Reasons: Decisions, Orders and Rulings - Ontario...

Chapter 3

Reasons: Decisions, Orders and Rulings

3.1 REASONS

3.1.1 H.E.R.O. INDUSTRIES LTD., MIDDLEFIELD CAPITAL FUND, MIDDLEFIELD FINANCIAL LTD. ET AL. - S. 123 & 124

IN THE MATTER OF THE SECURITIES ACT, R.S.O. 1980, CHAPTER 466, AS AMENDED

AND

IN THE MATTER OF H.E.R.O. INDUSTRIES LTD., MIDDLEFIELD CAPITAL FUND, MIDDLEFIELD FINANCIAL LTD.

AND NEW FRONTIERS DEVELOPMENT TRUST plc

AND

IN THE MATTER OF GARTH JESTLEY, CHARLES HOBBS AND MURRAY BRASSEUR

Hearing:

Decision:

Panel:

Counsel:

July 19, 23 and 25, 1990

July 31, 1990

Charles Salter, Q.C. William D. Moull John W. Blain, Q.C. Paul L. Waltzer Dean C. Kitts

Joseph Groia John D. MacNeil Justin A. Connidis

John I. Laskin G. Wesley Voorheis William M. Ainley

Peter F.C. Howard John M. Stransman

Larry Taman Patricia Koval

Paul Stein Peter Marrone

- Vice-Chairman - Vice-Chairman - Commissioner - Commissioner - Commissioner

for Commission Staff

for HRO Acquisition Corp. and Gordon Capital Corp.

for Middlefield Capital Fund, Middlefield Financial Ltd., Garth Jestley and Murray Brasseur

for New Frontiers Development Trust plc and Charles Hobbs

for H.E.R.O. Industries Ltd.

September 14, 1990 (1990), 13 OSCB 3775

Reasons: Decisions, Orders and Rulings Page 3-334

REASONS FOR DECISION (Sections 123 and 124)

This is the third case in a trilogy, in a period of barely

three years, in which the Commission has had to consider its role

in protecting the public interest in the course of a take-over

bid that may technically comply with the requirements of Part XIX

of the Securities Act.

In 1987, in Re Canadian Tire Corporation Ltd. et al., 10

OSCB 858, the Commission established that 'it was prepared to

intervene in a take-over bid to protect the public interest even

if the bid did not breach any particular provision of the Act,

the Regulation, or the Policy Statements. In Canadian Tire, the

Commission used its cease-trading power under section 123 of the

Act to restrain a bid that it found to have been designed to

avoid "the animating principles" underlying the Act, the

Regulation, and the Policy Statements, and which was thus clearly

abusive both of investors and of the capital markets generally.

In 1988, in Re Selkirk Communications Ltd., Southam Inc.,

et al., 11 OSCB 286, the Commission had to determine whether it

should intervene in a bid that, on itS face, complied with the

requirements of the "private agreement exemption" in clause

92(1)(c) of the Act. All nine Commissioners held that the

Commission had the power to so intervene to protect the public

interest in appropriate circumstances; six of those nine found

that the use of clause 92(1)(c) in the circumstances presented in

Selkirk/Southam was prejudicial to the public interest; and three

September 14, 1990 (1990), 13 OSCB 3776

Reasons: Decisions, Orders and Rulings -335

3

of those six would have been prepared to use the Commission's

cease-trading powers under section 123 to restrain the bid in

question.

Now, as in Selkirk/Southam, we have been asked to determine

whether it is appropriate for the Commission to intervene in a

take-over bid in order to protect the public interest, even if

that bid strictly complies with the letter of the private

agreement exemption in clause 92(1)(c) of the Act. And, as in

Canadian Tire, we must determine the extent to which the

"animating principles" of Part XIX should compel us to intervene

to protect the public interest, by orders under sections 123 and

124, against transactions that may be found to be abusive of both

investors and the capital markets. Specifically, in this matter

we must determine whether the use of the private agreement

exemption in clause 92(1)(c) of the Act, with the effect of

thwarting a rival's bid for control made to public shareholders,

is an abuse of the capital markets that ought to be restrained by

orders under sections 123 and 124.

