date of the squeezeout including the purchase or sale p r i c e . - 165 - 4. Financial statements of the issuer prepared subsequent to the date of i t s most recently f i l e d f i n a n c i a l statements not previously released or sent to security holders. 5. The o f f e r i n g price per share and the aggregate proceeds received by the issuer when se c u r i t i e s have been offered to the public during the 5 years preceding the squeezeout. 6. A general description of the income tax consequences of the squeezeout transaction to the issuer and to security holders. 179. A valuation of the shares of the issuer must be prepared and submitted to the Ontario Securities Commission at least 120 days p r i o r to the announcement of any going private transaction and at least 40 days p r i o r to the date of any meeting at which the transaction w i l l be considered. Once approved, the issuer must forward a summary of the valuation to i t s shareholders and inform them that a copy of the valuation w i l l be sent upon request for a nominal charge s u f f i c i e n t to cover p r i n t i n g and postage. The - 166 - summary should include the basis of computation, the scope of review, the relevant factors and t h e i r values and key assumptions on which the valuation i s based. The valuation i t s e l f must follow techniques that are appropriate i n the circumstances, giving consideration to going concern or l i q u i d a t i o n assumptions, or both, and to other relevant factors to a r r i v e at a value or range of values r e s u l t i n g in a per unit value for the s e c u r i t i e s of the issuer being eliminated or modified. It must not contain a downward adjustment to r e f l e c t the fact that the affected s e c u r i t i e s do not form part of a c o n t r o l l i n g interest, but must include an estimate of the cash equivalent of the s e c u r i t i e s offered to minority shareholders which the issuer does not plan to redeem immediately following the going private transaction. The valuation must also be prepared by an independent party. There i s some debate, however, whether auditors or the issuer or investment dealers t r u l y q u a l i f y as "independent" because of the apparent c o n f l i c t s of interest a r i s i n g from a desire for continued employment with the company. See Campbell & Steele, supra, Note 1; Salter, supra, Note 2; and Notice, supra, Note 2 for discussion of thi s issue. 1. The d i r e c t or i n d i r e c t benefits to every senior o f f i c e r , director, insider, associate of an insider or associate or a f f i l i a t e of the issuer as a r e s u l t of the transaction; 2. the d e t a i l s of any contract, arrangement or understanding, formal or informal, between the issuer and any securityholder; 3. the source of cash to be used for payment, and i f funds are to be borrowed, the terms of the loan, the circumstances under which i t must be repaid and the proposed method of repaying i t ; 4. the frequency and amount of dividends with respect to the shares of the issuer during the two years preceding the date of the squeezeout transaction, any r e s t r i c t i o n s on the a b i l i t y of the issuer to pay dividends and any plan or intention to declare a - 168 - dividend or to a l t e r the dividend p o l i c y of the issuer. 181. If the consideration offered i s other than cash or a security providing an immediate right to cash or i s less i n amount than the per share price indicated by the valuation, Po l i c y 3-37 and Section 188 of the Draft OBCA require at least 2/3 approval by the independent minority. 182. Supra, Note 97. See also Notice, supra, Note 2 i n which the OSC stated the reason for adopting the majority of the minority t e s t : "But valuations alone are not enough. They might s u f f i c e i f the minority shareholder had true freedom of choice, but i n these transactions that luxury i s unavailable. By d e f i n i t i o n , a going private transaction i s so designed as to bind even the dissentient. Even i f t h i s were not true, the p r a c t i c a l i t i e s of the si t u a t i o n often leave the minority shareholder with no r e a l i s t i c a l ternative to acceptance. Almost invariably, the of f e r i s at a pric e s i g n i f i c a n t l y i n excess of p r i o r market price, and w i l l be accepted by the great majority of the offerees. Accordingly, the dissentient would face the l i k l i h o o d of an i l l i q u i d market aft e r completion of the transaction, with small opportunity to r e a l i z e as much in the future. It i s for t h i s reason that the majority of the minority test was introduced as a common feature of these transactions." - 169 - 183. Supra, note 146; and Brudney, supra, note 114 at 81. See also supra, note 156 for reference to the broad investigatory powers which the OSC possesses. 