R.S.O. 1990, c. S.5, AS AMENDED (THE "OSA")
IN THE MATTER OF THE SECURITIES ACT
S.A. 1981, CHAPTER S-6.1, AS AMENDED (THE "ASA")
IN THE MATTER OF
MACDONALD OIL EXPLORATION LTD., MACDONALD TRADING CORPORATION,
RUSSELL MARTEL AND BRESEA RESOURCES LTD.
August 9, 1999, Toronto, Ontario
ALBERTA SECURITIES COMMISSION
William Hess, Q.C. - Chair
Eric Spinach - Vice-Chair
ONTARIO SECURITIES COMMISSION
Howard I. Wetston, Q.C. - Vice-Chair
Robert W. Korthals, - Commissioner
Stephen N. Adams, Q.C. - Commissioner
For the Staff of the Ontario Securities Commission
Janet A. Holmes
For the Staff of the Alberta Securities Commission
David F.C. Sherida
For PriceWaterhouseCoopers Inc.
Douglas Stewart, Q.C.
For MacDonald Oil Exploration Ltd.
For Intervenor, Deloitte Touche Inc.
Barbara R.C. Doherty
MacDonald Oil Exploration Ltd. ("MacDonald Oil") is an Ontario corporation with its headoffice in Toronto. Its common shares are quoted on The Canadian Dealing Network Inc.("CDN").
The chief executive officer and chairman of the board of directors of MacDonald Oil isFrank Smeenk, who is also a director and principal shareholder of MacDonald TradingCorporation ("MacDonald Trading").
Russell Martel is the former president of MacDonald Oil.
Bresea Resources Ltd. ("Bresea") is a corporation continued under the Canada BusinessCorporations Act ("CBCA"), with its head office in Calgary.
PricewaterhouseCoopers Inc. ("PWC") was appointed as Interim Receiver and Managerof Bresea pursuant to an order of the Court of Queen's Bench of Alberta dated November5, 1997.
Deloitte & Touche Inc. ("Deloittes") is the Trustee of the estate of Bre-X Minerals Ltd.("Bre-X"), a bankrupt. Bre-X owns 8,000,000 common shares of Bresea.
(b) The Offer
All the issues in this matter relate to a take-over bid by MacDonald Oil for all theoutstanding common shares of Bresea, on the basis of one MacDonald Oil convertiblepreferred share and one MacDonald Oil E-Warrant for each Bresea common share.
The MacDonald Oil bid was made by offer (the "Offer") and accompanying take-over bidcircular (the "TOB Circular"), each dated June 8, 1999. The Offer and TOB Circular,together with a letter to Bresea shareholders also dated June 8, 1999 (collectively, the"Offer Documents") were mailed to all Bresea shareholders. The Offer was scheduled toexpire at 5:00 p.m. (Toronto time) on July 12, 1999 (the "Expiry Time").
(c) General Outline of the Issues
A large number of issues, many of them inter-related, arose in relation to the Offer. All theissues fall under three general categories:
(i) issues arising from the fact that Bresea is in receivership;
(ii) issues arising from alleged disclosure defects in the Offer Documents; and
(iii) issues arising from alleged misconduct of MacDonald Oil, MacDonaldTrading and Russell Martel in relation to the Offer.
Not every issue that was raised was addressed during the hearing and our findings onsome issues made it unnecessary for us to deal with other issues. The most importantissues are addressed in more detail under the heading "Issues and Analysis". In order toproperly introduce the context of the issues and the hearing, it is useful to outline some ofthe background under the three general categories mentioned.
(i) issues arising from the fact that Bresea is in receivership
As a target for a take-over bid, Bresea is extremely unusual.
Bresea is a reporting issuer in British Columbia and Québec, but not in Ontario or Alberta.Bresea has approximately 65.5 million common shares issued and outstanding, of whichapproximately 74% are held by Ontario residents and approximately 13% are held byAlberta residents.
Bresea owned approximately 22% of the common shares of Bre-X, and Bre-X ownedapproximately 13% of the common shares of Bresea. Management of the two companieswas closely linked. Their share prices moved in tandem during the notorious eventsrelating to Bre-X.
After Bre-X was placed in bankruptcy, PWC was appointed Interim Receiver and Managerof Bresea on November 5, 1997 by order of the Court of Queen's Bench of Alberta. PWC'smandate, as clarified by a subsequent order dated February 11, 1998, includes thepreservation of Bresea's assets and dealing with legal actions relating to Bresea. Thereare a number of legal actions against Bresea involving potential liability exceeding $3billion, but PWC is of the view that there is a possibility that the claims against Bresea maybe resolved on a basis that would leave Bresea solvent.
The most recent audited financial statements prepared in respect of Bresea were for theyear ended December 31, 1995. Bresea's failure to file audited financial statements for the1996 fiscal year, among other things, lead to Bresea being cease-traded by both theBritish Columbia Securities Commission and the Commission des valeurs mobilères duQuébec in 1997. Since then, PWC has not been in a position to file audited financialstatements. Internal statements have been prepared for tax purposes, but auditedstatements are not available. Bresea has assets of approximately $31.5 million, most ofwhich is cash, but the virtual impossibility of quantifying the claims against Bresea makesits overall financial status uncertain.
Bresea has no directors and PWC's mandate under the relevant court orders issignificantly different from the role of a board of directors. As such, neither PWC noranyone else was in a position to issue a directors' circular in response to the Offer, andno directors' circular was issued.