The essential facts in this matter are not seriously in

dispute. H.E.R.O. Industries Ltd., a B.C. company, is a

reporting issuer under the Act whose common shares are listed on

the Toronto Stock Exchange. On June 12, 1990, Gordon Capital

Corporation, through a wholly-owned subsidiary, HRO Acquisition

Corp., made an offer to acquire all of the issued and outstanding

common shares of H.E.R.O. at a price of 85 cents per share. This

price represented a substantial premium to market of

September 14, 1990 (1990), 13 OSCB 3777


4

approximately 70%, since the common shares of H.E.R.O. had been

trading in the 50 cent per share range for some time prior to

early June 1990. At the time of launching its bid, Gordon held

746,440 common shares of H.E.R.O. (approximately 14%) and the

Gordon bid was made conditional upon, among other things, a

minimum of 3,314,811 common shares of H.E.42.0. (approximately

62.34%) being tendered to the Gordon bid by persons other than

associates of Gordon. This condition was ,inserted so that Gordon

could then effect a "going private" transaction (which under

British Columbia corporate law, we were advised, would require a

75% shareholder vote). However, Gordon retained the right to

waive this condition should it so choose. Neil Jamieson, a

director of Gordon, was a director of H.E.R.O. until he resigned

on July 13, 1990.

On June 12, 1990, Middlefield Capital Fund was the

beneficial owner of 1,584,400 common shares of H.E.R.O.

(approximately 29.8%). Middlefield Capital is a unit trust

established under the laws of Ontario, owned by a number of

institutional investors and some individuals. It is a member of

the Middlefield Group of companies which also includes

Middlefield Financial Ltd., a registrant under the Act. Two of

the senior executives of the Middlefield Group, Garth Jestley and

Murray Brasseur, were also members of the H.E.R.O. Board.

On June 12, 1990, New Frontiers Development Trust plc held

991,500 common shares of H.E.R.O. (approximately 18.6%). New

Frontiers is a closed end investment trust incorporated under the

September 14, 1990 (1990), 13 OSCB 3778


laws of the United Kingdom, with its principal centre of

operations in London, England. Charles Hobbs, an officer of New

Frontiers, was also a director of H.E.R.O.

It would appear that there was little love lost between

Gordon and Middlefield with respect to their investments in

H.E.R.O., at least as demonstrated by the evidence of Messrs.

Jamieson and Jestley before us. It seems that for some time

before the public announcement of the Gordon bid on June 7, 1990,

Gordon and Middlefield had been sparring about their relationship

in H.E.R.O. and, in particular, about one buying the other out or

finding a third party to buy out the both of them. In

particular, in April 1990 Gordon suggested that it would make a

bid or would be prepared to have Middlefield make a bid at the

same price, and that it (Gordon) would agree to tender to that

bid. No satisfactory arrangements in this regard could be made,

and Gordon initiated its bid as a way of breaking the impasse.

Correspondingly, Middlefield saw the Gordon bid as coercive of

its own position in H.E.R.O., and appears to have determined to

resist the Gordon bid if at all possible.

As one would expect, the market price of H.E.R.O. common

shares began to rise dramatically after the announcement of the

Gordon bid on June 7, 1990. From the 50 cent per share range, by

July 3, 1990 the market price had risen in response to the Gordon

bid to almost 80 cents per share. Accordingly, on July 3, 1990,

115% of the "market price" of H.E.R.O. common shares, as

determined in accordance with the Regulation for the purposes of

September 14, 1990 (1990), 13 OSCB 3779


6

clause 92(1)(c), for the first time exceeded the 85 cents per

share offered under the Gordon bid. On July 4, 1990, and

throughout the balance of that week, 115% of "market price" as so

determined exceeded 87 cents per share. There was no evidence

before us at all to suggest that Middlefield had anything to do

with this rise in the price of H.E.R.O. shares. However,

Middlefield admitted that it was closely tracking the rise in the

market price for H.E.R.O. common shares from some point very

shortly after the making of the Gordon bid. As a result,

Middlefield determined that the fundamental requirement of the

private agreement exemption in clause 92(1)(c), that the purchase

price not exceed 115% of "market price" as determined'in

accordance with the Regulation, would have permitted a purchase

price of 87 cents per share by July 4, 1990.