184. P o l i c y 3-37, supra, note 38 "Interpretations-Exemptions." 185. Id. For example, employees or former employees. 186. _Id. Appendix I; Supplement to OSC Pol i c y 3-37; See also Draft OBCA s,188(6). 187. I_d. It i s suggested that management c e r t i f y that no intervening event nor any p r i o r event undisclosed at the time of the i n i t i a l transaction could reasonably be expected materially to increase the value of the corporation. 188. Id. 189. See Salter, supra, note 2; Notice, supra, note 2. - 170 - 190. See Loebex, supra, note 176. 191. P o l i c y 3-37, supra, note 38. 192. Id. 193. Id. 194. Id. 195. Id. 196. Id. 197. Draft OBCA S.188(4) 198. While Quebec companies l e g i s l a t i o n contains a compulsory acq u i s i t i o n right i t has no other statutory provisions a s s i s t i n g shareholders to claim f a i r value. However, the decision i n Re Simco Ltee., supra, note 167 indicates that s.46 which requires j u d i c i a l approval of an arrangement may provide the court with greater powers than anticipated. See text i n f r a , at 44. If so, p r o h i b i t i o n may only be - 171 - required i n amalgamation squeezeouts or c l a s s i f i c a t i o n - consolidation freezeouts by special resolution. 199. The courts i n Maple Leaf M i l l s and Westeel, supra, note 5 did not award damages because they were of the opinion that the actions of the defendant were l i k e l y to cause irreparable harm, not compensible through damages. This i n i t s e l f , suggests that they were of the opinion that shareholders had a right i n the form and not the value of th e i r investments. 200. Supra, note 77. See also Prentice, "Corporate Arrangements-Protecting Minority Shareholders" 92 LQR 13 (1977) . 201. The facts i n Hellenic were as follows: The scheme involved cancellation of the common shares of Hellenic and the issuance of new shares to a bank (Hambros), following which the existing shareholder would be compensated i n cash for the loss of t h e i r shares. The actual e f f e c t of the scheme was to enable Hambros to purchase a l l the issued common shares of - 172 - Hellenic. MIT, a wholly owned subsidiary of Hambros, owned approximately 53%, while the objector, the National Bank of Greece ("NBG") held 14%. At a meeting of a l l the common shareholders c a l l e d to approve the scheme, the req u i s i t e special resolution was passed with the assistance of a favourable vote by MIT. 202. Supra, note 77 at 388 ( A l l E.R. c i t a t i o n ) . 203. See the comments of the Court i n Maple Leaf M i l l s , supra, note 5 at 201(O.R.) and i n Westeel, supra, 5 at 216(O.R.). 204. Supra, note 167. 205. Query why the Court did not inquire into the market value of the shares and use i t as a reference for determining a " f a i r " buy-out figure. 206. The decision not to impose a majority of the minority test would appear to be correct i f section 46 of the QCA does give the Court the power to order a minority buy-out when - 173 - i t i s charged with the r e s p o n s i b i l i t y of approving an arrangement. 207. See Scott, "Going Private: An Examination of Going Private Transactions Using the Business Purpose Standard" 32 S.W.L.J. 64 (1978) and Borden & Messmar, supra, note 6. 208. In spite of the decision i n Marshel v. AFW Fabric Corp. 533 F. 2d 1977 (2d C i r . ) , vacated and remanded for a determination of mootness, 429 U.S. 881 (1976), the U.S. Supreme Court i n Green v. Santa Fe Industries Inc. 533 F. 2d 1283 (2d C i r . , 1976), rev'd, 430 U.S. 462 (1977) held that the creation of a proper corporate purpose test i s a matter of state and not Federal law. Following t h i s decision, Rule 13e-3, supra, note 4, was amended and the requirement of a proper corporate purpose was deleted. 209. See for example: Jutkowitz v. Bourns, Inc. No. CA-000268 (Cal. Super. Ct. LA Co. Nov. 19, 1975); Kaufman v. Lawrence 386 F. Supp. 12 (SDNY 1974); Tanzer Economic Associates P r o f i t Sharing Plan v. Universal Food S p e c i a l t i e s Inc., 87 Misc. 2d 167, 383 NYS 2d 472 (Sup. Ct. 1976) - 174 - 210. Matteson v. Ziebarth 40 Wash. 2d 286, 242 P. 2d 1025 (1952); Po l i n v. Conductron 552 F. 2d 797 (8th C i r . ) , Cert. Denied, 98 S.Ct. 178, 54 L. Ed. 2d 129 (1977). 