MI 61-101 -- Reporting issuer parent has principal operating subsidiary that is also a reporting issuer -- application by subsidiary for a decision exempting subsidiary from certain requirements of MI 61-101 otherwise applicable to settlement of litigation between parent, subsidiary and certain third parties -- unusual circumstances present including the following -- settlement resolves extensive litigation between parent and subsidiary -- parent's control over subsidiary significantly constrained by consent order, presence of special monitor and other factors -- settlement was the result of a lengthy mediation process and subsequent negotiations, which involved independent counsel, oversight by the Ontario Court and by a separate Court-appointed monitor -- settlement considered by the subsidiary's special committee, subsidiary's board and by the special monitor and determined to be in the best interests of subsidiary shareholders -- circumstances unusual and decision unlikely to be accepted by staff as a precedent
Applicable Legislative Provisions
MI 61-101 Protection of Minority Security Holders in Special Transactions.
IN THE MATTER OF
THE SECURITIES ACT, R.S.O. 1990,
CHAPTER S.5, AS AMENDED
IN THE MATTER OF
MULTILATERAL INSTRUMENT 61-101
PROTECTION OF MINORITY SECURITY
HOLDERS IN SPECIAL TRANSACTIONS
IN THE MATTER OF
SUN-TIMES MEDIA GROUP, INC.
UPON the application (the Application) of Sun-Times Media Group, Inc. (STMG) to the Director pursuant to section 9.1 of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (the Instrument) for a decision exempting STMG from the requirements in sections 5.4 and 5.6 of the Instrument that:
(a) the Settlement (as defined below) be approved at a meeting of the shareholders of STMG,
(b) an information circular be sent to shareholders of STMG in connection with the Settlement,
(c) a formal valuation be obtained with respect to the Settlement, and
(d) a summary of the formal valuation be provided in the disclosure document for the Settlement,
(the Requested Relief);
AND UPON considering the application and the recommendation of staff of the Commission;
AND WHEREAS defined terms contained in the Instrument have the same meaning in this order unless they are defined in this order;
AND UPON STMG having represented to the Director as follows:
1. STMG is a corporation incorporated pursuant to the laws of Delaware. STMG is a reporting issuer under the Securities Act (Ontario) and the Securities Act (Quebec).
2. STMG's authorized capital consists of 65,438,124 issued and outstanding Class A shares, each of which carries one vote, and 14,990,000 issued and outstanding Class B shares, each of which carries ten votes and, under STMG's articles of incorporation, is convertible into one Class A share. All Class B shares are held by Hollinger Inc. (Hollinger) and one of its affiliates. Class B shares participate equally on liquidation and winding up as Class A shares.
3. Based on STMG's list of registered shareholders as at April 3, 2008, and a geographic breakdown of beneficial shareholders obtained from Broadridge Financial Solutions, Inc. on May 5, 2008, STMG's registered and beneficial shareholders with Canadian addresses are as follows:
(a) STMG has six registered holders of its Class A shares with Canadian addresses, holding 26,130 Class A shares: four registered holders are located in Ontario, and two registered holders are located in Quebec.
(b) There are seven holders of Hollinger International Inc. (HLR) Class A shares with Canadian addresses (all HLR share certificates were reissued as STMG share certificates with new CUSIP numbers) who have yet to exchange the original share certificates for STMG Class A share certificates. Apart from Hollinger and one of its affiliates who hold an aggregate of 782,923 HLR shares, there are 5 shareholders holding 810 HLR shares. Three of those shareholders are located in Ontario, one is located in Saskatchewan and one is located in British Columbia.
(c) There are 4,153 beneficial holders of Class A shares located in Canada, holding 4,957,014 Class A shares. Of those, Ontario persons hold 4,679,047 Class A shares, representing 7.15% of the issued and outstanding Class A shares.
Accordingly, beneficial holders of STMG's Class A shares resident in Quebec hold less than 2% of the outstanding STMG's Class A shares.
4. By virtue of the super-voting rights of the Class B shares held by Hollinger and its affiliate described above, Hollinger controls more than 70% of the voting rights in STMG while holding only approximately 20% of the equity of STMG.
5. STMG's Class A shares are currently listed on the New York Stock Exchange (NYSE) but have been suspended from trading and are in the process of being delisted from the NYSE. STMG's Class B shares are not listed on any stock exchange.