PWC did take a position on the Offer. On June 30, 1999, PWC issued a news releaserecommending that Bresea shareholders reject the Offer. By letter dated July 5, 1999,addressed to the securities commissions in Alberta, British Columbia, Ontario and Québec,counsel for PWC made a number of submissions. These included a list of allegeddeficiencies in the Offer and confirmation that PWC was not in a position to issue adirectors' circular. PWC asked the B.C. and Québec commissions not to lift their existingcease-trade orders to permit Bresea shareholders to tender their shares to the Offer. PWCasked the Alberta Securities Commission ("ASC") and the Ontario Securities Commission("OSC") (collectively, the "Commissions") to issue cease-trade orders against Breseashares. PWC also asked that "all securities commissions cease trade the Offer".
On July 21, 1999 PWC sought advice and direction from the Court of Queen's Bench ofAlberta on how PWC ought to respond to the Offer. The Court authorized PWC to appointcertain individuals to the Shareholders' Advisory Committee, and ordered PWC to consultwith the Shareholder's Advisory Committee and thereafter to respond to the Offer as anyprudent management would. On July 22, 1999, with the approval of the Shareholders'Advisory Committee, PWC applied to the ASC and OSC pursuant to section 144 of theASA and section 104(1) of the OSA for:
(a) a permanent/final cease-trade order with respect to the Offer, including, tothe extent necessary, the return to the tendering shareholders of all Breseashares tendered to the Offer; and
(b) an order cease-trading all common shares of Bresea until December 31,1999.
In support of the application, PWC pointed again to the alleged deficiencies in the Offer.PWC also argued that, under the circumstances, no offers for Bresea shares should bepermitted until December 31, 1999, by which time significant progress should have beenmade in respect of assessing the claims against Bresea and in electing a board ofunconflicted directors to respond to such offers.
PWC's application is specifically addressed in part 2(b) of these reasons, below.
(ii) issues arising from alleged disclosure defects in the Offer Documents
After receiving PWC's submissions dated July 5, 1999, staff of the OSC advisedMacDonald Oil on July 7 that the OSC had concerns about the Offer, and were in theprocess of considering PWC's submission "as to whether the Offer should be cease-traded". OSC staff asked MacDonald Oil to respond to PWC's submissions by July 9.MacDonald Oil's counsel did so by letter dated July 9.
After reviewing the July 9 letter, OSC and ASC staff participated in a conference call lateron the same day with Mr. Smeenk and MacDonald Oil's counsel. During that conferencecall, staff advised Mr. Smeenk and MacDonald Oil's counsel that staff believed that theOffer should not proceed to completion at the Expiry Time because Bresea Shareholdersdid not have sufficient information to enable them to make an informed decision aboutwhether or not to accept the Offer. Staff indicated that their concerns arose because,among other things, there were a significant number of apparent disclosure deficienciesin the Offer Documents, which did not comply with applicable securities legislation.
Staff's concerns were not resolved and, on July 12, 1999 both the OSC and the ASCissued 15-day cease-trade orders in relation to: a) Bresea shares by MacDonald Oil; andb) the MacDonald Oil Preferred Shares and MacDonald Oil E-Warrants to be issued asconsideration pursuant to the Offer. The OSC order was a temporary order made underOSA section 127(5). The ASC order was an interim order under ASA section 21(1).
On July 19, 1999 OSC staff sent a 13-page letter to Mr. Smeenk and MacDonald Oil'scounsel, describing staff's disclosure concerns and asking for MacDonald Oil's comments.The letter noted that the requirements of Alberta and Ontario securities legislation aresubstantially the same, so that most of the concerns expressed were also relevant toMacDonald Oil's disclosure obligations under Alberta law. The letter also indicated that,unless staff's concerns were addressed by July 22, 1999, staff intended to issue a noticeof hearing requesting "that the OSC and ASC make additional orders to address thesedeficiencies".
On July 22, 1999 MacDonald Oil's counsel suggested that they needed more time torespond to staff's concerns, and that the 15-day cease-trade orders should be extendedfor this purpose. On July 23, 1999, the OSC and the ASC extended their respective ordersuntil August 11, 1999.
On July 27, 1999 MacDonald Oil's counsel sent a 20-page letter to OSC staff, respondingto staff's July 19 letter. MacDonald Oil's counsel sent a brief further response on July 29.On July 30, 1999 staff of the OSC and ASC issued the Notices of Hearing pursuant towhich this hearing was convened. On that same date, staff issued a "Joint Statement ofAllegations of Staff of the Ontario Securities Commission and the Alberta SecuritiesCommission", which contained, among other things, a list of alleged disclosure deficienciesrelating to the Offer.
Certain of the alleged disclosure defects are specifically addressed in part 2(a) of thesereasons, below.
(iii) issues arising from alleged misconduct in relation to the Offer
Staff made a number of allegations concerning the conduct of MacDonald Oil and otherparties in relation to the Offer, including allegations that:
- MacDonald Oil violated the "pre-bid integration" rules set out in section 94(5)of the OSA and section 134.1(2) of the ASA. By agreement dated May 13,1999, MacDonald Trading (allegedly acting jointly or in concert withMacDonald Oil) agreed to purchase 8,000,000 Bresea shares from Deloittesfor $0.25 per share. Although MacDonald Trading failed to complete thetransaction, staff alleged that the Offer should have offered at least $0.25per share cash.
