Reasons for Decision: In the Matter of CW Shareholdings Inc. et al.
R.S.O. 1990, c.S.5, AS AMENDED
IN THE MATTER OF
CW SHAREHOLDINGS INC. AND
WIC WESTERN INTERNATIONAL COMMUNICATIONS LTD.
Panel: J.A. Geller, Q.C. - Vice-Chair
M.P. Carscallen, FCA - Vice-Chair
K.D. Adams - Commissioner
Counsel: Grant Haynen - For WIC Western International
Robert Staley - Communications Ltd.
John W. Sabine -
Robyn M. Bell -
Sheila R. Block - For CanWest Global
James Turner - Communications Corp.
James Tory - and CW Shareholdings Inc.
Neil Finkelstein - For Shaw Communications Inc.
Jay Naster For the Staff of the
Cathy Singer Ontario Securities Commission,
Margo Paul the Alberta Securities Commission and the British Columbia Securities Commission
On March 31, 1998, counsel for CW Shareholdings Inc. ("CW") applied to the Ontario Securities Commission (the "Commission"), the Alberta SecuritiesCommission (the "Alberta Commission") and the British Columbia Securities Commission (the "British Columbia Commission) (collectively, the "Commissions")for (a) cease trade orders pursuant to clause 127(1)2 of the Securities Act (the "Act"), and corresponding sections of the Securities Acts of British Columbia andAlberta, with respect to the Class B Non-Voting Share purchase rights (the "Rights") issued by WIC Western International Communications Ltd. ("WIC")pursuant to a shareholder rights protection plan agreement (the "Rights Plan") implemented by WIC on March 28, 1998 and (b) an order under clause 127(1)3 ofthe Act removing the prospectus exemptions in section 72 of the Act in respect of the distribution of Rights under the Rights Plan and in respect of the exerciseof the Rights, and corresponding orders under the Securities Acts of British Columbia and Alberta.
On April 8, 1998, a panel of the Commission, together with panels of the British Columbia Commission and the Alberta Commission, held a hearing on theapplication. At the commencement of the hearing, Mr. Finkelstein, on behalf of Shaw Communications Inc. ("Shaw"), requested standing in order to bepermitted to make submissions to the Commissions. Standing was granted on a "Torstar" basis. See In the Matter of Torstar Corporation and SouthamIncorporated (1985), 8 O.S.C.B. 5067. On April 9, 1998 each of the Commissions, issued a substantially similar decision which provided that unless the RightsPlan had ceased to be in effect with respect to the offer (the "Bid") dated March 24, 1998 of CW for shares of WIC by 4:00 p.m., Toronto time, on April 20,1998, an order would issue on April 21, 1998 cease trading the Rights, the distribution and the exercise thereof and the issuance of any Class B Non-VotingShares of WIC ("Class B Shares") or other securities on the exercise thereof. A copy of the Decision of the Commission is attached to these Reasons.
WIC is a publicly held corporation, incorporated under the laws of Canada, involved in television and radio broadcasting, pay television, satellite network andwireless communications services. It is one of the largest private television and radio broadcasters in Canada, with television broadcasting facilities in BritishColumbia, Alberta, Ontario and Quebec and radio broadcasting facilities across Western Canada and in Ontario. The Class B Shares are listed and posted fortrading on The Toronto Stock Exchange.
The authorized capital of WIC consists of an unlimited number of Preferred Shares, an unlimited number of Class A Voting Shares ("Class A Shares") and anunlimited number of Class B Shares, of which, as at December 8, 1997, there were outstanding 903,995 Class A Shares and 24,616,803 Class B Shares. Each ofthe outstanding Class A Shares carries the right to one vote. The holders of Class B Shares are entitled to receive notice of and to attend and be heard at allmeetings of shareholders of WIC and are entitled to receive notices of meetings, information circulars and other written information from WIC that the holdersof Class A Shares are entitled to receive, but are not entitled to vote at any meeting of the shareholders of WIC except as specifically provided pursuant to WIC'sarticles and the Canada Business Corporations Act. In addition, WIC has outstanding Convertible Debentures which are convertible at any time before maturityinto Class B Shares at the rate of 31.41 Class B Shares per $1,000 principal amount at maturity of Convertible Debentures. As at August 31, 1997, ConvertibleDebentures in the aggregate principal amount at maturity $6,238,000 were outstanding. The Convertible Debentures are currently redeemable by WIC.
Immediately prior to March 14, 1998, Western Broadcasting Company Ltd. ("WBC"), a British Columbia corporation, owned directly or beneficially 553,641Class A Shares, approximately 61.25% of the Class A Shares. WBC was owned or controlled by the Griffiths family.
On March 14, 1998, Shaw, an Alberta corporation, announced that it had acquired 372,902.5 Class A Shares and 1,277,728 Class B Shares from WBC andother Griffiths family holding companies and 78,775 Class A Shares and 46,688 Class B Shares from Daphne Holdings Ltd., in each case at a price of $61 perClass A Share and $39 per Class B Share. Shaw announced that as a result of these transactions it owned 451,677.5 Class A Shares, or approximately 49.96%of the Class A Shares, and 3,435,876 Class B Shares, approximately 13.96% of the Class B Shares, and that a portion of the shares it acquired were being held intrust on behalf of Shaw pending regulatory approval.