211. Bryan v. Brock & Blevins Co. 490 F. 2d 563 (5th C i r . ) , Cert, denied 419 U.S. 844 (1974); Clark v. Pattern Analysis & Recognition Corp. 87 Misc. 2d 385, 384 NYS 2d 660 (Sup. Ct. 1976). 212. Schulwolf v. Cerro Corp. 86 Misc. 2d 292; 380 NYS 2d 957 (Sup. Ct. 1976); Tanzer Economic Associates, supra, note 209; Young v. V a l h i 382 (Del. Ch. Feb. 22, 1978). See also Singer v. Magnavox Co. supra, note 6. 213. Grimes v. Donaldson Lufkin & Jenrette Inc. 392 F. Supp. 1393 (ND Fla.) a f f d, 521 F. 2d 812 (5th C i r . 1975); Teschner v. Chicago T i t l e & Trust Co. 322 N.E. 2d 54 (1975); Cole v. Schenley Industries Inc. [1975-1976 Transfer Binder] Fed. Sec L. Rep. (CCH) Section 95,765 (Sony 1976), remanded 563 F. 2d 35 (2d C i r . 1911)-, Schulwolf v. Cerro Corp., supra, note 212; Tanzer Economic Associates, supra, note 209. - 175 - 214. Young v. V a l h i , supra, note 212; Kemp v. Angel, 381 A. 2d 241 (Del. 1977) Cf. Schulwolf v. Cerro Corp., supra, note 212. 215. Tanzer v. International General Industries 379 A. 2d 1121 (Del. 1977); Tanzer Economic Assoc., supra, note 209. 216. In Singer v. Magnavox, supra, note 6, the Delaware Supreme Court overturned a decision of the Court of Chancery and rejected the contention of the defendants that a merger was "l e g a l l y unassailable" because of f u l l compliance with procedure. See also Najjar v. Roland I n t ' l Corp. 387 A. 2d 709 (Del. Ch. 1978); Bryan v. Brock & Blevins Co., supra, note 213; Gabhart v. Gabhart 390 N.E. 2d 346 (Ind. 1977); Berkowitz v. Power Mate Corp. 342 A. 2d 566 (N.J. Ch. 1975); Tanzer Eco. Assocs., supra, note 209; In re Jones & Laughlin Steel Corp. 398 A. 2d. 186 (S.C. Penn., 1979). Note the analysis of the B r i t i s h Columbia Court of Appeal in Canadian A l l i e d Property, supra, Note 7. Carrothers J.A. stated at 620 (W.W.R.): "We are not to be concerned with the motivation behind the desire to acquire the minority shareholder unless i t i s abusive of or unfair to the minority. Certainly there i s no presumption of abuse to be derived merely from the majority position of the - 176 - acquiring company. We must assume, u n t i l the contrary be shown, that the objective or motivation of the acquiring company i s proper. There are many legitimate reasons for eliminating a minority shareholding and i f we are to speculate about that motivation I would prefer to contempate these. A co n t r o l l i n g shareholder can then make business decisions, p a r t i c u l a r l y long-term ones, without concern for c o n f l i c t s of intere s t with the minority shareholders and without having to worry about adverse effects on the trading price of shares on the market. To obtain f u l l share control would eliminate the administrative burden and expense of maintaining status as a reporting company with shares l i s t e d on stock exchanges. Future financing obtained through the c o n t r o l l i n g shareholder's resources would be f a c i l i t a t e d by that c o n t r o l l i n g shareholder having a l l the voting and p a r t i c i p a t i n g shares i n the subject company. O r i g i n a l l y the small public shareholding here served as a balancing and leavening influence on the two equal c o n t r o l l i n g shareholders (who were both well established and renowned as long-term investors but were strangers to thi s business community) and introduced a l o c a l short-term interest to be considered and served by the subject company's di r e c t o r s . That equal control has gone and so perhaps have the other reasons for the minority shareholdings." 217. Westeel, supra, note 5 at 216 (O.R.) 218. Supra, note 137. 219. Id. at 278. 220. Id. at 283. - 177 - 221. Unlike the CBCA, SBCA and Draft OBCA, the U.K Act requires an offeror to be an "acquiring company" and not an in d i v i d u a l . To quote the Privy Council i n Blue Metal Indus. Inc. v. D i l l e y , supra, note 27: "It i s p a r t i c u l a r l y s i g n i f i c a n t that the power cannot be exercised by an ind i v i d u a l or, even on the hypothesis that p l u r a l a c q u i s i t i o n i s possible by a company or companies and an in d i v i d u a l or individuals together. This seems strongly to support the ind i c a t i o n that the section i s a company structure section and not one of concentration of property i n t e r e s t s . " 222. Supra, note 137. 