- MacDonald Oil acted contrary to the public interest by mailing the OfferDocuments to Bresea shareholders in British Columbia and Québec withoutfiling the Offer with the British Columbia Securities Commission or theCommission des valeurs mobilères du Québec. MacDonald Oil andMacDonald Trading allegedly breached the applicable securities legislationin British Columbia and Québec by failing to file a news release and report(an "Early Warning Report") upon signing the agreement with Deloittes topurchase 8,000,000 Bresea shares. It was also alleged that MacDonald Oilacted contrary to the public interest by purporting to allow the Offer to expirein circumstances where residents of British Columbia and Québec wereunable to participate in the Offer due to cease-trade orders extant in thoseprovinces.
- MacDonald Oil violated section 75 of the OSA and section 118 of the ASAby failing to issue and file a news release disclosing the nature andsubstance of a material change in MacDonald's affairs, that being theissuance of cease-trade orders on July 12, 1999.
- MacDonald Oil acted contrary to the public interest in relation to a series ofevents commencing on July 9, 1999 whereby MacDonald Oil purported totake up Bresea shares tendered to the Offer.
- MacDonald Oil breached the cease-trade orders dated July 12, 1999, andMr. Martel allegedly acted contrary to the public interest, by reason of aletter dated July 19, 1999 to Equity Transfer Services Inc., which purportedlyauthorized the transfer of Bresea shares to MacDonald Oil, Mr. Smeenk, Mr.Martel and Mr. Miranda.
During the hearing, the Chair pointed out that most of the remedies sought by staffappeared to relate to the disclosure issues with the Offer, and not necessarily to theconduct issues, even though the conduct issues arose in the context of the Offer. Staffacknowledged that, if the Commissions determined that the disclosure in the OfferDocuments was materially inadequate, that would be sufficient to justify the relief beingsought by staff and it might not be necessary to deal with all the conduct issues.
Certain aspects of the conduct issues are specifically addressed in part 2(c) of thesereasons, below.
(b) The Hearing
This matter was conducted as a joint hearing by panels of the OSC and ASC. The hearingaddressed some of the matters raised in the two Notices of Hearing issued by staff of theOSC and ASC dated July 30, 1999, as well as the application by PWC.
Deloittes was granted standing to make submissions on PWC's application, but not as aparty to these proceedings, in accordance with the OSC decision in Re Torstar Corp.(1985), 8 O.S.C.B. 5067.
The joint hearing took place in Toronto on August 9, 1999. After hearing evidence andsubmissions, the panels delivered an oral decision on August 9, without reasons. Thatdecision is reflected in orders of the OSC and ASC dated August 11, 1999.
At the outset of the hearing Mr. Sheldon, counsel for MacDonald Oil, informed the panelsthat his client would not participate in the hearing. He pointed out that Bresea is a CBCAcorporation and said:
Based on the paramountcy of federal legislation, it isMacDonald Oil's position that the Ontario SecuritiesCommission and the Alberta Securities Commission do nothave jurisdiction and have exceeded their jurisdiction over thematters set out in the Notice of Hearing dated July 30, 1999.
By letter dated July 22, 1999, MacDonald Oil requested exemptive relief from theapplication of section 95(9) of the OSA, but had not formally filed the application nor paidthe appropriate fees. At the hearing, Mr. Sheldon formally withdrew that application onbehalf of MacDonald Oil.
Mr. Martel appeared and, initially, requested an adjournment of the hearing on the basisthat he had not received sufficient notice. Shortly afterwards, he withdrew his applicationfor an adjournment and took no further part in the proceedings.
2. ISSUES and ANALYSIS
(i) disclosure requirements
The disclosure requirements applicable to the Offer are found in Form 32 under the OSAand Form 31 under the ASA, which are practically identical. Because this was a share-for-share offer, Item 15 of Form 32 in Ontario and Item 15 of Form 31 in Alberta requiredMacDonald Oil to provide the information prescribed by the form of prospectus appropriatefor MacDonald Oil, which is Form 14 in both Ontario and Alberta.
The approach to be taken to allegations of inadequate disclosure in take-over bidsituations was considered by the OSC in In the Matter of Standard BroadcastingCorporation Limited et al (1985), 8 O.S.C.B. 3672. The OSC said, commencing at p. 3676:
As to the allegations of inadequate disclosure that were madeand did surface at several points during the course of thehearing, none were, in our respectful opinion, material in thesense that the disclosure asked for would have beennecessary to allow an investor to make an informed investmentdecision. We stress this last point, as it is often the case thatallegations of non-disclosure or inadequate disclosure, aremade during the course of a take-over bid. There is adifference between perfect disclosure (which no two opposingcounsel likely would ever agree upon), acceptable disclosureand material non-disclosure or material misleading disclosure.In a case between these parties, that was argued in theSupreme Court of Ontario...Madam Justice McKinlay notedthat the appropriate standard of materiality is that set out in thejudgment of the United States Supreme Court in TSCIndustries Inc. et al v. Northway Inc., 426 U.S. 438, 96 S. Ct.2126 (1976), which standard was approved by Montgomery J.in Royal Trustco Ltd. et al. v. Campeau Corp. et al. (1980), 31O.R. (2d) 75 at 101 and by the Ontario Court of Appeal inSparling et al v. Royal Trustco Ltd. et al (1984), 45 O.R. (2d)484 at 490. That standard is:
"...an omitted fact is material if there issubstantial likelihood that a reasonableshareholder would consider it important indeciding how to vote..." [or in deciding whetherto tender his shares in the case of a take-overbid]
No one of the allegations of non-disclosure or inadequatedisclosure met that standard of materiality. Although the TSCIndustries standard of materiality often has been quoted andis well understood, it is frequently lost sight of when anallegation of non-disclosure is made before the Commission.The fact that counsel for an applicant would have worded amatter differently, or would have made fuller disclosure, orwould have placed emphasis on a different aspect of a matter,does not amount to non-disclosure unless there is a showingof materiality.