Also on March 14, 1998, Cathton Holdings Ltd. ("Cathton"), an Alberta corporation owned or controlled by the Allard family, announced that it had acquiredfrom WBC, pursuant to a right of first refusal granted to it by WBC, an additional 180,638.5 Class A Shares, to bring Cathton's holdings to 451,897.5 Class AShares, or 49.99% of the Class A Shares. It also announced that it had an option to buy, subject to approval of the Canadian Radio-television andTelecommunications Commission, an additional 100 Class A Shares from WBC. If this option were exercised, Cathton's holding would be 451,997.5 Class AShares, or exactly 50% of the Class A Shares.
CW, which is a wholly-owned subsidiary of CanWest Global Communications Corp. ("CanWest"), holds .04% of the Class A Shares.
Holders of Class B Shares have the right to convert their shares into Class A Shares under certain change of control circumstances. The conversion right arises,except in certain specified circumstances, if an offer is made for such number of Class A Shares as, together with the Class A Shares held by the offeror, itsaffiliates and associates, and persons acting jointly or in concert with the offeror, will exceed 50% of the Class A Shares outstanding.
CW owned beneficially, directly or indirectly, on March 24, 1998, in addition to its small holding of Class A Shares, 8,837,408 Class B Shares, approximately35.9% of the outstanding Class B Shares.
CanWest is one of Canada's largest independent private broadcasters as measured by potential audience size and syndicates programming in Canada to its owntelevision stations and other non-competing stations, including stations owned by WIC, and provides advertising sales services in Canada to its own televisionstations and to certain other non-competing stations. It owns significant or controlling interests in television broadcasting companies in Canada, Australia andNew Zealand and a commercial radio network in New Zealand. It also owns 45% of the equity shares of and controls a corporation which has been awarded alicense to launch the Republic of Ireland's first private sector national television network and 29.9% of the share of a corporation which operates the ITVfranchise in Northern Ireland. In Canada, it owns and operates the Global Television Network.
On March 24, 1998, CW made the Bid, offering to acquire any and all Class A Shares and Class B Shares not currently owned by CW at $39 per share. In theBid, CW stated that it and CanWest believed that the transactions described above announced on March 14, 1998 had resulted in a change of control of WICwithout allowing the holders of Class B Shares to exercise their right to convert those shares into Class A Shares and that the holders of the Class B Shares havebeen denied the right, and are entitled to the opportunity, to convert their Class B Shares into Class A Shares. In the Bid, CW also stated that CanWest intendedto make applications to the appropriate authorities to seek that result. However, the Bid was not conditional upon the Class B Shares being held to beconvertible into Class A Shares.
On March 23, 1998, CW had acquired 1,494,400 Class B Shares in the market and had announced that the Bid would be made.
In their Directors Circular (the "Circular"), dated April 3, 1998, the board of directors of WIC (the "Board") unanimously recommended that WIC shareholdersnot accept the Bid "at this time". The Circular described the setting up by the Board of a special committee of directors (the "Special Committee") comprised ofRobert Brodie, Peter Classon, Rhys Eyton, John Lacey and Wendy Leaney, stated that the Special Committee had been authorized to review the Bid and makerecommendations to the Board in light of the Bid, stated that Robert Manning, a director of WIC, was authorized to attend meetings of the Special Committeebut did not have a vote in it's proceedings, and stated that CIBC Wood Gundy Securities Inc. ("Wood Gundy") and Bennett Jones Verchere had been retained toadvise the Board and the Special Committee on financial and legal matters, respectively. (Mr. Lacey is the president and chief executive officer of WIC, and Mr.Manning is a representative of Cathton on the Board.)
The Circular also stated that Mr. Eyton had been appointed by the Special Committee as its chairman, that the Special Committee had met with its advisors,reviewed the Bid in detail, and considered possible alternatives that might be pursued in an effort to maximize value for shareholders, that the Special Committeehad reviewed materials prepared by it's advisors concerning the proposed terms of a shareholder protection rights plan, and that the Special Committee hadunanimously agreed to recommend that the Board adopt the Rights Plan to provide sufficient time within which alternatives that could enhance the value of theClass A Shares and Class B Shares beyond the $39 price provided for in the Bid could be identified and, if appropriate pursued. The Circular went on to statethat the Board had met and received the reports and recommendations of the Special Committee and its advisors, that the Board and its advisors had discussedpossible alternatives that could be pursued in an effort to maximize the value of the Class A Shares and the Class B Shares, and that the Board had unanimouslyapproved the adoption of the Rights Plan. It was also stated that after WIC had been advised that CanWest had applied to the Commissions requesting that theyissue cease trading orders that would have the effect of neutralizing the Rights Plan, the Special Committee had considered the terms of the Rights Plan anddetermined to recommend that the Board approve certain amendments to the Rights Plan, which were subsequently made by the Board.