On June 22, 1990, the Board of Directors of H.E.R.O.

issued the required Directors' Circular in response to the

Gordon bid. Messrs. Jamieson and Brasseur did not take part ih

the meeting of the H.E.R.O. Board at which the Gordon bid and the

Directors' Circular were considered. MessrS. Jestley and Hobbs

did do so, however, and both concurred in the decision not to

make a recommendation to H.E.R.O. shareholders whether to accept

or reject the bid. The Directors' Circular also stated that

(except for Mr. Jamieson) none of the directors or senior

officers of H.E.R.O., nor after reasonable enquiry, any of their

respective associates, any person or company holding more than

10% of H.E.R.O. common shares, or any person acting jointly or in

September 14, 1990 (1990); 13 °SOB 3780


7

concert with H.E.R.O., had accepted or currently intended to

accept the Gordon bid. While much was made of the adequacy or

inadequacy of this level of disclosure in evidence and argument

before us given what transpired shortly afterwards, in the end we

think that little turns on the point. As would be expected,

however, this form of disclosure in the Directors' Circular had

no real impact upon the expectant, upward trend of the market

price of H.E.R.O. shares.

On July 4, 1990, Jestley of Middlefield approached Hobbs of

New Frontiers with an offer to purchase the latter's shares in

H.E.R.O. at a price of 87 cents per share. As noted above, July

4 was the first day upon which 115% of the market price of

H.E.R.O. shares, as determined in accordance with the Regulation,

exceeded 87 cents per share and thus exceeded by any real margin

the 85 cents per share being offered under the Gordon bid. No

agreement was reached that day; in fact, New Frontiers contacted

Gordon and gave Mr. Jamieson at least some brief period of time

in which to match the offer from Middlefield. That evening, Mr.

Jestley flew to London (armed with certified cheques in

anticipation of a quick purchase if a deal could be made). The

next morning, at a meeting of under an hour's length, he

concluded the purchase of New Frontiers' shares in H.E.R.O. at a

price of 87 cents per share (apparently, Mr. Jestley was prepared

to go as high as 89 cents per share, and had a further cheque

with him to support that offer if need be, but in the end he did

not need to increase his offer in order to entice New Frontiers

September 14, 1990 (1990), 13 OSCB 3781


8

to sell). On July 5, 1990, Middlefield Financial announced by

way of a press release that it had purchased privately from New

Frontiers, for resale to Miadlefield Capital, 878,135 common

shares of H.E.R.O. (approximately 16.5%) at a purchase price of

87 cents per share, and had agreed subject to certain conditions

(including the consent of this Commission to a transfer in

escrow) to purchase a further 113,365 common shares of H.E.R.O.

(approximately 2.2%) at the same price. Combined, these two

acquisitions gave Middlefield holdings of 2,575,900 H.ER.O.

common shares (approximately 48.5%).

Gordon brought the matter to the attention of Commission

staff early on July 5, 1990, and the Commission issued

tempo'rar order on that date under sections 123 and 124 of the

Act, ceasing trading in H.E.R.O. common shares by Middlefield

Capital, Middlefield Financial and New Frontiers for a period of

15 days and denying to Middlefield Capital, Middlefield Financial

and New Frontiers for a period of 15 days the benefit of the

exemptions contained in sections 34, 71, 72, and 92 of the Act in

respect of trades in H.E.R.O. common shares. On July 5, 1990,

the Commission also ordered that a hearing be held within 15 days

to determine whether these temporary orders ought to be allowed

to expire or to be extended, and further to determine whether

orders under sections 123 and/or 124 should be made in respect of

Messrs. Jestley, Hobbs and Brasseur and whether an order should''

be made directing Middlefield to comply with Part XIX of the Act.

This hearing resulted.

, .

September 14; 1990 (1990), 13 osoti '3782


9

At the beginning of the hearing, counsel for Middlefield

questioned the standing of Gordon to participate in the hearing.