223. Canada Corporations Act R.S.C. 1970 c. C-32 as amended. "136. (1) Notice to dissenting shareholder. - Where any contract involving the transfer of shares or any class of shares i n a company (in t h i s section referred to as "the transferor company") to any other company (in t h i s section referred to as "the transferee company") has, within four months a f t e r the making of the o f f e r in that behalf by the transferee company, been approved by the holders of not less than nine- tenths of the shares affected, or not less than nine- tenths of each class of shares affected, i f more than one class of shares i s affected, the transferee company may, at any time within two months a f t e r the expiration of the said four months, give notice, i n such manner as may be prescribed by the court i n the province in which the head o f f i c e of the transferor company i s situated, to any dissenting shareholder that i t desires to acquire his shares, and where such notice i s given the transferee company i s , unless on an application made by the dissenting shareholder within one month from the date on which the notice was - 178 - given the court thinks f i t to order otherwise, e n t i t l e d and bound to acquire those shares on the terms on which, under the contract, the shares of the approving shareholders are to be transferred to the transferee company." 224. Supra, note 137 at 151. 225. Supra, note 6. 226. Supra, note 95. 227. Supra, note 57. 228. Supra, notes 139-144. 229. Supra, note 137 at 149. 230. The CBCA, SBCA and Draft OBCA permit the ac q u i s i t i o n of shares i f a takeover i s accepted by holders of not less "than 90 percent of the shares of any class . . . other THAN SHARES HELD AT THE DATE OF THE TAKEOVER BID BY OR ON B BEHALF OF THE OFFEROR OR AN AFFILIATE OR ASSOCIATE OF THE OFFEROR." The BCCA refers to "not less than 9/10 of those shares or of the shares of that class other than shares - 179 - already held at the date of the o f f e r by, or by a nominee for, the acquiring company or i t s a f f i l i a t e . " For a discussion of the term "Nominee", see Jefferson v. Omnition Investments, supra, note 41; Sammell v. President Brand Gold Mining Co. supra, note 41; and Gregory v. Canadian A l l i e d Property, supra, note 5. 231. Percival v. Wright [1902] 2 Ch. 421. For discussions of directors' duties, see Iacobucci, Pilkington & Prichard supra, note 62 at 286-318; Anisman, supra note 62 at 158 f f ; Gower, supra, note 57 at 571 f f ; Palmer, "Directors' Powers and Duties" Studies i n Canadian Company Law, (J. Ziegel ed.) Ch. 12. In the recent decision of the New Zealand Court of Appeal, Coleman v. Myers, supra, note 105, directors engaging i n the ac q u i s i t i o n of shares were held to be subject to a general duty of disclosure when dealing with prospective purchasers or s e l l e r s . The Court stated that Shareholders who surrender t h e i r shares on a takeover must be t o l d of a l l material facts, including the method of financing the transaction. Cf. A l l a n v. Hyatt (1914), 17 D.L.R. 7 (P.C.) and Anisman, supra, note 62 at 159. - 180 - The "Complainant." See supra, note 127. CBCA s.232-233,235; BCCA s.225; MCA s.232-233,235; OBCA s.99; SBCA s.232-233,235; Draft OBCA ss.244-245; A derivative action i s a s u i t brought by a person i n the name of and on behalf of the corporation to remedy a wrong done to the corporation. It i s available only for the enforcement of duties owed to the corporation and i s unavailable to enforce the rights of an i n d i v i d u a l or group of shareholders. However, i t may be brought i n a representative form. See Beck, "The Shareholders' Derivative Action" 52 Can. Bar Rev. 159 (1974) and Beck, supra, note 99. In j u r i s d i c t i o n s which have not enacted a statutory derivative action, shreholders may bring a derivative action, but i t s scope w i l l be severely limited by the rule in Foss v. Harbottle (1843) 2 Hare 46; 67 E.R. 189. For discussion, see Beck, supra, note 99. - 181 - 234. Beck, supra, note 99. Note that the directors i n t h e i r capacity as c o n t r o l l i n g shareholders are not permitted to r a t i f y fraudulent actions. See Cook v. Peeks [1916] 1 A.C. 554 (P.C.); Cf. Regal (Hastings) Ltd. v. G u l l i v e r , [1942] 1 A l l E.R. 378 (H.L.). 235. Supra, note 233. 236. Wallersteiner v. Moir (No. 2), [1975] 1 A l l E.R. 849 (C.A.). 237. Whereas BCCA s.142 and OBCA s.144 require that a direc t o r "act honestly, i n good f a i t h and i n the best interests of the company", CBCA s.117; MCA s.117, SBCA s.117 and Draft OBCA s.13 3 are more f l e x i b l e and use the phrase "with a view to the best interests of the company." 