Allegations of CW
WC asserted the following in support of its request for relief:
a) the implementation of the Rights Plan in the present circumstances is completely inappropriate and is abusive of the rights of the holders of the Class B Shares;
b) the existence of the Rights Plan is preventing the holders of Class B Shares from receiving $39.00 cash per Class B Share, the same consideration which waspaid by Shaw in the March 14 transactions;
c) the Bid is patently fair and the holders of Class B Shares should be free to make their own investment decisions whether or not to have their shares purchasedunder the Bid without hindrance by the Board;
d) in any event, over an extended period of time since CanWest's last bid in November 1995, and clearly since the Board became aware of the March 14transactions, until the expiry of the Bid, the Board will have had sufficient time to consider the Bid and to identify alternatives to maximize shareholder value(which is stated to be the purpose of the Rights Plan); and
e) in the face of CanWest's position that the coattail has or should have been triggered by the March 14 transactions, the Rights Plan has the improper effect ofentrenching the current management of WIC.
In their response, dated April 3, 1998, to the CW application, WIC's counsel made a number of arguments, the most pertinent of which can be summarized asfollows:
1. the Bid is coercive;
2. the Board and the Special Committee are fully aware of their statutory and common law obligations to act in the best interest of WIC and its shareholders;
3. the Board and the Special Committee are engaged in a process of seeking to maximize value for WIC's shareholders, and the Rights Plan was adopted toprovide adequate time to carry out that process;
4. WIC is a highly complex company and has recently undergone a series of changes, including significance changes in the ownership of its Class A Shares,resulting changes in its Board, and involvement in the regulatory approval process associated with the ownership changes;
5. the Board believes that the members of the Special Committee are independent of the holders of the Class A Shares;
6. the Board and the Special Committee have retained financial and legal advisors to assist them in the process of maximizing shareholder value;
7. as part of those efforts, WIC and Wood Gundy have contacted and are continuing to contact parties potentially interested in enabling WIC to pursue coursesof action that will result in enhanced value for shareholders, and WIC has received several unsolicited expressions of interest;
8. in WIC's current circumstances, the Board and the Special Committee consider themselves to be under a duty to maximize the value of the investments of theWIC shareholders in WIC, and it is by no means clear that $39 is the highest price that a willing buyer would pay for Class A Shares and Class B Shares of WIC;
9. there is a broad consensus amongst regulators and capital market participants that the minimum statutory period of 21 days for take-over bids is inadequate toenable a target company's directors to discharge their duty to maximize value;
10. the Rights Plan was adopted in good faith by the Board based on the recommendations by the Special Committee and advice from expert advisors, istemporary in nature and will expire 120 days after its adoption, if not earlier redeemed or waived;
11. the CW application was filed on March 31, 1998, a mere 7 days after the Bid was made and 8 days after it announced, the Board is conducting a processdesigned to maximize the value of the investments of the WIC shareholders in a complex company in complicated and difficult circumstances, and there is noevidence suggesting that any of WIC's directors is acting other than in good faith; and
12. for these reasons, the CW application is highly premature.
The staffs of the Commissions argued that the Rights Plan should not be immediately cease traded. Their arguments were as follows.
The Board and the Special Committee owe a fiduciary duty to act in the best interests of WIC and its shareholders. In the context of the Bid, this duty includesan obligation to engage in a process of seeking to maximize value for WIC shareholders. The Commission has expressed its reluctance in previous decisions tointerfere with the judgement of a board of directors on the continued use of a rights plan, particularly where the consequences of doing so may relieve the boardof its duties. The following circumstances favour not interfering with the exercise of the Board and Special Committee's discretion at this time:
a) The Bid was announced the day before it was launched on March 24, 1998 and is only open for the statutory minimum period of 21 days. The Board wasunaware of the offer until it was announced. Given the stated complexity of WIC's operations, the recent changes to the shareholdings and to the composition ofthe Board, it is not unreasonable in the circumstances for the Board to require additional time to carry out its obligations.
b) The Board and Special Committee have retained financial advisors to assist them in their obligations. These advisors have begun to contact potentiallyinterested parties and have also received "several unsolicited expressions of interest" which they are exploring. These facts are consistent with the contentionthat given a reasonable period of time the Board and Special Committee could increase shareholder choice, maximize shareholder value and promote an auction.
c) The voting members of the Special Committee, tasked with the responsibility to review and make recommendations to the Board in connection with the offer,provide an additional measure of protection that the Board's decisions are motivated solely by a desire to maximize shareholder value and not for any improperpurpose.
d) The bid price of $39 is described by CW as "patently fair", relying on a price paid for Class B Shares under the March 14 transactions. These transactions,however, were private, with their own terms and conditions. Consequently, the price obtained in the private transactions are not necessarily a reflection of theprice which could be obtained following a public auction promoted by the Board.
e) There is no evidence that the Board and the Special Committee are acting other than in good faith.
WIC filed, in addition to other material:
a) an affidavit of John S. Lacey, its president and chief executive officer, a director of WIC and a member of the Special Committee;
b) an affidavit of Rhys T. Eyton, a director of WIC and a member and the chairman of the Special Committee; and
c) an affidavit of Paul B. Spafford, a vice-chairman of Wood Gundy.