At the very least, counsel said, if Gordon were to be permitted

to participate it ought to be limited to what has come to be

called "Torstar" standing (see Re Torstar Corporation and Southam

Inc. (1985), 8 OSCB 5068), with standing to make argument only at

the end of the hearing but not to lead evidence or cross-examine

witnesses. On this issue we were referred to the several

decisions of this Commission and of the Ontario courts bearing on

standing in Commission proceedings, as well as to the helpful

analysis of the Alberta Securities Commission Board in its

decision in Re James F. Matheson, May 9, 1990 (ASC Summary for

June 1, 1990).

It was evident to us that Gordon's interest in this matter

was far greater than that of a mere intervenor for whom "Torstar"

standing might be appropriate. For one thing, Gordon is an

offeror and therefore an "interested person" within the meaning

of subsection 88(1) of the Act, and so would have been in a

position to bring an application for an order under section 100c

had staff not decided to seek the temporary order mentioned

above. Moreover, as was the case in Re Core-Mark International

Inc. et al. (1989), 12 OSCB 3185, we found it hard to imagine any

person with a greater interest in the outcome of the hearing than

"a competing bidder who seeks to buy the whole company" (see page

3198). Accordingly, we granted full standing to Gordon.

Gordon and staff counsel sought to have us issue, among

September 14, 1990 (1990), 13 OSCB 3783


1 0

other things, an order pursuant to clause 100c(1)(cy directing

Middlefield to comply with Part XIX of the Act. In essence,

staff and Gordon asked us to find that Middlefield had acted in

breach of Part XIX by purchasing shares from_New Frontiers as it

did, and then to order that Middlefield should comply with the

strict requifetents of Part XIX and, in particular, the

restrictions in the private agreement exemption in clause

92(1)(c).

We found ourselves unable to make such an order against

Middlefield under clause 100c(1)(c). In the first place, for

Part XIX to apply to a transaction, that transaction must be,a

"take-over bid" as defined in subsection 88(1). To be a take-

over bid, an offer to acquire must be made to a person "who is in

Ontario" or "whose last address as shown on the books of the

offeree issuer is in Ontario". It was'admitted that the address

of New Frontiers on the books of H.E.R.O. is in the United

Kingdom, and it was readily apparent to us that New Frontiers is

not "in" Ontario for the purposes of Part XIX. It has no

apparent presence "in" Ontario, either physically Or in any'

appropriate notional sense. It is based in the United Kingdom,

and its only connection with Ontario would seem to be that it

holds investments in certain companies, Such as H:E.R.O., which

are present here in some form. Accordingly, in our view the

offer to acquire H.E.R.O. shares made by Middlefield to New

Frontiers was not a take-over bid within the meaning of Part XIX,

so that we had no jurisdiction to make a compliance order with .

;'September 14,1990 05OB, 3704


11

respect to it under clause 100c(1) (c).

Even if we had found that we had such jurisdiction, we

would likely have been reluctant to exercise it in the

circumstances of this matter. We need not reach a firm decision 1

on this point, but it appears to us that the purchase of H.E.R.O.

shares by Middlefield from New Frontiers did comply with the

strict terms of the private agreement exemption in clause

92(1)(c), and in particular with the price limitation to no more

than 115% of "market price" as determined in accordance with the

Regulation. In Selkirk/Southam, there were sharp differences of

opinion among the three groups of Commissioners as to whether the

Commission retains any inherent power to re-calculate this market

price test given the amendments that were made to Part XIX in

1987. Even if we still have this power, it is probably best left

for the most egregious cases, such as those in which there is

some evidence of collusion, or market manipulation, or some other

active interference with the auction market mechanism upon which

the 115% test is based. Here, there was evidence that

Middlefield tracked the rise in the market price of H.E.R.O.

shares on a regular basis, from shortly after the launching of

the Gordon bid up until the point at which the 115% test produced

a price that would comply with clause 92(1)(c) but, at the same

time, allow Middlefield to offer New Frontiers something more

than Gordon 's price. That conduct may be opportunistic, but it

is not collusive or manipulative. Accordingly, had we been

pushed to decide the point, we would likely have concluded that

September 14, 1990 (1990), 13 OSCB 3785

Reasons: Decisions, Orders and Rulings -, Page 3-344

12

we had no basis for re-calculating the 115% test in this

instance, even if we still have the authority to do so.

