R.S.O. 1990, c.S.5, as amended




HEARING DATE:January 10, 2001

PANEL: Howard I. Wetston, Q.C. - Vice-Chair
Derek Brown - Commissioner
R. Stephen Paddon, Q.C. - Commissioner

COUNSEL: Janet Holmes - For the Staff of the Ontario
Johanna Superina Securities Commission
Hugh Corbett
Terry Moore

Mark A. Gelowitz - For the Applicant
Allan D. Coleman

John B. Laskin - For the Respondent
James C. Tory
Peter Jewett


These reasons are in support of the Order issued by the Ontario Securities Commission (the "Commission or OSC") on January 11, 2001 dismissing the Application for relief under section 104 of the Ontario Securities Act R.S.O. 1990, c. S.5, as amended (the "Act") of the Applicant, Chapters Inc. ("Chapters"). Chapters, the subject of an unsolicited take-over bid (the "Offer") initiated by Trilogy Enterprises L.P. ("Trilogy") requested that the Commission issue an order requiring Trilogy to amend its take-over bid circular (the "Circular") to include the historical and current year pro forma financial statements (collectively, the "Indigo Financials") of Indigo Books & Music Inc. ("Indigo").
The question presented for our consideration was whether or not the Indigo Financials would reasonably be expected to affect the decision of the shareholders of Chapters to accept or reject the Offer and should therefore have been included in the Circular.


1.Chapters is a reporting issuer governed by the laws of Ontario. The authorized share capital of Chapters consists of an unlimited number of common shares ("Common Shares"), of which 11,374,704 were issued and outstanding as at December 18, 2000. The Common Shares are listed for trading on The Toronto Stock Exchange.

2.Trilogy is a limited partnership formed for the purposes of making the unsolicited partial take-over bid. The general partner of Trilogy is a corporation controlled by Mr. Gerald W. Schwartz. Mr. Schwartz and his spouse, Ms. Heather M. Reisman, are the only two named principals of Trilogy. Ms. Reisman is also the Chief Executive Officer of Indigo, one of the principal competitors of Chapters.

3.On November 28, 2000, Trilogy announced an unsolicited bid to acquire 4,888,000 Common Shares for cash consideration of $13.00 per share. This represents approximately 43% of the outstanding Common Shares. On November 28, 2000, a total of 1,082,200 Common Shares, representing approximately 9.5% of the outstanding Common Shares, were held by Trilogy. If the bid were to be successful, Trilogy would own approximately 53% of the Common Shares. Upon the successful completion of the Offer, Trilogy has indicated that it intends to propose a merger plan between Chapters and Indigo.

4.On December 21, 2000, the Board of Directors of Chapters mailed a directors’ circular unanimously recommending to shareholders that they reject the Offer.

5.On December 29, 2000, Chapters submitted an application to the Commission requesting various relief pursuant to section 104 of the Act

6.On January 8, 2001 Chapters amended its request for relief to the disclosure of:

a)Indigo’s historical financial statements;

b)Indigo’s current year pro forma financial statements;

c)pro forma financial statements relating to the merger of Chapters and Indigo, including qualification of any merger synergies;

d)details of the merger process, including identification of the directors and management of Chapters and Indigo; and

details of the proposed business strategy for the merged entity.

7.On January 9, 2001, Trilogy submitted a rider as an addendum to the Circular. Among other things, the rider outlines some of the synergies Trilogy expects will be realized upon the merger of Chapters and Indigo.

8.As of the date of the hearing, no terms and conditions relating to a proposed merger of Chapters and Indigo had been agreed upon.

9.On January 10, 2001, a hearing was held to consider the Application.

10.At the commencement of the hearing Chapters further narrowed its request for relief to the disclosure of Indigo’s:

a)historical financial statements; and

b)current year pro-forma financial statements.


Whereas, in its original application Chapters requested information in connection with the post-bid trading value of the resulting minority shares and details surrounding the proposed merger, at the commencement of the hearing, Chapters narrowed its request to details relating to the post-bid trading value of the resulting minority shares. Chapters did not pursue its request for information pertaining to the proposed merger.

Chapters argued that the nature of the Offer mandates the disclosure of the Indigo Financials. To succeed, Chapters had to persuade us that: a result of the nature of the bid minority shareholders will be left with illiquid and minority discounted shares; and

2.disclosure of the Indigo Financials would provide the minority shareholders with material information regarding liquidity and post-bid trading price.

1.The Nature of the Bid

Chapters submitted that partial bids are inherently coercive and relied upon the following passage from Re Ivanhoe III Inc. (1999), 22 O.S.C.B. 1327 [hereinafter Ivanhoe], as support for this proposition:

"The Offer is a "partial bid". A partial bid structure is inherently coercive because it forces shareholders to make a decision as to whether to accept an offer (and in respect of how many shares), reject such offer, sell into the market or maintain their position without knowing whether and to what extent other shareholders will accept such offer and without knowing the price at which the shares will settle after such offer. A shareholder may feel compelled to deposit to a take-over bid which the shareholder considers inadequate, out of a concern that in failing to do so, the shareholder may be left with illiquid or minority discounted shares. Information about tender and post-bid trading price is obviously material to a shareholder’s investment decision since the extent to which any one shareholder can have its shares purchased at the Offer price, as opposed to sold in the market at the post-bid settled price, depends on the extent to which other shareholders tender their Common Shares to the Offer."