There was also filed in evidence letters, protesting against the implementation of the Rights Plan, from the following holders of Class B Shares: Goodman &Company; Economic Investment Trust Limited; Ontario Hydro; Ecando Investments Limited; The Dominion of Canada General Insurance Company; and UnitedCorporations Limited.
CW called as a witness George Kiddell, the chairman of Gryphon Investment Counsel Inc. ("Gryphon") Mr. Kiddell has been in the investment business over 40years, initially with an investment dealer and for the last 30 years as a money manager, firstly with an insurance company, secondly with a trust company, andthirdly, for the past 18 years, with Gryphon.
Mr. Kiddell testified that Gryphon is a money management organization, its minimum account size is $50,000,000, it manages institutional funds, the bulk beingcorporate accounts with the occasional endowment fund, and has approximately 46 accounts at the present time, it is also a manager for Integra Corporation,which has approximately 350 accounts. So, "within reason" as stated by Mr. Kiddell, Gryphon has control over the WIC shareholdings of about 400 pensionfunds in Canada. Mr. Kiddell stated that Gryphon has under management 1,200,675 Class B Shares, all of its managed accounts having proportionate numbersof such shares.
In his direct examination by Ms. Block, Mr. Kiddell also testified as follows:
1. the $39 offered in the Bid is a very fair price, although it may not be the finest available;
2. since control of WIC is locked up, the prospects of a better bid than $39 for Class B Shares seems to be exceedingly unlikely;
3. the Rights Plan takes away an option for liquidity which Gryphon feels is very desirable, particularly in the market circumstances as they exist today;
4. this market is a very vulnerable one, and Gryphon feels the need to have the liquidity;
5. he would be very surprised if, in a reasonable space of time, the liquidity would appear that would enable Gryphon to get rid of its substantial block of sharesthrough sales in the market;
6. it is entirely possible that the Board could increase shareholder value, but there would be a considerable time delay before such value could be put forth.
On cross-examination by Mr. Staley, who pointed out to him that securities regulators have recognized that Rights Plans may be an appropriate tool to maximizevalue, Mr. Kiddell stated that he had noticed that, that he thinks that the case has been made that when there is a bid for control the poison pill has the effect oflengthening the time factor available, and in this case he does not think that it applies.
When asked by Mr. Staley whether it was reasonable for an informed person to conclude that whatever happens in these proceedings CanWest will have acontinuing interest in pursuing WIC, Mr. Kiddell stated that he would be somewhat surprised if they did not but that at Gryphon, "we are also market animals,and I would feel that very much could change if there were any serious drops in securities values which I would not be surprised to see over the next little while.In other words, we are day-to-day players. I have no strong belief that these bids would be around in the face of any really severe market correction".
Mr. Staley referred Mr. Kiddell to Mr. Kiddell's letter of April 6, 1998 to Cathy Singer, the Commission's General Counsel, which indicated that Gryphon hasalways voted against shareholder rights plan but that it believed that a reasonable time should be allowed in order to mount a counter-offer after a bid for controlhad been made. When asked whether this was his view, Mr. Kiddell said that it was in the case of a bid for control but that he didn't believe that the Bid was abid for control. Although the Bid was for both the Class A Shares and the Class B Shares, Mr. Kiddell felt that "realistically, I think you would be very surprisedif you saw any people who just purchased shares at 61 selling the A shares for $39".
On re-examination by Ms. Block, Mr. Kiddell was asked why he hadn't sold Gryphon's block of shares or any part of it into the market. His response was "Well,to the best of my knowledge, I noticed that it was about 26,000 shares at actually traded today, but I think these are arbitragers who will speculate on anything.I don't believe they intend to hold the stock for more than minutes, and I don't think there is a serious bid out there at a higher price than 39 for a major block ofstock. That is our opinion at this time". He went on to add that "things can change very quickly, but our best guesstimate right now is that the market wouldnot take a million two at around these prices".
Ms. Block asked Mr. Kiddell why he was concerned about the risk of CW not keeping the Bid on the table after it's 21 day initial period. His response was"Because, under the market circumstances today, if there is a sudden change in the fortunes of the markets, all bids could disappear for everything. This is myconcern".
We found Mr. Kiddell to be a very credible witness, experienced in the securities marketplace, and had no difficulty whatsoever in accepting his testimony.
Evidence of WIC Witnesses
WIC called 3 witnesses, John S. Lacey, WIC's president and chief executive officer and a member of the Board and of the Special Committee, Rhys T. Eyton, amember of the Board and a member and the chairman of the Special Committee, and Paul B. Spafford, a vice-chairman of Wood Gundy. In each case anaffidavit containing direct testimony was filed and, in addition, the witness was examined by Mr. Staley and subsequently cross-examined.
In his affidavit, Mr. Lacey gave evidence as to WIC and its share capital, with respect to the Special Committee and WIC's response to the Bid, with respect tothe Rights Plan, with respect to the Board's recommendation against the Bid, and with respect to CanWest's request for confidential information and Shaw'srequest for a WIC shareholders list made on April 3, 1998. Mr. Lacey testified that, as a member of the Special Committee and the Board, he had at all timesacted and would continue to act in what he believed to be in the best interest of the shareholders of WIC. He stated that WIC was a party to terminationagreements with certain senior executives which provide for severance payments in the event of termination of the employment in certain circumstances,including their termination after a change of control of WIC without cause, that he was a party to such an agreement and that he did not in consider himself to bepersonally vulnerable, financially or otherwise, if CanWest or another entity or group acquired WIC.