Certainly, for the purposes of the discussion that follows, we

are prepared to assume that Middlefield's purchase of H.E.R.O.

shares from New Frontiers, had it been a take-Over bid as defined

in Part XIX, strictly complied with the letter of clause

92(1)(c).

That is - far from the end of the matter, however. By this

stage, there should be no doubt in anyone's mind that the

Commission will intervene to protect the public interest in cases

in which the rules in Part XIX are complied with, but the spirit

underlying those rules is not. Canadian Tire is the leading and

best-known decision on this point, of course, but it is far from,

the only one. Recently, in Re Mithras Management Ltd. et al.

(1990), 13 OSCB 1600, at pages 1617-18, the Commission had this

to say about its approach to the exemptions in Part XIX:

It should be clear to all that the underlying purpose of Part XIX of the Act is the protection of the integrity of the capital markets in which take-over bids are made, and in particular the protection of investors who are solicited in the course of .a take-over bid. Those purposes are carried out through provisions which, among other things, attempt to ensure that equal treatment is accorded to all offerees in a bid, that offerees have a reasonable time within which to consider the terms of a bid, and that adequate information is available to offerees to allow them to make a reasoned decision as to whether to accept or reject a bid. These provisions exist to protect investors, of course, but their over-arching purpose is the protection of the integrity of the capital markets in which those investors have placed their money -- and their trust.

Certain exemptions are available, of course, from the strict requirements of Part XIX. These are set out in

September 14, 1990 (1990), 13 0SCS 3786

- Reasons: Decisions, Orders and Rulings Page 3-345

13

section 92 of the Act. Generally speaking, these exemptions are available in circumstances in which it is reasonable to expect that the purpose of Part XIX will be carried out even if formal compliance with all of its provisions is not required. Where the strict terms of an exemption are met, and the policy objectives of Part XIX are nonetheless fully carried out, this Commission will have no basis for intervening in a bid. But where the policy objectives of Part XIX are not carried out, then this Commission will not hesitate to intervene in a bid even if the strict terms of an exemption have been met.

In determining whether or not to so intervene, the

Commission must have regard to whether its intervention will

enhance the pursuit of the policy objectives it has identified.

For one thing, it must determine that the transaction in question

has a sufficient Ontario connection or "nexus" to warrant

intervention to protect the integrity of the capital markets in

the province (see Re Asbestos Corporation Ltd. (1988), 11 OSCB

3419). It would be futile (and probably wrong) for the

Commission to purport to intervene in a transaction whose

connections with Ontario were so slight as to render such

intervention meaningless. Here, however, we had no concerns on

this score. While New Frontiers has no apparent connection with

Ontario, all other interested persons certainly do. Both Gordon

and Middlefield are based in Toronto, and while H.E.R.O. is based

in British Columbia it is a reporting issuer under the Act and

its shares are listed on the Toronto Stock Exchange. Moreover, a

large number of H.E.R.O. minority shareholders have, we were

told, addresses indicating Ontario residence. Accordingly, we

found that we had sufficient jurisdictional basis upon which to

September 14, 1990 (1990), 13 OSCB 3787


14,

intervene in this matter should we determine that policy

considerations required us to do so.

One of the fundamental policy objectives underlying Part

XIX is the equality of treatment of offerees by those who seek

control through a take-over bid. Achievement of this policy

objective is represented in Part XIX by a variety of specific

rules, such as those in section 96 requiring identical

consideration and prohibiting collateral benefits which have the

effect of conferring upon one offeree a "consideration of greater

value" than that offered to other offerees. Its achievement is

also the source of the rules in section 93 which, among other

things, prohibit an offeror from utilising exemptions such as

that found in clause 92(1)(c) to acquire shares from a select few

before, during or after its public bid at a higher price than

that offered:to the public.