We agree with these comments and consider that we must look at the alleged disclosuredefects in light of the language of the relevant Forms and the "materiality" standarddescribed in Standard Broadcasting.
(ii) the lack of a directors' circular
In assessing whether disclosure defects are material, such defects must be considered intheir particular context. The lack of any board of directors for Bresea and the resulting lackof a directors' circular makes the context of this case unique. No one was able to recall acomparable take-over bid situation.
In normal circumstances there is a directors' circular as contemplated by section 99 of theOSA and section 138 of the ASA. In normal circumstances, the directors' circular respondsdirectly to information in the TOB Circular. The two circulars may be adversarial, and somedegree of tactical manoeuvring and hyperbole is expected, and tolerated, because it isunavoidable in hostile bids. This adversarial process provides a vigorous expression ofdifferent views (in the circulars, new releases, and media coverage) for consideration bythe offeree shareholders. In normal circumstances, the Commissions' task in assessingdisclosure issues involves weighing the overall effect of these differing views, which oftencounter-balance one another to a large degree.
This case is not normal. Here, Bresea shareholders received only the Offer Documents.Although PWC issued a news release on June 30 recommending that Breseashareholders reject the Offer, we cannot view that as being in any way comparable to aproper directors' circular because it did not identify, address or attempt to correct any ofthe alleged disclosure defects in the Offer. Virtually all of the debate over disclosure hasoccurred in private, between Macdonald Oil and staff, and has not been presented toBresea shareholders. The Commissions must, therefore, assess the overall effect of theOffer Documents alone in determining whether alleged disclosure defects are material.
At the hearing, there was some discussion about whether the lack of a directors' circularincreased the bidder's onus to disclose or, whether the onus remains the same but theramifications of failure to meet the onus are more significant. Our conclusion is that theonus is always the same but, where there is no directors' circular to counter-balance thetake-over bid circular, disclosure defects are more likely to be material.
Defects that might be, in effect, "corrected" by a directors' circular are accentuated by thelack of a countervailing document. This may cause defects to have an unusual cumulativeeffect. Relatively minor individual defects, that would normally be "corrected" by adirectors' circular, may interact and combine with other such defects to produce somethingthat is, considered overall, materially misleading.
(iii) particular defects alleged by staff
Staff alleged that there were many particular defects in the Offer Documents. Not all ofthese were addressed at the hearing. We based our decision on the following.
A. pro forma balance sheet and income statement
Pursuant to Item 15 of both Form 32 under the OSA and Form 31 under the ASA,MacDonald Oil was required to include in the Offer Documents the information prescribedby the form of prospectus appropriate for MacDonald Oil. That included pro forma financialstatements of MacDonald Oil giving effect to the exchange of securities as at the date ofMacDonald Oil's most recent balance sheet included in the TOB Circular based on theinformation in Bresea's most recent audited financial statements.
MacDonald Oil did not do this. Instead, they used unaudited financial information forBresea taken from a PWC report. That information was incomplete as it contained noinformation regarding income and earnings. MacDonald Oil represented the Bresea lossand deficit as nil, whereas staff argued that it should have contained an estimate ofaccrued loss for Bresea attributable to the Bresea litigation. Staff argued that, as a result,the pro forma statements contained a material overstatement of the value of MacDonaldOil if it acquired Bresea. We agree.
This begs the question of how MacDonald Oil should have provided appropriate disclosurein light of the fact that literal adherence to Item 15 would require them to use the 1995audited financial statements of Bresea. Obviously, literal adherence to Item 15 would haveproduced unacceptable disclosure. Staff suggested that, in this situation, it would havebeen appropriate for MacDonald Oil to have applied to the Commissions for discretionaryexemptive relief from the literal requirements of Item 15 prior to launching their bid. Weagree.
In our view, the reference in Item 15 to the use of the target company's "most recentaudited financial statements" is based on the implicit assumption that such statements areappropriate for this purpose. The Forms cannot be expected to provide explicit instructionsabout what to do in exceptional situations, like this one, where literal adherence would beinappropriate. That is why the legislation permits the Commissions to provide exemptiverelief from the normal take-over bid requirements. If the applicant so requests, theCommissions may consider applications for such relief on a confidential basis.
It is puzzling that MacDonald Oil did not apply for such relief, since it apparentlyrecognized that its Offer did not comply with the Forms, and that literal adherence to theForms would be inappropriate here. Exemptive relief was obviously required and, becausepro forma financial information would generally be material to offeree shareholders, it wasimprudent for MacDonald Oil to simply proceed with non-compliant disclosure as it did.
B. withdrawal rights
Section 95 of the OSA and section 135 of the ASA provide that offeree security holdersmay withdraw securities tendered to a take-over bid at any time before the expiration of21 days from the date of the bid. Item 9 of each of the Ontario Form 32 and Alberta Form31 requires a description of these withdrawal rights.