He stated that on the recommendation of Wood Gundy, the Special Committee had discussed and unanimously resolved to recommend that the Board adopt theRights Plan, subject to regulatory approval, so as to provide sufficient time within which alternatives that could enhance the value of the shares of WIC beyondthe Bid price of $39 could be identified and, if appropriate, pursued. The resolution to make this recommendation to the Board, he said, followed a detaileddiscussion with its financial and legal advisors as the appropriateness of this course of action.
Mr. Lacey stated that subsequently the Board met and received reports and recommendations of the Special Committee as well as its legal and financial advisors,that possible alternatives were discussed that could be pursued in an effort to maximize the value of the shares of WIC, that advice was received from WoodGundy that additional time was required to pursue this effort, and that, following a detailed discussion, the Board unanimously approved the adoption of theRights Plan, the terms of which were described in the Circular.
Mr. Lacey stated that the Rights Plan was adopted by the Board to give it time to assess and, if appropriate, to pursue alternatives to maximize shareholdervalue, that it was adopted in good faith by the Board based on a recommendation by the Special Committee and advice from the Board's financial and legaladvisors, that, in voting in favour of the Rights Plan, both at the Special Committee and at the Board, he fully understood his fiduciary obligations to theshareholders of WIC and acted in a manner consistent with those obligations, and that the Rights Plan was not adopted by the Board to prevent the Bid or anyother takeover bid for the shares of WIC from succeeding and was not adopted to secure continuance of management or the members of the Board in office.
He went on to state that the members of the Board and their advisors were actively engaged in a process of identifying, developing and pursuing courses ofaction that might result in near term value for shareholders greater than the $39 per share price under the Bid and that WIC and its financial advisors hadcontacted and were continuing to contact potentially interested parties. He said that WIC had also received several unsolicited expressions of interest in thecorporation, and that confidential financial, operating and other relevant information concerning WIC and its businesses were being provided for review byappropriate parties pursuant to the usual form of confidentiality agreement. He said that WIC required additional time to pursue this process, that Wood Gundyhad provided both the Special Committee and the Board with preliminary assessments of the Bid and potential alternatives that could result in a higher value forshareholders, but that their analysis of WIC's operations, prospects and strategies had not yet been completed.
On direct examination by Mr. Staley, Mr. Lacey stated that the Special Committee was established primarily to review the options that the Board would have onbehalf of all shareholders facing the Bid, and that, in his view, "our main focus is to see if we can establish that this bid, or any other bid, can create a maximumvalue for our shareholders at large".
Mr. Lacey was asked by Mr. Staley what he had to say about the contention that in some fashion he was in a conflict of interest by serving on the SpecialCommittee given that he was the president and chief executive officer of WIC. He replied: "Actually, I take exception to that".
He was asked why, and responded: "Well, if you look at my track record at Scott's, where I was in a similar two-tier voting, family-controlled business, theprincipal driver in breaking up that company and eliminating my own job, but from that, the shareholders doubled their value in share price. I think that trackrecord speaks for itself. And, secondly, as a director of this company, my job...and as CEO of this company, is to maximize the benefits for all shareholdersequally."
Mr. Lacey was asked by Mr. Staley what Mr. Manning's role was in connection with the Special Committee. Mr. Lacey replied that Mr. Manning was anobserver and had no vote and that the role that he played in the deliberations of the Special Committee was to listen to the deliberations and serve as a resourcewhen necessary.
There was nothing in Mr. Lacey's testimony which, in our view, could lead us to conclude that the Bid was coercive, as alleged by WIC, or that there was anyrealistic possibility that a higher bid for the Class B Shares would be forthcoming within any reasonable period of time, except, perhaps, from Shaw.
Mr. Eyton is a businessman and director, having served as chairman, president and chief executive officer of Canadian Airlines as well as on a number of otherboards.
In his affidavit, Mr. Eyton testified that he was providing leadership and direction to the Special Committee in the process of considering the Bid and possiblealternatives to maximize shareholder value and that, in pursuing this process, the Special Committee had been working with its financial and legal advisors andwould continue to do so.
He stated that he had reviewed Mr. Lacey's affidavit and that Mr. Lacey had accurately described WIC's response to the Bid, including the establishment of theSpecial Committee and the meetings of the Board and the Special Committee, and that he was in full agreement with the statements contained in Mr. Lacey'saffidavit concerning the Rights Plan. He stated that he completely agreed that the Rights Plan was adopted by the Board to give it time to assess and, ifappropriate, to pursue alternatives to maximize shareholder value, and that he shared Mr. Lacey's view that the Rights Plan was adopted in good faith by theBoard based on the recommendation by the Special Committee as well as advice from the Board's financial and legal advisors.
He went on to say that, in voting in favour of the Rights Plan, both at the Special Committee and at the Board, he fully understood his fiduciary obligations to theshareholders of WIC and acted in a manner consistent with those obligations, and he agreed with Mr. Lacey that the Rights Plan was not adopted by the Boardto prevent the Bid or any other takeover bid for the WIC shares from succeeding, and that it was not adopted to secure continuance of management or themembers of the Board in office.