But it should not be supposed that these specific rules, as

set out in Part XIX, necessarily exhaust all of the policy

concerns which led to the implementation of those rules in the

first place. The particular rules in Part XIX deal specifically

with the conduct of an offeror. But the absence of particular

rules dealing with the conduct of rivals for control should not

be taken to mean that there are not equivalent policy concerns

regarding that conduct. Just as the specific rules in Part XIX

exemplify our concerns about private steps taken by an offeror to

help ensure the success of its public bid, so are we concerned

about the use of an exemption, such as that contained in clause

(1990), 1P.,05.QB 37,0P; September 14, 1S,60


15

92(1)(c), that has the effect of defeating a rival bid made to

the public at a premium price.

These policy concerns are amply demonstrated by the

Commission's decision in Selkirk/Southam. There, a proposed

public bid by a third party caused the market price of Selkirk

shares to increase dramatically (just as the market price of

H.E.R.O. shares did here). The proposed bid was never made,

however, since Southam, the dominant shareholder of Selkirk,

announced that it would not tender to the bid if made. Shortly

thereafter, Southam wished to use the private agreement exemption

to purchase additional Selkirk shares from certain institutional

investors. The Commission had to consider whether it was

appropriate for Southam, as the dominant shareholder, to rely

upon the exemption in clause 92(1)(c) in such circumstances.

Three members of the Commission (Vice-Chairman Salter and

Commissioners Taschereau and Reid) saw the matter this way (at

pages 317-19):

Since the introduction of take-over bid regulation in Ontario with The Securities Act, 1966 a private agreement exemption has co-existed (albeit uneasily) with the general rule of equal opportunity for all. The Securities Act, 1978 imposed the follow-up offer obligation where an excessive premium was paid under private agreements, and the restrictive effect of the 1987 amendments has been noted above. In a parallel line of decisions and policy statements, the Commission moved to restrict the use of the private agreement exemption in the context of a linked take-over bid by the private agreement purchaser. Those restrictions reflect positions taken by the Commission in 1978 (MacMillan Bloedel and Domtar), 1981 (Federal Commerce & Navigation and Abitibi-Price; B.C. Resources/Noranda and MacMillan Bloedel) and 1982 (OSC Policy 9.3) and have been carried into the Act in the 1987 amendments. They are now found in subsections 93

September 14, 1990 (1990), 13 OSCB 3789


16

(2) and (5) dealing respectively with acquisitions during a take-over bid and integration of pre-bid private transactions. These legislated limits on the use of the private agreement exemption are not to be given a preclusive effect: legislative recognition of certain wrong uses of the exemption does not constrain the Commission from marking out and prohibiting other wrong uses when such are brought before it in specific cases. It is now well settled (Re Cablecasting Limited (1978) OSCB 37; Re Canadian Tire Corporation, Limited (1987) OSCB 858 (OSC), discussed with approval in Divisional Court reasons (1987) OSCB 1772 at 1806- 7) that a specific breach of the legislation or a policy statement need not be shown before section 123 can be invoked. To accede to that contention

...would not only be contrary to the plain wording of section 123, but also would be a failure by the Commission to exercise the mandate vested in it by the Legislature. There are few areas in our public life that are as dynamic and as innovative as our capital markets. For the most part, that dynamism and innovation enure to the benefit of the economy at large and individual investors in particular. But that same dynamism and innovation can, and does, lead to abuse. A regulatory agency charged with oversight of the capital markets must have the ,capacity to move quickly to stop transactions which it considers to be injurious to the capital markets."

(Re Canadian Tire Corporation, Limited (OSC) p. 931).

As a result, these three members of the Commission would have

issued orders under section 123 cease-trading the transactions

proposed by Southam.

Another group of three Commission members (Chairman Beck

and Commissioners Holland and Waitzer) also found the proposed

transactions offensive, saying (at page 303):

We are of the opinion that there is prejudice to the public interest, in the sense of the public trading markets, for a dominant shareholder to take advantage of a market anomaly to enter into private agreements with a small number of relatively large shareholders that sees the premium created by that market anomaly

September 14, 1990 (1990), 13 OSCB 3790


17

given exclusively to those shareholders, and to the exclusion of their fellow shareholders.