While a partial bid structure may be coercive, we cannot agree with the submission of Chapters that the Commission in Ivanhoe has decided that all partial bids are inherently coercive. The language relied upon by Chapters in its application and throughout the hearing was taken from a quotation extracted from the Cambridge Directors’ Circular as cited by the Commission in its reasons. While the Commission stated in Ivanhoe that, "In general we agree with this statement" [emphasis added], one cannot conclude from this that the inherently coercive nature of partial bids is a matter of settled law or Commission policy. As such, Chapters cannot simply rely on Ivanhoe as establishing the principle that partial bids are ipso facto coercive.

Chapters submitted that, as articulated in Ivanhoe, the presence of a partial bid creates a dilemma for shareholders. The Applicant argued that shareholders may feel coerced into tendering their shares to what they consider to be an inadequate bid out of a concern that if they do not deposit their shares they will be left with less liquid and consequently less valuable shares. This coercion is caused by the fact that not all of the shares will be taken up under the Offer. As a result, shareholders are unable to ascertain the true value of the Offer because they cannot determine the impact of a successful bid on the liquidity and the value of the minority position and thus cannot make an informed decision with respect to whether or not to tender.

To succeed on this basis, Chapters would have had to demonstrate that illiquidity would result from a successful bid and that the disclosure of the Indigo Financials would assist an investor to properly assess the impact of illiquidity on the post-bid trading price of Chapters’ shares. In our view, the evidence adduced by Chapters was not persuasive. Chapters’ expert witness conceded that he had deliberately not made a definitive connection between the disclosure of the Indigo Financials and the post-bid trading price because he simply did not know what the outcome of the offer would be in this regard. Chapters’ expert was unable to confirm whether illiquidity was probable. If the harm is that shareholders are not equipped to make an informed decision with respect to whether or not to tender, and if as Chapters argued, information with respect to whether or not to tender is largely based upon the impact of a successful bid on liquidity and its effect on the value of the resulting minority shares, it is incumbent upon the Applicant to demonstrate that a successful bid will likely result in illiquidity. Accordingly, the Applicant, with respect to this argument, has failed to demonstrate the harm and thus has also failed to establish the basis for a remedy.

Moreover, even if Chapters had successfully established that in the event of a successful bid, the minority position would be less liquid and hence less valuable, Chapters would still have been required to demonstrate that the disclosure of the Indigo Financials was material to the minority shareholders’ decision of whether or not to tender their shares.

2.The Materiality Standard

Chapters submitted Item 19(b) of Form 32, Regulation to the Securities Act, R.R.O. 1990, Regulation 1015, as the basis for determining whether or not the Indigo Financials are required to be disclosed in the Circular. Item 19(b) provides that a take-over bid circular shall include:

"any other matter not disclosed in the foregoing that has not been generally disclosed and is known to the offeror but which would reasonably be expected to affect the decision of the securityholders of the offeree issuer to accept or reject the offer" [emphasis added].

Chapters’ argument appeared to be that Item 19(b) should lead the Commission to adopt a "reasonable expectations" test. As we understand this argument, it is that, if it is reasonable for the Commission to conclude that there was any other matter, the disclosure of which could in some way be reasonably expected to affect a shareholder’s decision whether or not to tender to Trilogy’s partial bid, then disclosure of that matter should be ordered.

In our opinion Item 19(b) must be read within the context of Item 19 and Form 32. Firstly, the information being sought, the Indigo Financials, is not common in the context of disclosure in an all-cash take-over bid. While thisinformation is specifically mandated for disclosure in Item 15 of Form 32 in the context of share exchange offers, Trilogy’s offer is all-cash. It is reasonable to presume that if this type of information is specifically identified in a limited context within the Form, that disclosure of such information was not contemplated as imperative in an all-cash bid context. This does not mean that disclosure of such information in this context or other contexts might never be desirable nor does it preclude the Commission from ordering disclosure in some limited circumstances.

Secondly, Item 19(b), as with all Items of Form 32, should be read in the context of Item 24, the certificate provision. Item 24 clearly imports a materiality standard into Item 19(b). As a practical matter, an offeror must determine that it has not, inter alia, either misstated or omitted a material fact with respect to the offeror’s disclosure obligations. Moreover, the phrase "reasonably be expected to affect the decision" in Item 19(b) should be interpreted in light of the comments in Re MacDonald Oil Exploration Ltd. (1999), 22 O.S.C.B. 6452 at 6455, where it was stated that: "[there] is a difference between perfect disclosure....., acceptable disclosure and material non-disclosure or material misleading disclosure" to deduce that only "material" information is affirmatively obligated to be disclosed.