In his direct examination by Mr. Staley, Mr. Eyton said that he understood his duties as a director of WIC to be a fiduciary responsibility to all shareholders toattempt to maximize shareholder value and that the Rights Plan was consistent with those duties.
On cross-examination by Ms. Block, Mr. Eyton was asked whether he agreed that the decision as to whether to accept the take-over bid was a decision for theshareholders. His response was "It is, and the board".
He reiterated, several times that the directors had a responsibility to try and maximize shareholder value, and that this takes time.
In response to a question from Ms. Block, Mr. Eyton acknowledged that he was aware that the Special Committee was supposed to be independent.
In response to a further question from Ms. Block, Mr. Eyton acknowledged that Mr. Manning was the president of Cathton.
In response to an assertion by Ms. Block that when control wasn't being sold a rights plan was not required, Mr. Eyton stated "I think that is probably true".
There was nothing in Mr. Eyton's testimony which, in our view, could lead us to conclude that the Bid was coercive, as alleged by WIC, or that there was anyrealistic possibility that a higher bid for the Class B Shares would be forthcoming within any reasonable period of time, except, perhaps, from Shaw.
We should also note that Mr. Eyton's apparent view that the board of a target company, as well as its shareholders, are entitled to take part in the decision as towhether to accept the bid is not correct, based on previous decisions of the Commission, if by his statement to that effect Mr. Eyton meant any more than thatthe board of the target company is entitled to advise the shareholders and attempt to provide them with alternatives. The Commission's view on this questionwas first articulated in In the Matter of Canadian Jorex Limited and Manville Oil and Gas Limited (1992), 15 O.S.C.B.257, as follows:
"Underlying our conclusion was our view of the public interest in matters such as this. As is amply reflected in National Policy 38, the primary concern of theCommission in contested take-over bids is not whether it is appropriate for a target board to adopt defensive tactics, but whether those tactics "are likely to denyor severely limit the ability of the shareholders to respond to a take-over bid or a competing bid" or "may have the effect of denying to shareholders the ability tomake a [fully informed] decision and of frustrating an open take-over bid process". If so, then as National Policy 38 clearly indicates, the Commission will bequite prepared to intervene to protect the public interest as we see it. For us, the public interest lies in allowing shareholders of a target company to exercise oneof the fundamental rights of share ownership -- the ability to dispose of shares as one wishes -- without undue hindrance from, among other things, defensivetactics that may have been adopted by the target board with the best of intentions, but that are either misguided from the outset or, as here, have outlived theirusefulness.
In so stating our view of the public interest, we must be taken as disagreeing with the views of another of Jorex's witnesses, Mr. David Ward (also of Burns,Fry), who stated most emphatically that, in his opinion, "shareholders can't individually handle a lot of this". In Mr. Ward's view, therefore, the ultimate decisionas to the value and appropriateness of a given bid, and thus as to whether or not it should be considered to be acceptable, should be left in the hands of the targetboard or its independent committee, and their professional advisers. Clearly, this is not the view that we take (nor does National Policy 38, for that matter), sincewe have every confidence that the shareholders of a target company will ultimately be quite able to decide for themselves, with the benefit of the advice theyreceive from the target board and others, including their own advisers, whether or not to dispose of their shares and, if so, at what price and on what terms. Andto us the public interest lies in allowing them to do just that."
See also In the Matter of Lac Minerals Ltd. and Royal Oak Mines Inc. (1994), 17 O.S.C.B. 4963, In the Matter of MDC Corporation and Regal Greetings &Gifts Inc. (1994), 17 O.S.C.B. 4971 and In the Matter of Tarxien Corporation and Ventra Group Inc. (1996), 19 O.S.C.B. 6913.
Mr. Spafford joined Wood Gundy in 1976, and in 1984 became director responsible for its mergers and acquisitions activities. In 1996 he became avice-chairman of Wood Gundy.
In his affidavit, Mr. Spafford stated that he was the senior member of the Wood Gundy team that was advising WIC, and had attended all of the meetings of theBoard and the Special Committee since March 25, 1998.
He said that Wood Gundy had acted as financial advisor to WIC in connection with a previous unsolicited take-over bid for WIC made by CW in November1995, and that he was the senior member of Wood Gundy advising WIC in connection with that bid as well.
Mr. Spafford stated that he had extensive experience in mergers and acquisitions.
He said that, immediately following Wood Gundy's engagement with respect to the Bid, it had considered various alternatives available to WIC to enhance thevalue of the Class B Shares beyond the $39 offer price, and that, in this regard, Wood Gundy recommended, and the Special Committee and the Boardunanimously agreed to adopt, a limited duration shareholder protection rights plan. He went on to say that it was and is his view that the adoption of the RightsPlan was essential to provide the Board with adequate time in which to fulfil their duties to maximize value for shareholders.
Mr. Spafford said that, as part of its mandate, Wood Gundy was working with the Board and the Special Committee in a process of identifying, developing andpursuing courses of action that may result in near term value for shareholders greater than the $39 per share price under the Bid, and that Wood Gundy had beenmeeting with and speaking by telephone with potentially interested parties, the meetings and discussions being active but at an early stage.