The Offer Documents incorrectly state that: "All deposits of Bresea shares pursuant to thisOffer are irrevocable, provided that any Bresea shares deposited in acceptance of thisOffer may be withdrawn by, or on behalf of, the depositing shareholder at any time priorto June 15, 1999."
In correspondence with staff, MacDonald Oil advised that the June 15 date was atypographical error and the date should have been June 20, which is still inaccurate as thedate should have been June 29.
The Offer Documents also contain conflicting information about MacDonald Oil's rights towithdraw the Offer. On page 4 of the TOB Circular, it says:
"MacDonald Oil may withdraw this Offer subsequent to theexpiry of this Offer and prior to the acquisition of any commonshares of Bresea, if any action or any other event results in amaterial adverse change in the affairs of Bresea or in theevent of other specified conditions. See Conditions of thisOffer."
On page 10 of the TOB Circular, under the heading "Conditions of this Offer", it says:
"Macdonald Oil has the right to withdraw this Offer by givingnotice in writing to Bresea at its principal office in Calgary, ifsubsequent to this Offer, any of the following conditions is notsatisfied prior to 5:00 p.m. (Toronto time) on the TerminationDate [July 12]:
...there shall have occurred any change (or any condition,event or development involving a prospective change) in thebusiness, operations, assets, capitalization, financialcondition, prospects, licences, permits, rights, privileges orliabilities, whether contractual or otherwise, of Bresea which,in the sole judgment of the board of directors of MacDonaldOil, is materially adverse or may be considered to besignificant to a purchaser of Bresea shares...."
We find that the disclosure of Bresea shareholders' withdrawal rights is deficient, as is thedisclosure of MacDonald Oil's withdrawal rights. These deficiencies appear to beaccidental and might have been easily corrected but, since they were not corrected, wemust assess the impact of the deficient disclosure upon Bresea shareholders. We find thatthese deficiencies are material because withdrawal rights are generally important toofferee shareholders and it would be impossible for such shareholders to clearlyunderstand their withdrawal rights, or Macdonald Oil's withdrawal rights, based on theOffer Documents.
C. nature of the consideration for Bresea shares
Staff alleged that there were a number of disclosure deficiencies in the Offer Documentsrelating to the consideration being offered for Bresea shares. Since all these allegeddefects relate to the nature and quality of the consideration being offered, it is appropriatethat they be considered together. Staff's concerns centred around the disclosure relatingto dividends, but focussed mainly on the liquidity of the consideration, including marketliquidity and the likelihood of the consideration being either redeemed or repurchased byMacdonald Oil.
The Offer was for one MacDonald Oil convertible preferred share and one MacDonald OilE-Warrant for each Bresea common share. The description of the convertible preferredshares in the TOB Circular, at page 3, includes the following:
- Stated value of 40-cents each;
- MacDonald Oil may redeem, all or part pro-rata, at anytime, of the convertible preferred shares upon 30 daysnotice at 40-cents a share, or purchase the convertiblepreferred shares in the market at a price not to exceed40-cents a share.
- the MacDonald Oil Convertible preferred shares aresecured by the Bresea common shares and one half ofany proceeds from the sale of any part of the Breseashares would finance a purchase fund to acquireMacDonald Oil convertible preferred shares in themarket.
- Each MacDonald Oil convertible preferred share isentitled to a cumulative annual dividend of 4% and nodividend may be paid to the common shareholdersunless the aforesaid dividend is paid on the convertiblepreferred shares.
At page 16 of the TOB Circular, the dividend is described as "non-cumulative". In theircorrespondence with staff, MacDonald Oil indicated that this is a typographical error, andthat the dividend is cumulative.
On page 1 of the TOB Circular, it states:
MacDonald Oil common shares trade on the unlisted marketin Toronto. Bresea shareholders who accept this Offer shallreceive MacDonald Oil convertible preferred shares and E-Warrants which are freely tradeable in the unlisted market.See Public Market for Macdonald Oil. Any Bresea shareholderwho does not accept this Offer may continue to own non-marketable shares as there is currently no public market forBresea common shares. See Risk Factors.
Under the heading "Public Market for MacDonald Oil", the TOB Circular states, at page 23:
There is a public market for MacDonald Oil common shares onthe unlisted market in Toronto. MacDonald Oil common sharesare quoted as MACO on the Canadian Dealing Nethreerk [sic]("CDN"). On May 31, 1999 MacDonald Oil common traded76,000 shares at 10-cents each on the unlisted market.
MacDonald Oil intends to have the MacDonald Oil convertiblepreferred shares and E-Warrants quoted on the unlistedmarket. Bresea shareholders who accept this Offer wouldacquire MacDonald Oil convertible preferred shares andwarrants that are freely tradeable in the unlisted market; seePublic Market for MacDonald Oil. Any Bresea shareholder notaccepting this Offer would continue to own non-marketableshares as there is presently no public market for Breseacommon shares; see Risk Factors.
Also on page 23, the TOB Circular contains a chart showing the "Price Range ofMacDonald Oil...Common Shares" from January 1997 through May 1999, with the notation"Information provided by Canadian Dealing Network".
Under the heading "Risk Factors", the TOB Circular states, at page 26:
Bresea shareholders who do not accept the Offer wouldcontinue to own non-marketable shares as there is no publicmarket for Bresea shares and a public market may not developfor the Bresea shares.