Thirdly, while the language of Item 19(b) does not explicitly refer to materiality, the heading refers to "Other Material Facts". As such, materiality is explicitly contemplated within the Item and 19(b) should be read as establishing the standard to be used when determining whether information would reasonably be expected to affect the decision of a security holder and therefore be required to be disclosed in the circular.

This approach is supported by the Commission’s decision in Re MacDonald Oil, supra, where at p.6455 it was stated that:

"The approach to be taken to allegations of inadequate disclosure in take-over bid situations was considered by the OSC in In the Matter of Standard Broadcasting Corporation Limited et al (1985), 8 OSCB 3672. The OSC said, commencing at p. 3676:

As to the allegations of inadequate disclosure that were made and did surface at several points during the course of the hearing, none were, in our respectful opinion, material in the sense that the disclosure asked for would have been necessary to allow an investor to make an informed investment decision. We stress this last point, as it is often the case that allegations of nondisclosure or inadequate disclosure, are made during the course of a take-over bid. There is a difference between perfect disclosure (which no two opposing counsel likely would ever agree upon), acceptable disclosure and material non-disclosure or material misleading disclosure. In a case between these parties, that was argued in the Supreme Court of Ontario, Madam Justice McKinlay noted that the appropriate standard of materiality is that set out in the judgement of the United States Supreme Court in TSC Industries 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), 31 O.R. (2d) 75 at 101 and by the Ontario Court of Appeal in Sparling 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 is substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote." [or in deciding whether to tender his shares in the case of a take-over bid]

No[t] (sic) one of the allegations of nondisclosure or inadequate disclosure met that standard of materiality. Although the TSC Industries standard of materiality often has been quoted and is well understood, it is frequently lost sight of when an allegation of nondisclosure is made before the Commission. The fact that counsel for an applicant would have worded a matter differently, or would have made fuller disclosure, or would have placed emphasis on a different aspect of a matter, does not amount to non-disclosure unless there is a showing of materiality [emphasis added].

We agree with these comments and consider that we must look at the alleged disclosure defects in light of the language of the relevant Forms and the "materiality" standard described in Standard Broadcasting."

The standard of materiality put forth in TSC Industries Inc. et al. v. Northway Inc., 426 U.S. 438, 96 S. Ct. 2126 (1976), and adopted in Re MacDonald Oil, supra, is informative. To grant the relief requested, the Commission must be persuaded that, on the basis of the evidence presented, the omitted facts are material because a Chapters shareholder would consider the Indigo Financials important when deciding whether to tender shares to the bid. This determination must not be made in isolation, but rather in the context of all the disclosure made available by Trilogy to Chapters’ shareholders. As stated by the U.S. Supreme Court in TSC Industries, supra:

"… there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the "total mix" of information made available."

Chapters ultimately had to demonstrate how the disclosure of the Indigo Financials, in light of the total amount of disclosure already made, would remedy the uncertainty of the post-bid valuation of the Chapters share price and allow for informed investment decisions.

Chapters premised its argument on two factors: the potential back-end merger plans and the alleged coercive nature of the take-over bid. The main argument advanced in support of disclosure is that absent this information shareholders will not be able to assess either the desirability of Indigo as a merger partner or the implications of becoming a minority shareholder in the merged entity. Chapters stated in its oral submission that:

"if Indigo is in desperate financial condition and Chapters’ shareholders find out about it before they have to decide whether to tender, they are going to be warned that a merger may well not be in their interest. They might be better off waiting for Indigo to die a natural death."

In response to this statement, given that no terms and conditions had been reached, Trilogy questioned the utility of the financial statements:

"…the attractiveness of a merger partner simply can’t be determined based on financial information about the prospective partner. The important point in assessing the attractiveness of a merger partner, are the terms of the proposed merger.

A Corporation in quite bad financial health could well be a very attractive merger partner. It all depends on what values get assigned to the respective partners in the merger, whether it’s an attractive deal or whether it’s not an attractive deal. You can’t do that assessment without knowing what the proposed terms of the merger are going to be…"

In this regard we agree with Trilogy’s submissions. It should be noted that even in the event that terms and conditions are eventually agreed upon, the interests of Chapters’ minority shareholders will be afforded the protection of OSC Rule 61-501, which would require a proposed merger to be approved by independent directors and a majority of minority shareholders.

With respect to the nature of the bid, Chapters failed to persuade us that as a result of a successful bid the minority interest would be less liquid and less valuable. Moreover, the Applicant failed to establish a nexus between the Indigo Financials and the post-bid trading value of the minority interest and that the disclosure of this information "would reasonably be expected to affect the decision of the securityholders of the offeree issuer to accept or reject the offer." In light of these determinations, Chapters did not meet the test of materiality contemplated in Item 19(b).


Accordingly, the Application was dismissed.

February 9, 2001.

Howard I. WetstonDerek BrownR. Stephen Paddon