Perceived conflict won't protect minority shareholders

The recent decision from the BC Court of Appeal in <i>Jaguar Financial v. Alternative Earth Resources</i> has upped the ante for litigants attacking the conduct of boards during takeover proceedings. “The case is an authoritative and detailed reminder that minority shareholders seeking the protection of statutory provisions must meet significant requirements so as to preserve a pragmatic balance between their rights and respect for the democratic rights of boards elected by a majority of shareholders to run the affairs of a company,” ...
Perceived conflict won't protect minority shareholders
Annual general meeting of BlackBerry Ltd. (Jon Blacker, Reuters)
The recent decision from the BC Court of Appeal in Jaguar Financial v. Alternative Earth Resources has upped the ante for litigants attacking the conduct of boards during takeover proceedings.

“The case is an authoritative and detailed reminder that minority shareholders seeking the protection of statutory provisions must meet significant requirements so as to preserve a pragmatic balance between their rights and respect for the democratic rights of boards elected by a majority of shareholders to run the affairs of a company,” says Mark Andrews of Fasken Martineau Dumoulin LLP in Vancouver.

Jaguar also directly addresses the issue of conflicts when directors of a target company are poised to take on positions with the acquirer following a combination. “The case clarifies that the intention of taking on a position with an acquirer is not inherently fatal to being involved with the transaction on behalf of the target,” says Mathew Good of Blake, Cassels & Graydon LLP in Vancouver. “However, if an individual’s primary motivating purpose is to accrue benefits from a position with the target, then that is cause for intervention by the courts.”

The ruling arose in the context of a dispute over the future of TSX-V listed Alternate Earth Resources Inc. Jaguar Financial Corp., an investment bank, held almost 20 per cent of AER’s shares and was the company’s largest shareholder. In 2014, the company sold its assets, leaving it with cash but no operations.

AER identified a potential acquisition in the purchase of the shares of Black Sea Copper & Gold Corp., a private company with mining interests in Turkey. Once negotiations began, an AER director disclosed that he was a shareholder in Black Sea and its CFO. AER’s board responded by striking a committee of non-interested directors to consider the transaction.

In October 2015, AER signed a letter of intent to acquire Black Sea. The deal contemplated a reconstitution of AER’s board to consist of two directors from the existing AER and two from Black Sea. Most of the consideration for the acquisition would come in the form of AER shares, thereby diluting the stake of existing shareholders.

Jaguar objected to the transaction and initiated oppression proceedings under the BC Business Corporations Act for the failure of AER’s directors to disclose their interest as represented by the new positions they would assume. Jaguar also maintained that the transaction was essentially a reverse takeover that prejudiced its interests, and asked the court to restrain the deal’s closing unless approved by a prior special resolution of AER’s shareholders.

The motions judge sided with Jaguar, but AER appealed and the British Columbia Court of Appeal
overturned the decision. As the court saw it, the fact that AER’s directors would stay on did not make their interest disclosable, particularly since the proposed remuneration was commercially reasonable. “The court made a contextual analysis,” Good says. “If it had appeared from the terms of the agreement that the benefits were outlandish or not in keeping with existing benefits or with the nature of the company’s business, the court might have interfered.”

Andrews believes that the decision reassesses the balance between minority rights and a board’s rights to govern a company the way it sees fit. “It’s a pragmatic decision that says minority shareholder need to have a very substantial case that meets a high threshold if they want to get the protection of statutory provisions,” he says. “They can’t walk in armed only with innuendo and suspicion and lay waste to what the board is doing.”

Other appellate courts will take heed, Andrews says: “Although the decision is to some degree based on BC statutes, there is quite good cross-fertilization between Canadian appellate courts, especially between Ontario and British Columbia. Jaguar is consistent with Ontario law and will certainly be picked up in Ontario and maybe in other jurisdictions.”

Ironically, however, Jaguar may invite more litigation on the subject of directors who stay on after an acquisition. “The argument that the AER directors were in conflict was surprising to some extent, because what they did is not at all uncommon and there are already general rules in existence to prevent breaches of fiduciary duty,” Good says. “But Jaguar could result in more scrutiny from the simple fact of directors staying on, which could become a more common avenue from which transactions can be challenged.”