6. On June 17, 2003, the STMG Board established a special committee comprised of directors independent of Hollinger (the Special Committee) to conduct an independent review and investigation of allegations of wrongful conduct that had been made against STMG's then-senior officers and directors. The Special Committee was authorized to initiate and prosecute litigation and to take any other actions the Special Committee deemed appropriate, in its sole discretion, in fulfilling its mandate. The Special Committee is comprised of STMG directors Gordon A. Paris, Raymond G.H. Seitz, and Graham W. Savage. The Special Committee continues to oversee the litigation of the Illinois Action (defined below) and is empowered to settle the Illinois Action on such terms as it deems appropriate.
7. On January 16, 2004, the Securities and Exchange Commission (the SEC) filed a civil injunctive complaint against STMG in the United States District Court for the Northern District of Illinois, alleging violations of federal securities laws in connection with the misappropriation of funds by STMG's former management. Simultaneous with the filing of the SEC's Complaint, STMG consented to entry of a Partial Final Judgment (the Consent Judgment), which was entered with the court on January 16, 2004. The Consent Judgment requires STMG to permit the Special Committee to take any action it deems necessary to fulfill its mandate as set forth in its authorizing resolutions.
8. The Consent Judgment also provides that upon certain "triggering events," former SEC Chairman Richard C. Breeden would become the Special Monitor of STMG (the Special Monitor). The triggering events include Hollinger altering STMG's Board. Breeden became the Special Monitor in 2005 when Hollinger altered STMG's Board. The Special Monitor's mandate includes protecting the interests of non-controlling shareholders of STMG, and preventing the dissipation of STMG's assets.
9. STMG, Hollinger, and Davidson Kempner Management LLC (DK) have entered into a settlement (the Settlement) as set out in a term sheet among STMG, Hollinger, 432235 Canada Inc., Sugra Limited, and DK (the Term Sheet), which contains the following terms that are relevant to STMG:
(a) Conversion of Class B Shares: The 14,990,000 Class B shares will be converted into Class A shares on a one-for-one basis, after approval of the Settlement by the Ontario Superior Court of Justice (the Ontario Court). STMG also will issue an additional 1,499,000 Class A shares to Hollinger (the Additional Class A Shares).
(b) Payment of $2 Million by Hollinger: Hollinger will pay STMG up to $2 million on account of its legal fees in the proceedings (the CCAA Proceedings) commenced by Hollinger and two of its affiliates for protection under the Companies' Creditors Arrangement Act (the CCAA), immediately after Ontario Court approval.
(c) Release of Litigation Claims: Hollinger and STMG will release each other from all claims, including claims made in an action filed in the United States District Court for the Northern District of Illinois on October 29, 2004, Case No. 04C-0698 (the Illinois Action), other than the Allowed Claims, as described below.
(d) Agreement on Ravelston Distribution: Hollinger's majority shareholders, The Ravelston Corporation Limited and Ravelston Management Inc. (collectively, Ravelston) are in receivership under the CCAA and the Bankruptcy and Insolvency Act. Under the Settlement, any recoveries by Hollinger and STMG, described above, will be split equally. This will obviate the need to litigate the validity of Hollinger's secured claims in the Ravelston estate.
(e) Agreement on Insurance Distribution: Pursuant to a stipulation and agreement of settlement of U.S. and Canadian class actions against STMG and Hollinger and an insurance settlement agreement dated June 27, 2007, up to US$24.5 million (plus interest, less fees and expenses) will be paid to STMG and/or Hollinger and other claimants under their directors' and officers' insurance policies (the Insurance Settlement Proceeds). Under the terms of the Settlement, Hollinger and STMG will cooperate to maximize the recoverable portion of the Insurance Settlement Proceeds payable to them, and they have agreed that STMG will receive 85% and Hollinger will receive 15% of the amounts to be received by Hollinger and STMG from such proceeds.
(f) Changes to the STMG Board: Upon Ontario Court approval, six directors of STMG who were appointed by Hollinger on July 31, 2007, will resign from STMG's Board.