Mr. Spafford gave his view that, in view of a number of factors which he listed, 60 days from the date of the Bid represented a minimum amount of time for theBoard and the Special Committee, together with its legal and financial advisors, to develop and pursue courses of action to maximize shareholder value. Hestated that, notwithstanding the factors that combine to make WIC more difficult to market to prospective interested parties, in his view there was a reasonableprospect of achieving for WIC's shareholders a greater value than the $39 per share represented by the Bid.
In direct examination by Mr. Staley, Mr. Spafford said that rights plans, as currently adopted and written, are purely designed to buy some time.
Mr. Spafford said that Mr. Eyton was providing the leadership to the Special Committee in terms of steering the course of getting through the agenda of theSpecial Committee and that Mr. Lacey had been extremely helpful in helping to stimulate conversation and making sure that the Special Committee was dealingwith the issues efficiently, and providing whatever company support was required to pursue that.
Mr. Spafford was asked why Wood Gundy had recommended the adoption of the Rights Plan, and responded that in order to consider the alternatives availableto WIC, Wood Gundy felt that it would need more time than was provided in the Bid since WIC was a complex business in terms of the different businesses thatit was involved in and because the regulations surrounding this kind of business were complex, and WIC also had a complicated shareholder structure.
Mr. Spafford was asked whether he agreed with the assertion that no one other than CanWest, Shaw or Cathton was seriously going to make a bid for WIC. Heresponded that he didn't agree with the assertion because he didn't know how one knew that at this stage of the game, and that this was certainly supported fromthe conversations that Wood Gundy had had and the people that had phoned them, expressing interest in participating in the transaction.
Mr. Spafford was referred to the indication in his affidavit that, in his view, there was a reasonable prospect of achieving for WIC's shareholders a value greaterthan the $39 per share represented by the Bid. When asked for the basis of that belief, he responded as follows:
"Well, I think to a large part it is a matter of judgement, and it is a matter of circumstance. In this situation, we have one party who has put a bid on the table forall the company at $39. I guess my experience in these matters would suggest that maybe that is not their best bid. Number one. Number two, we had atransaction that took place not more than two weeks prior to that where Shaw Communications purchased shares in WIC, both A shares and B shares, and if youaverage the price they paid, and assuming they are all equity shares, it comes out to $44.60.
We have had conversations with people who are obviously interested in taking a look at the situation, and they recognize that they can't have a serious interestunless their bid is higher than $39. So, when you add those things together, you get some comfort that a transaction may be possible and, I think, when you lookat trading levels generally for broadcast communications companies, you get a sense that this is not exactly a very healthy premium in the context".
On cross-examination, Mr. Spafford was asked by Ms. Block whether he could guarantee a price better than $39 per share. He responded as follows:
"Well, I could actually, for Mr. Kiddell, but for the fact that, in the context of defending a take-over bid, our firm isn't allowed to trade as principal, but I think, ifwe were allowed to trade as principal, I would be bidding for his shares today at $39.01. I think we can make some money out of that".
Mr. Spafford was asked by Vice-Chair Carscallen as to whether CW's offer of $39 for the Class A Shares was a realistic bid to make for those shares. Thefollowing exchange then occurred:
A. "No, probably not in the context. No, I don't think so.
Q. Would the fact that the present A shareholders have at least acquired a good chunk of them at $61 quite recently, would it be then reasonable to assume thatthe CanWest offer is, in reality, for B shares at $39 a share?
Q. When you talk about expressions of interest from outsiders, from people you were getting in touch with, could you tell me whether those are expressions ofinterest in buying B shares, only?
A. Well, I think it would be inappropriate to suggest at this juncture that we have gotten to that stage of detail of the discussion. I mean, I think we have talkedto them on the basis that, if they were interested in purchasing, in the market, a significant equity interest in the company, that they would be buying B shares inthat context, and that if they wanted to have a voting position, if you will, that that wasn't currently available, but that, at a point, they may wish to speak to thecompany about that, or they may wish to speak to the two A shareholders regarding that, and perhaps some arrangements could be made where they couldparticipate in voting, as well.
Q. Setting that aside, it is your opinion then, I take it, that there is a reasonable chance of getting an offer for B shares at a higher price than $39?
A. Well, I think if I was being truthful, which I think I am supposed to be, I think that the...I think that to get a bona fide offer at well in excess of $39 is possiblein the context of a transaction that may provide some accommodation to the acquirer that is...not only involves B shares, but some other kinds of arrangements.
Q. So require the cooperation of the A shareholders?
A. Perhaps. It would certainly, I think, require the cooperation of the company".
In the course of Mr. Spafford's questioning by Vice-Chair Geller, the following exchange occurred:
Q. "The whole purpose in connection with a take-over bid is to get a committee which is independent of management, because management may have a conflict,even though they are acting very honestly, and independent of major and significant shareholders who may have an interest different from that of the offeror; isthat not correct?
A. I think that is an accurate characterization. I think I would quibble, to some extent, when you talk about management having to...