238. Teck Corporation Ltd. v. M i l l a r 33 D.L.R. (3d) 288 (BCSC, 1972); Parke v. Daily News Ltd., [1962] Ch. 927; Re Smith & Fawcett Ltd., [1942] Ch. 304. For further discussion of this phrase, see Gower, supra, note 57 at 576-580. - 182 - 239. See Farrar, "Abuse of Powers By Directors" 33 Camb. L.J. 221 (1974); Bennun, "Directors' Powers To Issue Shares: Two Contrasting Decisions" 24 Int. and Comp L.Q. 359 (1975); Birds, "Proper Purposes As a Head of Directors' Duties" 37 Mod. L. Rev. 580 (1974); Gower, supra note 57 at 580-582; Iacobicci, Pilkington and Prichard, supra, note 62 at 297-300. 240. See Fraser v. Whalley (1864), 2 H & M 10, 71 E.R. 361; Punt v. Symons & Co. Ltd., [1903] 2 Ch. 506; Piercy & S. M i l l s & Co. Ltd., [1920] 1 Ch. 77; Bonisteel v. C o l l i s Leather Co. Ltd. 45 O.L.R. 195 (Ont. H.C.,1919); Re Smith & Fawcett, supra, note 238; Hogg v. Cramphorn Ltd. [1967] Ch. 254 and Teck Corporation v. M i l l a r , supra, note 238. 241. When Directors have issued themselves additional shares to retain voting control of the Company and defeat a takeover bid, t h i s has been held to be an "improper purpose." See Hogg v. Cramphorn, supra, note 240; Teck Corporation v. M i l l a r , supra, note 238; Winthrop Investments Ltd. v. Winns Ltd., [1975] 2 N.S.W.L.R. 666 (C.A.), Bernard v. V a l e n t i n i , 18 O.R. (2d) 656 (4.c.1978). Query whether the directors may r a t i f y t h i s action i n t h e i r capacity as - 183 - co n t r o l l i n g shareholders. See Bamford v. Bamford, [1970] Ch. 212; Hogg v. Cramphorn, supra, note 240 and Teck Corp. v. M i l l a r supra, note 238 and Prentice, "COMMENT" 47 Can. Bar Rev. 648 (1969). The "proper purposes test" i s somewhat superfluous because Directors must act bona fide i n the best inte r e s t of the company. What i s the difference between acting "bona f i d e " and for an "improper purpose"? For a l i s t of suggested "proper corporate purposes", see the comments of Carrothers, J.A. i n Canadian A l l i e d Property, supra, notes 5 and 216. 242. See Howard Smith Ltd. v, Ampol Petroleum Ltd. and Others [1974] 1 A l l E.R. 1126 (H.L.) Cf. Teck Corp. v. M i l l a r , supra, note 238. 243. Phipps v. Boardman, [1967] 2 A.C. 46, [1966] 3 W.L.R. 1009; Regal (Hastings) Ltd. G u l l i v e r supra, note 234. See also, supra, note 70. 244. Keech v. Sandford (1726) Sel Cas. Ch. 61. See also Beck, "The Saga of Peso Siver Mines: Corporate Opportunity - 184 - Revisited" 49 Can. Bar Rev. 80 (1971) and Anderson, "Conflicts of Interest, E f f i c i e n c y , Fairness and the Corporate Structure" 2 5 UCLA L. Rev. 738 (1978). 245. Query whether the c o n t r o l l i n g shareholders may r a t i f y such an action. See Beck, supra, note 244 at 114; Canadian Aero Services Ltd. v. O'Malley, Zarzycki et a l . (1973), 40 D.L.R. (3d) 371; [1974] S.C.R. 592; and Beck, "The Quickening of Fiduciary Obligation: Canadian Aero Services v. O'Malley" 53 Can. Bar Rev. 771 (1975). 246. Canadian Aero Services, supra, note 245; Scottish Co- operative Wholesale Society Ltd. V. Meyer, supra, note 132. Cf. B e l l v. Lever Bros. [1932] A.C. 161. See also Beck, supra, note 245 at 787-792. 247. Pepper v. L i t t o n , 308 U.S. 295, 60 S. Ct. 238; Brown v. Halbert 271 A.C.A. 307, 76 Cal. Rptr. 781; Remillard Brick Co. v. Remillard-Dandini 109 Cal. App. 2d 405, 241 P. 2d 66; Jones v. H.F. Ahmanson & Company 1 Cal. 3d 93, 460 P. 2d 464. See also Gibson, "The Sale of Control i n Canadian Company Law" 10 U.B.C. L. Rev. 1 (1976). - 185 - 248. This i s based on the assumption that the constating documents constitute a contract between the company and each member. While t h i s fact i s expressly found i n Companies l e g i s l a t i o n i n memorandum j u r i s d i c t i o n s (e.g., BCCA s.13), i t i s not clear whether the same holds true for shareholders of l e t t e r s patent or a r t i c l e s of incorporation companies. See Beck, supra, note 99. See also Gower, supra note 57 at 653-656; Beck, supra, note 233 at 169-179; Charlebois et a l . v. Bienvenu et a l . [1967] 2 O.R. 635 and A l b o i n i , supra, note 1 at 609-617. 