This is not the ordinary case of a shareholder entering into an exempt take-over bid transaction through a private agreement with a small number of shareholders by paying them a 15 per cent premium to market. Rather, it is the case of the major shareholder turning down a bid of $35.00 per share, which would have been made to all the shareholders, and then taking advantage of the market impact of that proposed bid to increase its share position by offering a premium to Cablecasting and the Funds. Southam was under no obligation to accept a take-over bid at $35.00 per share, or at any other price. If, as the major shareholder, it wished to increase its share position, it ought to have considered the position of the minority shareholders.

They would not, however, have issued a cease-trading order

against the transactions. As they said (at pages 304-5):

Notwithstanding that "public interest" terminology is also used in s.123 of the Act, we are of the opinion that staff's application for a cease trade order ought to be denied. Staff's application depends upon a finding that the six trading days from October 15 to October 22, the period when the possibility of a Rogers bid was outstanding in the market, ought to be excluded in determining the market price for the purposes of these private agreements. We are not prepared to, in effect, amend the Act through the use of the cease trading power. This is not to say that there might not be an appropriate case where the Commission might decide that the market price as determined under s.164 (1) of the Regulations is inappropriate. But we do not think that this is such a case. If majority shareholders are to be precluded from relying on the market impact of a take-over bid that they declined to tender to, then that, and related situations, ought to be the subject of a policy statement and possible amendment to the Act. These are not such abusive transactions that the Act should be amended on an ad hoc basis and a cease trade order issued. It is not every transaction of which the Commission might disapprove that is the fit subject for a cease trade order.

The final group of three Commissioners (Commissioners

Blain, Carmichael and Wigle) also would have refused to issue a

September 14, 1990 (1990), 13 OSCB 3791


Page. 3-350

18

cease-trading order against the proposed transactions because

they did not find them to be abusive. As they said (at pages

330-1):

We agree with the Committee that achieving certainty in the regulation of take-over bids is of g'reat concern to the capital markets. It seems to us that any participant in the capital markets should be able to review the Act, the Regulation and the Policy Statements of the Commission and to structure his transaction based on the regulatory environment the create without fear of intervention by the Commission except in cases of clear abuse and perhaps manifeSt' unfairness.

In our view, for the reasons hereinafter given, market price should be calculated as provided in the Regulation and there should not be eliminated from the calculation those trading days which occurred from the date of the announcement of the proposed Rogers bid to the day Southam advised it would not tender any of it

if the bid were made. To eliminate those trading days would be the equivalent of the Commission fixing the market value, absent a clear power to do - so, and this we think the Commission should not do unless there are compelling reasons.

In the end, they concluded, "the actions of Southam during the

period of the proposed bid were not abusive or, we may add,

unfair" (page 333).

From time to time, much has been made of the diversity of

views expressed in Selkirk/Southam by the three groups of

Commissioners. However, there is a clear common thread-running

through their decisions; Each group acknowledged that the

Commission had the mandate, and the responsibility, to protect

the public interest against a transaction of the kind there in

issue if the transaCtion'crOSsed the appropriate threshold of

harm to warrant such intervention. The three groups may have

September 14, 1990 , (1990), 13 OSCB 3792


19

disagreed on the height of that threshold, but not on its

existence. In fact, two of the groups (six out of the panel of

nine Commissioners) were prepared to find that the transactions

there proposed would have been prejudicial to the public interest

for the purposes of clause 92(1)(c), and three of those six would

have been prepared to issue a cease-trading order had that been

necessary to restrain them.

Here, the facts are considerably more alarming than were

those in Selkirk/Southam. There, the proposed bid never

materialised after Southam announced that it would not tender to

it if made (as it was perfectly entitled to do). Accordingly,

Southam's resort to the private agreement exemption did not, in

and of itself, have any effect upon the launching or success of

any third party bid. Here, the Gordon bid was already launched

and, at the time of the hearing, was still in progress. Thus,

Middlefield's resort to the private agreement exemption had the

almost inevitable effect of thwarting the Gordon bid. Even if

Gordon were prepared to waive its condition of a minimum of some

62% of the shares being tendered to it, it would have been

virtually impossible for Gordon to obtain even majority control

given that Middlefield now held some 48.5% of H.E.R.O.'s shares.