The letter to Bresea shareholders from MacDonald Oil dated June 8, 1999, which was senttogether with the Offer and TOB Circular, states:
As there is no public market for your Bresea shares, and ourshares and warrants will be tradeable, you will soon be able torealize the current market value of your investment, wheneveryou wish, if you accept our offer.
Staff alleged that correction of the typographical error concerning the cumulative dividendought to have been communicated to Bresea shareholders, but staff's much larger concernrelates to MacDonald Oil's failure to adequately disclose the prospect any dividend everbeing declared or payable. Staff point out that MacDonald Oil has never issued a dividendand that MacDonald Oil is in a precarious financial position, as evidenced by the going-concern note to their financial statements. Staff also point out that the so-called "solvencytests" in the Ontario Business Corporations Act ("OBCA") sections 30(2), 32(2) and 38(3)would prevent MacDonald Oil from paying dividends, redeeming the preferred shares orpurchasing those preferred shares in the market, unless there was a significant changein MacDonald Oil's financial position. Staff object to MacDonald Oil's description of theconvertible preferred shares as "secured" by the Bresea common shares, because theOBCA solvency tests would likely prevent MacDonald Oil from setting aside a purchasefund.
Although MacDonald Oil's financial problems are disclosed in their financial statementsin the TOB Circular, staff contend that the probable application of the OBCA solvency testsshould be clearly disclosed as a "Risk Factor" under Item 10 of Form 14 under each of theOSA and ASA.
Staff also alleged that the Offer Documents were materially misleading in suggesting thatBresea shareholders were being offered liquid securities as consideration for their Breseashares. Staff initially assumed that references in the Offer Documents to "the unlistedmarket" were references to CDN, and asked MacDonald Oil about this. MacDonald Oilresponded by saying that it did not intend to claim that the preferred shares or E-warrantswould be quoted on CDN. MacDonald Oil indicated that "any dealer can quote unlistedsecurities in the unlisted market: this has been the practice for a very considerable periodof time. Quoting a security on the unlisted market is different from quoting it on [CDN] orlisting for trading on a stock exchange."
Staff also pointed out that MacDonald Oil failed to disclose the peculiar liquidity risks facedby Alberta residents. Since MacDonald Oil is not a reporting issuer in Alberta, Albertaresidents who receive MacDonald Oil common shares issues upon conversion of theConvertible Preferred Shares, or upon exercise of the E-Warrants, face indefinite holdperiods on those common shares under the ASA.
It appears that MacDonald Oil would almost certainly be unable to pay dividends on,redeem or repurchase the convertible preferred shares because of MacDonald Oil'sprecarious financial position and the consequent application of the OBCA solvency tests.That should have been clearly disclosed. It follows that MacDonald Oil's description of theconvertible preferred shares as "secured by the Bresea common shares" is alsomisleading.
There are important but subtle distinctions between securities that are "quoted in theunlisted market" and those that are "quoted on CDN". CDN is a quotation and tradereporting system. All over-the-counter transactions in unlisted securities must be reportedthrough CDN as required by section 154 of the Regulation to the OSA. Over-the-countertransactions may occur in many different ways including, as MacDonald Oil points out, byany dealer quoting a price for unlisted securities. In addition to CDN's trade-reportingfunction, CDN also provides continuous bid and asked price quotations for certain issuersof unlisted securities. CDN-quoted securities could also be described as being "quoted inthe unlisted market" but that would ignore the important fact that a CDN quote generallyprovides enhanced liquidity for the CDN-quoted securities.
Liquidity is relative and variable, depending upon the particular circumstances. Generallyspeaking, the unlisted market is highly illiquid. CDN-quoted securities generally enjoysignificantly more liquidity than do other unlisted securities, but even CDN-quotedsecurities are illiquid as compared to most listed securities.
The disclosure in the Offer Documents clearly emphasized the liquidity of theconsideration, relative to the liquidity of Bresea shares. In our view, the Offer Documentssuggest that the consideration will be quoted on CDN, which is materially misleading.
If the convertible preferred shares and the E-Warrants are merely quoted in the unlistedmarket, it is unclear how the consideration would be any more liquid than Bresea shares,which are equally capable of being quoted in the unlisted market (outside British Columbiaand Québec). Also, the suggestion in the Offer Documents that MacDonald Oil might sellBresea shares is difficult to reconcile with the repeated assertions by MacDonald Oil thatthere is no public market for Bresea shares. We agree with staff's assertion thatMacDonald Oil exaggerated the liquidity afforded by the consideration, and we find thatthe Offer Documents are materially deficient in their failure to properly disclose the liquidityrisks associated with the consideration.
Considered as a whole, we find that the disclosure in the Offer Documents relating to theconsideration being offered for Bresea shares is seriously deficient and that thosedeficiencies are clearly material.
D. Self-Dealing Transactions
Staff alleged that, pursuant to Item 15 of each of Ontario Form 14 and Alberta Form 14,MacDonald Oil was required to disclose:
(a) the names of anyone who had been a promoter of MacDonald Oil within the fiveyear period preceding the Offer;
(b the nature and amount of anything of value received or to be received by anypromoter from MacDonald Oil and the nature and amount of any assets, servicesor other consideration received by MacDonald Oil; and
(c) with respect to any assets acquired within the past two years or to be acquired fromany promoter, disclosure of the principles involved in determining the amount atwhich the asset was or is to be acquired, the identity of the person making thedetermination and his relationship to the issuer and the promoter.