249. Courts have been w i l l i n g to accept the proposition that a fid u c i a r y relationship does exist i n clo s e l y held companies. For example, i n Clemens v. Clemens Bros. Ltd. [1976] 2 A l l E.R. 268 (Ch. D.), the c o n t r o l l i n g shareholders proposed to increase the authorized c a p i t a l of the company i n order to issue further shares to themselves and to an employee trust fund. The e f f e c t of t h i s plan would have been to reduce the p l a i n t i f f ' s holdings from 45 percent to s l i g h t l y below 25 percent of the voting shares, with the r e s u l t that she could no longer block a special resolution. - 186 - Foster, J. set aside the resolution on the grounds that i t was passed primarily to deprive the p l a i n t i f f of her "negative control." In the opinion of the Court, the right to vote was "subject to equitable considerations . . . which may make i t unjust or inequitable . . . to exercise [ i t ] in a p a r t i c u l a r way." Cf. for example, the dictum of Cozens-Hardy M.R. i n P h i l l i p s v. Manufacturers Securities Ltd., supra, note 9: "Members of a company voting at a general meeting properly convened have no f i d u c i a r y o b l i g a t i o n either to the company or to the other shareholders." See Gibson, supra, note 247 for commentary on the case law. 250. Supra, note 57. 251. N.W. Transport v. Beatty, supra, note 70. 252. [1975] 54 D.L.R. (3d) 692 (Ont. C.A.). For commentary, see Slutsky, 39 Mod. L. Rev. 331 (1976). - 187 - 253. Id. at 679. 254. [1972] 3 O.R. 688 (H.C). 255. I_d. at 695-697. The Ontario Court of Appeal reversed the decision of Morand, J. [1973] 2 O.R. 132 on the basis that the action, as pleaded, was derivative and not personal. 256. Maple Leaf M i l l s , supra, note 5 at 205. 257. Westeel, supra, note 5 at 219-220. 258. Id. at 219. See also Re Loeb and Provigo Inc. 88 D.L.R. (3d) 139 (Ont. H.C. 1979) i n which Steele, J. held that an application to re s t r a i n Provigo, the c o n t r o l l i n g shareholder of Loeb, from diverting any present or future business of Loeb to i t s e l f , following a successful takeover bid, should be brought by way of a derivative action. 259. Investigations (supra, note 156); Freezing funds: NSSA no provision; NSA no provision; NBSFPA s.24; PEISA s.19; OSA S . 1 6 ( l ) ; BCSA s.27; ASA s.26; B i l l 76 S.14(1); QSA s.43; MSA s.26; SSA s.32; B i l l 72 S.16(1); Appointing a - 188 - receiver: OSA s.17; BCSA s.28; ASA s.27; B i l l 76 s.15; SSA s.33; MSA s.27; PEISA s.l9(3); B i l l 72 s.17; OSA s.132, B i l l 72 s. 132; B i l l 76 s. 129 permit the Securities Commission to apply to a judge for permission to begin or continue a c i v i l action on behalf of a reporting issuer against any insider or associate or a f f i l i a t e of the insider who has purchased or sold s e c u r i t i e s with knowledge of a material change or has informed another of the material change. 260. OSA s.123; BCSA s.58; ASA s.143; B i l l 76 s.121; MSA s.143; B i l l 72 s.123; SSA s.151; QSA s.63; NSSA s.23; NBSFPA s.18; PEISA no provision; NSA s.25. 261. OSA s. 124; BCSA ss.21,55; ASA ss.20,59; B i l l 76 s.122; MSA ss.20,59; B i l l 72 s.124; SSA ss.21,20(5); QSA s.20; NBSFPA s.22; NSSA ss.4, 20; PEISA s.2(4); NSA ss.6,21 (Attorney- General) 262. Alberta Stock Exchange Bylaws, Part X; Montreal Stock Exchange Rules section 9451; Toronto Stock Exchange Bylaws section 19.01; Vancouver Stock Exchange Rules 380-384; Winnipeg Stock Exchange Bylaw 5, section 4. - 189 - 263. Such an order may be made on any terms i f the s e c u r i t i e s regulatory authority concludes i t i s i n the "public i n t e r e s t . " An issuer must be given the benefit of a hearing, though t h i s right may be abridged for a temporary period i f the agency believes that a delay i n action would be p r e j u d i c i a l to the "public i n t e r e s t " . For discussion of what constitutes the "public i n t e r e s t " see Johnston, supra, note 15 at 360-362; A l b o i n i , supra, note 1 at 824-838. 264. Johnston, supra, note 15 at 361. 265. Id. 266. See Lost River Mining Corporation Limited et a l . [Oct. 1979] B u l l OSC 290 at 292; See also A l b o i n i , supra, note 1 at 837-838. 267. Notice, supra, note 2. 268. Re Cable Casting, supra, note 5; Loeb and Loebex, supra, note 176. In Maple Leaf M i l l s , supra, note 5, at 206 Steele, J. noted that the OSC declined to i n t e r f e r e with the trading of the s e c u r i t i e s of Maple Leaf because there - 190 - was no evidence of fraud and extensive disclosure had been made. 269. For commentary, see A l b o i n i , supra, note 1 at 835-837. 2 70. Supra, note 261. See also A l b o i n i , supra, note 1 at 838- 850. 271. BCSA s s . 2 0 ( l ) ( i ) 55(1); ASA ss. 19(1)(9), 58; B i l l 76 ss. 32(l)(p); 6 9 ( l ) ( j ) SSA s . 2 0 ( l ) ( j ) , 65; MSA ss.58(l)(b), ss. 1 9 ( l ) 1 0 ( i i i ) ; B i l l 72 ss.34(1)(16); 7 1 ( l ) ( j ) OSA s.34(1)16, s . 7 1 ( l ) ( j ) ; QSA s.20(e),52. 272. See BCSA, s s . 2 0 ( l ) ( i ) , 55(1); ASA, ss.19(1)9, 58; SSA, s s . 