In short, Middlefield's use of the private agreement exemption

effectively sounded the death knell for the Gordon bid. (In

fact, and not surprisingly, on August 8, 1990 Gordon abandoned

its bid when insufficient shares were tendered to give it even a

majority of H.E.R.O.'s shares.)

September 14, 1990 (1990), 13 OSCB 3793


20

During the hearing, considerable time was spent in

attempting to analyze Middlefield's motivations or intentions in

purchasing shares from New Frontiers. It seemed to us to be

reasonably clear that Middlefield was unhappy about the Gordon

bid, and was prepared to do what it could, within reason, to

resist it (including, it would seem, buying enough additional

shares to effectively thwart its rival). Flowevex, wha:t seemed

far more material to us was that the actions of Middlefield, in

attempting to resist the Gordon bid, would clearly have the

effect of defeating it. The result of Middlefield's actions, the

effect they had, was to us clearly prejudicial to the public

interest whatever Middlefield's subjective intention might or

might not have been. And, as a result of Middlefield's actions,

New Frontiers received 87 cents per share and the public minority

shareholders nothing whereas had the Gordon bid.been successful

all would have received 85 cents per share.

To us, such a result appears to be manifestly unair to the

public minority shareholders of H.E.R.0:, who lose the

opportunity to tender their shares to the Gordon bid at a

substantial premium (all of which, correspondingly, ends up in

the pockets of New Frontiers). The result is also clearly unfair

to GOrdon, since the specific rules in Part XIX that are designed

to ensure equality of treatment of offerees, as noted above,

prevented it from making use of the private agreement exemption

in the way that Middlefield did. It seems quite unfair that

Middlefield should be able to use the exemption in clause

September,14, 1,990 (1990), 1,3: ()SOB 3794


21

92(1)( ) to defeat the bid of its rival, Gordon, when Gordon

could not respond in kind. Finally, Middlefield's conduct seems

to us to be clearly abusive of the integrity of the capital

markets, which have every right to expect that market

participants like Middlefield will adhere to both the letter and

the spirit of the rules that are intended to guarantee equal

treatment of offerees in the course of a take-over bid, no matter

by whom the bid is made.

As a result, we found it to be in the public interest to

extend our temporary order under sections 123 and 124 of the Act

in respect of both Middlefield Capital and Middlefield Financial,

although upon certain conditions as set out in our formal order

dated July 31, 1990. These conditions would allow Middlefield

Capital and Middlefield Financial to tender their shares in

H.E.R.O. to any take-over bid made for all of the H.E.R.O. common

shares by way of circular in compliance with Part XIX. As well,

our order would cease to apply upon the completion of a take-over

bid made for all of the common shares of H.E.R.O. by Middlefield

Capital or Middlefield Financial, or an associate or affiliate

thereof, by way of circular in compliance with Part XIX at a

price per share not less than the greater of (i) 87 cents per

share and (ii) 115% of the market price per share at the date of

such bid, as calculated in accordance with the Regulation.

Unfortunately, we cannot compel Middlefield to comply with the

spirit of Part XIX after the fact. In this way, however, we

hoped to give Middlefield the chance to redeem the harm it has

September 14, 1990 (1990), 13 OSCB 3795


Page 3,354

22

done to Gordon, to the public minority shareholders of H.E.R.0

and to the capital markets generally by either tendering to, and

thus helping to ensure the success of, a third-party bid

(including Gordon's) or by itself proceeding to make a bid at an

appropriate price.

Given its limited and essentially passive role in this

matter, and given that its transfer of H.E.R.O. shares to4

Middlefield is now virtually complete, we concluded that no

purpose would be served by continuing ourf temporary 'order against

New Frontiers.c, Moreover, we did not see anY real basis upon

which to make any order under. sections 123 and/or 124 in respect

of Messrs. Jestley, Hobbs and Brasseur personally.

DATED at Toronto this llth daY of September, 1990.

"W. D. "Charles Salter"

"Paul L. Waitzer" "J. W. Blain"

"Dean C. Kitts"

September 14, 1990 (1990), '13 OSCB 3796

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