No promoters are disclosed in the Offer Documents, even though the evidence clearlydemonstrates that Mr. Smeenk, Mr. Martel, Mr. Reid and MacDonald Mines are promotersof MacDonald Oil. In correspondence with staff, MacDonald Oil suggested that, since thepromoters did not receive consideration, other than that disclosed in the ordinary courseof business, Item 15 is not applicable. MacDonald Oil also suggested that the disclosurerequirements of Item 15 only apply to the 5-year period immediately preceding the date ofthe preliminary prospectus or a pro forma prospectus, and do not apply in the context ofa take-over bid.
We disagree with MacDonald Oil's interpretation. In our view, Item 15 is applicableaccording to its plain meaning and, in this context, it requires disclosure covering the 5-year period preceding the Offer. Anything of value must be disclosed, whether or not thatconsideration was paid in the ordinary course of business.
We find that the failure of the Offer Documents to disclose the information required by Item15 is material. Although we do not know what the missing disclosure may be, we are of theview that this type of disclosure is required precisely because it is normally consideredmaterial.
Another alleged disclosure defect was raised under this heading. Item 29 of Ontario Form14 and Alberta Form 14 requires disclosure of the interest of any director, senior officer,principal shareholder, or any of their associates or affiliates, in any transaction within the3 year period preceding the offer that would materially affect MacDonald Oil. Staff allegedthat the only disclosure provided in this regard was vague and insufficient. We agree, andfind that the failure to disclose the information required under this item is material.
E. MacDonald Oil's intention to discharge the receiver
The Offer Documents make it clear that MacDonald Oil intended to elect their ownnominees to the Bresea board of directors and then apply to the court, on behalf of theBresea shareholders, to discharge the Bresea receiver (PWC).
Staff allege that those statements are misleading because they imply that there is somelikelihood that the receiver may be discharged, which would somehow free up the assetsof Bresea for the benefit of Bresea shareholders. Staff allege that there is very littleprospect of this occurring, and that the Offer Documents should have disclosed this, aswell as the risks associated with the possible failure to discharge the receiver. We agree.
We find that the Offer Documents fail to adequately disclose the difficulties involved inMacDonald Oil's plan to discharge the Bresea receiver, and the risks associated with thepossible failure of that plan. In our view, this disclosure is material.
F. recent developments in the Bresea litigation
Staff alleged that certain material changes in Bresea's affairs were not disclosed in theOffer Documents. In January 1999, Judge Folsom of the United States District Court forthe Eastern District of Texas excluded the Canadian plaintiffs from the class of plaintiffswho could participate in the Texas action against Bresea for alleged breaches of federalsecurities law and state laws. In March 1999, Judge Folsom determined that the court hadpersonal jurisdiction over Bresea. On May 13, 1999, Justice Winkler of the OntarioSuperior Court certified the class action against Bresea, among others, for the allegationsof conspiracy and fraudulent misrepresentation and dismissed the plaintiff's action tocertify, as a class proceeding, the claim of negligent misrepresentation.
Although these matters are on the public record, in our view they should have beendisclosed in the Offer Documents and the failure to include them is material.
G. other allegations
There were other disclosure deficiencies alleged by staff that were not addressed at thehearing. We make no comment or findings on any matters or issues not specificallyaddressed in these reasons.
(b) PWC's Application
PWC applied to the Commissions for: a) a permanent/final cease-trade order with respectto the Offer, and b) an order cease-trading all common shares of Bresea until December31, 1999. At the hearing, PWC modified this latter request to November 30, 1999. PWC'sapplication under a) was effectively subsumed under staff's Notices of Hearing, so ourdiscussion here will focus only on PWC's application under b).
PWC's position is that Bresea shareholders are currently deprived of the benefits andprotections they would enjoy if Bresea had a functioning and competent board of directors.It is currently very difficult for Bresea shareholders to value their shares becausesettlement negotiations between PWC and Bresea's claimants are at a delicate stage.Even if directors were in place to respond to offers, or if PWC were to do so, the only wayto give meaningful information to Bresea shareholders about the value of Bresea shareswould be to provide full disclosure of the legal advice obtained with respect to the claimsagainst Bresea. That could significantly affect, and possibly prejudice, PWC's ability tonegotiate a favourable settlement of the claims. That is why PWC asks the Commissionsto, essentially, freeze Bresea shareholdings until November 30, 1999, by which timesignificant progress should have been made in respect of assessing the claims andcorporate governance issues.
Deloittes was granted Torstar standing, limited to making submissions on PWC'sapplication. Deloittes is interested in selling the 8,000,000 Bresea shares it holds asTrustee of the estate of Bre-X. Initially, Deloittes opposed PWC's application but withdrewits opposition during the course of the hearing.
Staff made extensive submissions in relation to PWC's application. Staff urged us to grantPWC's application because that would have the effect of forcing any prospective biddersto apply to the Commissions before making their bid. The Commissions would only permita bid to proceed if they determined in advance that all aspects of the bid were satisfactory,having regard to all the peculiar problems associated with such a bid.
We concluded not to grant PWC's application. In our view, there is no compelling reasonto cease-trade Bresea shares merely for the purpose of controlling prospective take-overbids for Bresea.