2 0 ( l ) ( j ) , 65; MSA, ss.19(1)10, 58(l)(b); B i l l 72 ss. 34(1)15, 7 1 ( l ) ( i ) ; OSA, ss.34(1)15, 7 1 ( l ) ( i ) ; QSA, ss.20,52; NBSFPA, ss.7(h), 12(12); PEISA ss.2(3)(f), 13(a); NSSA, s s . 4 ( f ) , 19(f); NSA, ss.5(g), 20(g) and B i l l 76, ss.32(l)(o) ( i ) , 6 9 ( l ) ( i ) ( i ) . 273. Supra, notes 271-272. In order for an issuer to q u a l i f y for the exemption i n B r i t i s h Columbia, Saskatchewan, Alberta, New Brunswick, Nova Scotia, Newfoundland and - 191 - Prince Edward Island, the share r e c l a s s i f i c a t i o n must be considered a "reorganization" which i s not defined by the se c u r i t i e s l e g i s l a t i o n of these j u r i s d i c t i o n s . In OSA, s. 3 4 ( l ) 1 5 ( l ) f and MSA, s.19(3)(1)(b), the share r e c l a s s i f i c a t i o n must be performed by arrangement. Quaere whether exemptions are available i n Quebec because of the wording of QSA, s.20(f): "the exchange by one company of se c u r i t i e s issued by i t for the s e c u r i t i e s of another company . . . for the purpose of reorganizing one of them." 274. Supra, notes 271-72. Unlike the r e c l a s s i f i c a t i o n , the consolidation i s expressly covered by the prospectus and r e g i s t r a t i o n exemptions i n Saskatchewan, Nova Scotia, PEI, B r i t i s h Columbia, Alberta, New Brunswick and Newfoundland. In Ontario and Manitoba, i t i s necessary to use an arrangement to obtain an exemption. In Quebec, there i s no statutory exemption. 275. BCSA s.6 ; ASA s.6 B i l l 76 s.22; MSA s.6 OSA s.24 ; QSA s.16 PEISA s.2 ; NSSA s.3 SSA s.6; B i l l 72 s.24 NBSFPA s.5 NSA s.4 - 192 - 276. BCSA s.36 ; ASA s.35 ; SSA s.42 B i l l 76 s.50; MSA s.35 ; B i l l 72 s.52 OSA s.52 ; QSA ss.50,53; NBSFPA ss.13-14; PEISA s.8 ; NSSA s.12 (r e g i s t r a t i o n statement); NSA s.13 ( r e g i s t r a t i o n statement). 277. For a discussion of the term, see A l b o i n i , supra, note 1 at 843-850. 278. OSA s.124(2); B i l l 72 s.124(2) and B i l l 76 s.122(2) also give the s e c u r i t i e s commission the power to withdraw any or a l l of the takeover bid or issuer bid exemptions. See supra, note 37. 279. Panacea Mining & Exploration Limited [Oct. 1971] B u l l OSC 156. 280. Murray M. S i n c l a i r [July 1975] B u l l OSC 187 ( f a i l u r e to f i l e insider reports); Mercantile Bank and Trust Co. Ltd. [Oct. 1973] B u l l OSC 173; ( f a i l u r e to f i l e i nsider reports); Chemalloy Minerals Limited [March, 1974] B u l l OSC 60. Cf. National Sea, supra, note 62. For commentary, see B a i l l i e and A l b o i n i , "The National Sea Decision - Exploring - 193 - the Parameters of Administrative Discretion" 2 Can. Bus. L.J. 454 (1978). 281. International Negotiators Limited et a l . [Oct. 1965] B u l l OSC 2. 282. J . F. Simard Company Limited [Nov. 1961] B u l l OSC 1. 2 83. Supra, note 176. See text accompanying note 268. 284. Supra, note 5. See text accompanying note 268. 285. See Globe and Mail (July 11, 1980) "OSC To Study Westfair Foods Proposals." Westfair proposed to issue junior preferred shares and make i t s non-redeemable Class A shares (held by the c o n t r o l l i n g shareholder) redeemable as part of a continuance under the CBCA. The OSC was asked to deny exemptions allowing Westfair to reorganize i t s c a p i t a l structure without a prospectus because the plan amounted to a l i q u i d a t i o n . - 194 - 286. See the table i n the Appendix. 287. Draft OBCA ss.1(1)26 & 188. 288. But for the creation of Policy 3-37, OSA Reg. s.163 and Draft OBCA s.188, Steele, J. would have been correct i n enjoining the transaction i n Maple Leaf M i l l s , because Ontario shareholders had no opportunity to command payment of an amount at least equal to the i n t r i n s i c value of t h e i r shares. OBCA s.100 and SBCA s.184 are only available to shareholders of" non-distributing" corporations. 289. The decision i s Westeel was correct only because there were procedural d e f i c i e n c i e s (no amalgamation agreement). However, had there been f u l l procedural compliance with a l l statutory provisions then i t would have been appropriate for Montgomery, J. to ins t r u c t the shareholders that recourse to the dissent or oppression remedy was proper i n the circumstances. 290. Supra, note 198. 291. Supra, note 96. - 195 - 292. Id. at 1359. 293. Id. at 1361-1362. The disclosure provisions i n the Ontario Proposals require the inclusion of a statement that a "going private transaction" w i l l follow a tender o f f e r . 294. Id. at 1365-66. 295. Id. at 1368-69. 296. Supra, note 32; Id at 1371. 