Q. Have you ever been involved in a special committee, in a take-over bid situation, where the president of the company was one of the committee members?
Q. Would you like to name them?
A. I believe in the case of Ault Foods, the president and chief executive officer, who was a director, was a member of the special committee.
Q. Any others?
A. Well, the other one I recall specifically, there wasn't a special committee. The president of Labatts was involved in that, and it was the full board. Therewasn't a separate committee.
Q. Have you ever been involved where the special committee on a take-over bid situation included, even as an observer who could be asked for advice, amember of a major shareholding group?
A. Not that I can recall.
Q. Now, you indicated that a holder of 1,000,000 shares would be able, in your view, to sell those shares for whatever the current market price is, and I thinkthat was the thrust of your response to a question?
A. Well, I believe, and I could stand corrected, but I believe I said that, in the context of the current market place, I think there is a reasonable chance that thatshareholder could sell his shares for more than $39 a share.
Q. You said that, if you were free to do so, you would bid...I think you said $41, but more than $39?
A. I said more than $39, yes.
Q. Are you aware that any of your competitors are doing that in the marketplace at the moment?
A. I am not aware".
There is nothing in Mr. Spafford's testimony which would lead us to conclude that the Bid was in any way coercive or that there was any reasonable possibility ofa higher bid than $39 per share being made for the Class B Shares within any reasonable period of time, except, perhaps, by either Shaw or Cathton. Nor couldwe accept Mr. Spafford's view that a block of over 1,200,000 Class B Shares could be sold in the market for more than $39 per share. Notwithstanding Mr.Spafford's extensive market experience, we considered this assertion to be highly questionable, and we much preferred Mr. Kiddell's testimony in this regard.
Following the examination of the witnesses, counsel for the parties made their submissions to the Commissions. Mr. Finkelstein, counsel for Shaw, advised that:
"This plan impacts on Shaw, as well as CanWest, and Shaw does not support the plan. The plan limits Shaw's options, as well as those of CanWest, and soShaw simply wanted to advise the Commission that that was its position".
From the evidence of Messrs. Lacey, Eyton and Spafford, it appears clear to us that the Special Committee was set up for purposes of convenience only, and notas an independent committee. In our view, in a take-over bid context a committee which includes as an active participant the president and chief executiveofficer of the corporation and, as an observer and resource, a representative of a shareholder which has 50% of the votes, is not an independent committee. Thefact that Mr. Lacey has a "golden parachute" agreement, does not in our view change this position.
In these circumstances, it is our view that we must place less reliance on the review by the Special Committee of the Bid, and possible alternative methods ofachieving a more beneficial result to shareholders, than we would if the Special Committee had been truly an independent committee.
Use of the Rights Plan
In these proceedings, we were not required to conclude, and have not concluded, that a shareholder rights plan may not be, in some circumstances, appropriatelyused in connection with a take-over bid which is not a bid for control.
However, we have concluded that the use by the Board of the Rights Plan as a response to the Bid was not appropriate for the following reasons.
1. Despite its form, it is clear to us from the evidence that the Bid was not in reality a bid for Class A Shares. It is, in our view, utterly unrealistic to concludethat the holders of the Class A Shares would tender them to the Bid.
2. Even if all holders of Class B Shares tendered them to the Bid, this would not give CW control of WIC. Accordingly the Bid was not a bid for control.
3. We conclude that the Bid is in no way coercive. Holders of Class B Shares are free to respond to the Bid if they consider that it is in their best interest to doso, and are also free to retain their Class B Shares if they would prefer to take their chances on the future of WIC. There is no change of control as a result ofthe Bid which would alter their position.
4. The Rights Plan was put into place in the face of the Bid and without a vote of shareholders. In such circumstances, it is, at the very least, necessary for thetarget company to demonstrate that it was necessary to do so because of the coercive nature of the Bid or some other very substantial unfairness or impropriety.This was not done by WIC in this case.
5. For the Board of WIC not to have put into place a shareholder rights plan which would have prevented the controlling shareholder from disposing of controlat a substantial premium over market price without requiring a corresponding benefit to minority shareholders, and then to put into place, without a vote ofshareholders, a shareholder rights plan which prevents minority shareholders from responding to a non-coercive offer, causes us great concern. We cannotaccept the reasons given by WIC's witnesses for their not having implemented a plan before the sale of control, namely that they did not know that control wasfor sale.
Possible Alternative Bids
On the evidence, we concluded that it was extremely unlikely that any third party, with the possible exception of Shaw or, perhaps Cathton, would make acounter-offer to the Bid at a price higher than $39 per share. Given Shaw's request for a list of the holders of Class B Shares and Mr. Finkelstein's statement tous, we considered it possible that Shaw might do so. Given their recent purchases of Class A Shares, it was our view that neither Shaw nor Cathton neededmuch further time to make their decision, and that if such a bid were to be forthcoming it could be announced very quickly.
Because we issued our decision on the day before a long holiday weekend, with the Bid due to expire on the following Tuesday, we decided that we should delaythe operation of our decision to cease trade the Rights Plan for one week.
April 23rd, 1998.
"J. A. Geller" "Morley P. Carscallen"
"K. D. Adams"