(g) Acceptance of STMG Non-Contingent Claims Up to a Cap: Under the terms of the Settlement, certain of STMG's claims against Hollinger will be allowed as unsecured claims, in agreed amounts (the Allowed Claims). STMG's total recovery in respect of the Allowed Claims will be capped at US$15 million. After STMG receives the first US$7.5 million in respect of the Allowed Claims, 50% of any further recovery received by STMG in respect of the Allowed Claims (subject to the US$15 million cap) will be assigned to Hollinger. Under the terms of the Settlement, the amounts so assigned are intended to be available to fund litigation claims of Hollinger against third parties.
None of items (a) through (g) above is dependent upon creditor approval: they are all expected to be effected on or shortly after Ontario Court approval.
10. When the Additional Class A Shares are issued, and the Class B shares are converted to Class A shares, Hollinger and its subsidiaries will hold 16,489,000 Class A shares, plus an additional 782,923 Class A shares that the CCAA Applicants hold in support of exchange requests made by holders of Hollinger Series II preference shares. The total Class A shares that will be held by Hollinger (17,271,923) will represent approximately 20.134% of the issued and outstanding Class A shares after conversion and issuance of the Additional Class A Shares. Under the Term Sheet, Hollinger and DK have agreed that they will not vote more than 19.999% of the issued and outstanding Class A shares at any time, in order to not trigger STMG's shareholder rights plan.
11. The Settlement was considered by the Special Committee. The Special Committee, after receiving advice from outside U.S. and Canadian counsel, resolved to recommend the Settlement to the Board of STMG.
12. Prior to making that recommendation, the Special Committee consulted with the Special Monitor, who is a U.S. judicially appointed officer whose mandate includes protecting the interests of non-controlling shareholders of STMG and to prevent the dissipation of STMG assets. The Special Monitor did not exercise any of his powers to prevent STMG from entering into the Settlement.
13. On May 12, 2008, on the recommendation from the Special Committee, upon receiving advice from counsel, and with counsel for the Special Monitor present, the Board of STMG unanimously voted in favour of the Settlement. The Board did not seek nor obtain a valuation with respect to the Settlement.
14. Since Hollinger and its affiliates are "related parties" of STMG, the Settlement will constitute a "related party transaction" within the meaning of the Instrument and, consequently, the Instrument requires that STMG obtain a formal valuation for, and minority approval of, the Settlement, in the absence of exemptions therefrom.
15. There are no enumerated exemptions from the minority approval and valuation requirements of the Instrument for the Settlement and therefore discretionary exemptive relief is required.
16. The Settlement is the result of a lengthy mediation process and subsequent negotiations, which involved judicial oversight by the Ontario Court and oversight by Ernst & Young Inc. in its capacity as a court-appointed officer monitoring Hollinger (the CCAA Monitor). Throughout the process, STMG and Hollinger acted as arm's length parties in negotiations. STMG's Special Committee is empowered to prosecute, and settle, certain litigation, including the litigation against Hollinger in the Illinois Action, and the Consent Judgment requires STMG to comply with its undertaking to permit the Special Committee to take whatever actions it, in its sole discretion, deems necessary to fulfill its mandate. If Hollinger attempted to interfere, either by way of stockholder written resolution or otherwise, with the Special Committee's work, including by forcing STMG to accept any settlement of any such actions, the Special Monitor could take remedial measures to protect the public minority shareholders.
17. Each of STMG, STMG's Special Committee, and Hollinger was represented by separate U.S. counsel and each of Hollinger, DK, the CCAA Monitor, and STMG were represented by separate Canadian counsel throughout the negotiations of the Settlement.
18. At the time STMG entered into the Settlement, the Class A shares had been suspended from trading on the NYSE and are scheduled to be delisted. STMG is not contesting the delisting. STMG has been advised by the NYSE that it anticipates that the Class A shares will be delisted on May 30, 2008.
19. STMG has had significant operating losses in the last three quarters, and the transactions are designed to enhance shareholder value at a time when it is critical that that value be enhanced. Preparing a formal valuation, holding a shareholder vote and obtaining the majority of the minority vote would cause significant delays that would adversely affect the financial position of STMG.
20. STMG has advised the Ontario Court and parties to the CCAA Proceedings of the fact of the application for the relief granted herein.
21. On May 26, 2008, the Ontario Court issued an order approving the Settlement and declaring the Settlement to be fair and commercially reasonable.
AND UPON the Director being satisfied that to do so would not be prejudicial to the public interest;
IT IS DECIDED by the Director pursuant to section 9.1 of the Instrument that the Requested Relief is granted.
DATED May 28, 2008.