If another bidder (including MacDonald Oil) chooses to launch another paper bid forBresea it will be necessary for them to apply to the Commissions for exemptive reliefbecause, as described above, it is impossible to comply with the legislative requirementrelating to pro forma financial statements. When the prospective bidder applies, we wouldexpect that all aspects of the prospective bid would then be scrutinized by staff and, ifnecessary, by the Commissions. If someone chose to launch an all-cash bid, it might bepossible to do so without exemptive relief.
In our view, securities legislation and the vigilance of staff provide Bresea shareholderswith adequate protection against improper bids. It would be an unwarranted and excessivestep for us to go further, and cease-trade Bresea shares generally, out of an abstractconcern over possible future bids.
(c) Conduct of MacDonald Oil
In light of our findings of inadequate disclosure contained in the Offer, it becameunnecessary for us to address most of staff's allegations of misconduct by MacDonald Oil.It is necessary, however, to deal with one aspect of staff's submissions relating toMacDonald Oil's conduct.
Staff suggested that MacDonald Oil's conduct was so contrary to the public interest thatthe Commissions should order that MacDonald Oil cease trading in Bresea shares quiteapart from this Offer. The effect of such an order would be to require MacDonald Oil toapply to the Commissions before launching another bid for Bresea. Staff would then be ina position to ensure, in advance, that such bid was in order.
Staff acknowledged that such relief was unusual, but pointed out that this was a mostunusual situation. In addition to the receivership, which would complicate any bid forBresea, staff observed that MacDonald Oil's steadfast refusal to address deficiencies inthe Offer was unprecedented.
The Commissions decided not to grant the order requested by staff. In our view, such anorder is not necessary to protect Bresea shareholders against subsequent improper bidsby MacDonald Oil. This is consistent with our position on PWC's application, describedabove. If MacDonald Oil launches another bid, the requirements of securities legislationand the vigilance of staff provide sufficient protection for Bresea shareholders.
We also note that the requested order is, essentially, an enforcement remedy. It would beinappropriate for us to consider applying enforcement remedies in the context of theseproceedings because this hearing focussed primarily upon the disclosure issues relatingto the take-over bid. Staff were correct to present the Commissions with as much of thecontext of the situation as possible, but it should be emphasized that this was conductedas a take-over bid hearing, not an enforcement hearing. There is an important functionaldistinction between the two.
Generally, a take-over bid hearing requires the Commissions to decide what, if anything,must be done in order to protect the interests of the shareholders of the target company.Such hearings often involve allegations and cross-allegations of non-compliance,impropriety, and conduct contrary to the public interest, all of which may be relevant, butis secondary, to the central issue of what to do about the bid(s).
This may be contrasted with an enforcement hearing, where such non-compliance,impropriety or conduct is itself the central issue. An enforcement hearing may addressconduct arising in the context of a take-over bid but, in an enforcement hearing, theCommissions are asked to decide what to do in relation to the actors, not in relation to thebid. So, for example, the Commissions may take enforcement action and impose sanctionsagainst an individual for conduct relating to a take-over bid, even though that conductmight not warrant the Commissions' intervention in the bid itself.
It will rarely be appropriate to combine a take-over bid hearing with an enforcementhearing because each type of hearing performs a different function. Take-over bidhearings are usually convened upon short notice and require an immediate decision.Enforcement hearings do not require an immediate decision and, typically, respondentsrequire considerable time to prepare for them. If staff think that it is appropriate tocommence enforcement proceedings, we expect that would normally occur after anyrelated take-over bid proceedings are concluded.
This matter was conducted as a take-over bid hearing. There was a limited amount of timeavailable and an immediate decision was required. The orders we made at the conclusionof the hearing in this case were intended only to protect Bresea shareholders from theconsequences of defects in the Offer. It was therefore unnecessary for us to make anyfinding on whether MacDonald Oil's conduct was contrary to the public interest. Nothingin the orders, or these reasons, should preclude staff from commencing whateverenforcement proceedings they consider appropriate in relation to the Offer.
In light of the findings described above, we ordered that:
(1) trading cease by MacDonald Oil in Bresea shares tendered to the Offer;
(2) trading cease in the consideration to have been issued pursuant to the Offer;
(3) MacDonald Oil immediately disseminate to the public a news release advisingBresea shareholders that:
(i) as a result of the Commissions' orders, MacDonald Oil cannot acquireBresea shares nor issue the consideration pursuant to the Offer in paymentfor tendered Bresea shares;
(ii) specifies that withdrawal rights are exercisable and continue to beexercisable; and
(iii) summarizes how Bresea shareholders can exercise their rights ofwithdrawal;
(4) MacDonald Oil, within 10 days, deliver to every Bresea shareholder a noticecontaining the information regarding withdrawal described in the precedingparagraph;
(5) MacDonald Oil honour any valid notice of withdrawal made by or on behalf ofBresea shareholders;
(6) directors and senior officers of MacDonald Oil cause MacDonald Oil to honour anyvalid notice or withdrawal made by or on behalf of Bresea shareholders; and
(7) MacDonald Oil, MacDonald Trading and Russell Martel cease trading in Breseashares unless and until they satisfy the Executive Directors of the Commissions thatthe above provisions have been complied with and that all the Bresea sharestendered to the Offer have been returned to the appropriate Bresea shareholders.
October 13th, 1999."Howard I. Wetston"
"Robert W. Korthals"
"Stephen N. Adams"