297. Id at 1371. The Ontario Proposals do not require disclosure by an acquiror when i t proposes to give minority shareholders " p a r t i c i p a t i n g s e c u r i t i e s . " See supra, note 4. 298. Id. at 1368. 299. See text, supra, at 32-33. 300. For example, see "Jannock Changes Mind" Fin a n c i a l Times (December 11, 1978) p. 32; "Keg Restaurants Skewers Buy- - 196 - Back Plan" B.C. Business Week (May 9, 1979) p. 38; Glover and Schwartz, "Going Private Fever Cools Off", supra, note 1; Slocum, "Westfair Foods Decides Not to Proceed With Proposals" Globe and Mail (July 17, 1980) p. B4. 301. Supra, notes 139-146. - 197 - BIBLIOGRAPHY STATUTUES Alberta. The Companies Act. R.S.A. 1970, c.60 as amended. Alberta. The Securities Act. 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"Incorporation and Taxation of a Private Corporation" 1980 B r i t i s h Columbia Tax Conference (Toronto: Canadian Tax Foundation, 1980) MacGregor "Take-Overs Revisited" 95 S. Af. L.J. 329 (1978) - 227 - MacKinnon, S. "The Protection of Dissenting Shareholders" i n Studies i n Canadian Company Law J. Ziegel ed. Toronto: Butterworths, 1967 McNamara, D.J. "Note on Compulsory Acquis i t i o n of Shares" 10 U.W.O.L. Rev. 141 (1971) Magnet J.E. "Shareholders' Appraisal Rights In Canada" 11 Ottawa L. Rev. 98 (1979) Manne, H. "Mergers and The Market for Corporate Control", 73 J . Pol. Eco. (1965) . "Cash Tender Offers - A Reply to Chairman Cohen" [1967] Duke Law Journal 231 Manning B. "The Shareholder Appraisal Remedy: An Essay For Frank Coker" 72 Yale L.J. 223 (1963) "OSC to Study Westfair Food Proposals" Globe and Mail July 11, 1980 p. B.6 Palmer J. "Amalgamation - Winding-Up" Report of the T h i r t i e t h Tax Conference (Toronto: Canadian Tax Foundation, 1980) 469 - 228 - . 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"Arm's Length Acquisitions Relating to Shares in a Public Corporation" i n 1978 Corporate Management Tax Conference (Toronto: Canadian Tax Foundation, 1978) 108 Yontef, M. "Insider Trading" i n Proposals for a Securities Market Law for Canada. Volume 3. Ottawa: Department of Consumer & Corporate A f f a i r s , 1979 - 232 - APPENDIX THE EXISTING FRAMEWORK FOR REGULATING MINORITY SQUEEZEOUTS IN CANADA The following two charts i l l u s t r a t e the degree of f l e x i b i l i t y available to management and the amount of protection available to minority shareholders under the laws of each incorporating j u r i s d i c t i o n i n Canada. It i s suggested that minority shareholders should be successful i n persuading a court to order an injunction, i n spite of f u l l procedural compliance by an acquiror of shares, when there are l i t t l e or no means available to them to challenge the payment of an amount less than the i n t r i n s i c value of t h e i r shares. - 233 - CHART 1: THE JURISDICTIONS WHERE NO INJUNCTION SHOULD BE GRANTED ONT. WITH OBCA ONT. with Draft OBCA MAN. SASK. ALTA. B.C. CBCA Dissent for Public Company- Shareholders Compulsory A c q u i s i t i o n Oppression Court Approved Amalgamation Court Approved Yes Arrangement Court Approved Reduction of Ca p i t a l S e c u r i t i e s L e g i s l a t i o n Class Voting Stat. Deri- vative Action Directors Duties Ma j o r i t y - Minority Test Corp. Repur- chase of Shares Express Cashout Amal- gamation Yes Yes Yes Yes Limited Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes * Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Regulates takeover bids and in s i d e r bids. - 234 - Yes Yes CHART 2: THE JURISDICTIONS WHERE AN INJUNCTION SHOULD BE GRANTED' NFLD. N.B. N.S. P.E.I. QUE. Dissent for Public Company Shareholders Compulsory ____ Ac q u i s i t i o n Oppression • Court Approved ** ** Amalgamation Court Approved Yes Yes Yes Yes* Arrangement Court Approved Yes . _ _ Reduction of Ca p i t a l S e c u r i t i e s Yes* ' Yes* Yes* Yes* Yes L e g i s l a t i o n Class Voting Stat. Derivative Action Directors Duties Yes Yes Yes Yes Majority _____ Minority Test Corporate Repurchase of Shares Express Cashout Amalgamation * No regulation of takeover or issuer bids. ** Optional *** The Re Sinco decision, supra, text at 44 states that the court may order the buyout of shares on an arrangement. I f that d e c i s i o n i s correct, then i t i s only an amalgamation, conso l i d a t i o n or r e c l a s s i f i c a t i o n squeezeout by s p e c i a l r e s o l u t i o n that shareholders require protection from the expropriation of t h e i r shares at le s s than i n t r i n s i c value.

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