ONTARIO SECURITIES COMMISSION
IN THE MATTER OF THE SECURITIES ACT, R.S.O. 1990, c.S.5, as amended
IN THE MATTER OF
CHAPTERS INC. AND TRILOGY RETAIL ENTERPRISES L.P.
REASONS FOR DECISION OF THE
ONTARIO SECURITIES COMMISSION
HEARING DATE: January 31, 2001
PANEL: Howard I. Wetston, Q.C. - Vice-Chair
Derek Brown - Commissioner
R. Stephen Paddon, Q.C. - Commissioner
M. Theresa McLeod - Commissioner
COUNSEL: Janet Holmes - For the Staff of the Ontario
Johanna Superina Securities Commission
Mark A. Gelowitz - For the Applicant
Allan D. Coleman
John B. Laskin - For the Respondent
James C. Tory
I. NATURE OF THE MOTION
These reasons are in support of the decision issued by the Ontario Securities Commission (the "Commission or OSC") on January 31, 2001, to dismiss the Application for relief under section 104 and section 127 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 Retail Enterprises L.P. ("Trilogy"), alleged that certain purchases of Chapters' shares made by Trilogy during the course of the Offer were in violation of subsection 94(3) of the Act. As a result Chapters requested that the Commission order Trilogy to amend the Offer from a partial-bid to an offer for all the common shares of Chapters, or in the alternative cease trade the Offer.
The question therefore presented for our consideration was whether the purchases of Chapters' shares made by Trilogy during the course of the bid were in violation of subsection 94(3) of the Act.
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, of which 11,374,704 were issued and outstanding as at December 18, 2000. The 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 Ms. Heather M. Reisman, are the only two named principals of Trilogy. Ms. Reisman was 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 of Chapters for cash consideration of $13.00 per share. This represents approximately 43% of the outstanding common shares. On November 28, 2000, Trilogy held a total of 1,082,200 shares, representing approximately 9.5% of the outstanding common shares. If the bid were successful, Trilogy would own approximately 53% of Chapters' common shares.
4. On December 11, 2000, Trilogy mailed the Offer to Chapters' shareholders. The Offer was initially open for acceptance until January 3, 2001; however, the expiry date was extended to January 24, 2001.
5. On December 18, 2000, Trilogy issued a press release stating that it had acquired an aggregate of 27,800 common shares of Chapters.
6. On December 19, 2000, Trilogy issued a press released stating that it had acquired a further 343,000 common shares of Chapters.
7. On December 20, 2000, Trilogy issued a press release stating that it had reversed the trades made on December 19, 2000, because it was precluded under securities rules as a technical matter from making additional market purchases for one business day after making the appropriate disclosure and regulatory filings in respect of the December 18 trades.
8. On December 21, 2000, the Board of Directors of Chapters mailed a directors' circular unanimously recommending to shareholders that they reject the Offer.
9. On January 10, 2001, Trilogy amended its Offer to acquire the Chapters shares for cash consideration of $15.00 cash per share.
10. On January 22, 2001, Trilogy further amended its Offer, to acquire, in aggregate, 7,146,000 of the common shares of Chapters for cash consideration of $17.00 per share. If completely successful, Trilogy would, in aggregate, hold approximately 77% of the common shares of Chapters.
11. RBC Dominion Securities ("RBC DS") was retained to act as the dealer manager for Trilogy with respect to its Offer.
12. Since the commencement of the bid and as of January 30, 2001 there have been 1,690 trades in Chapters shares on the facilities of The Toronto Stock Exchange (the "TSE"), involving a total of 1,917,323 Chapters shares. Of these trades, 697 trades, involving a total of 921,474 Chapters shares, were trades carried out by RBC DS. Of these 697 trades, 464 trades, involving a total of 559,694 Chapters shares, were performed by RBC DS on behalf of Trilogy. Of the 464 trades performed by RBC DS on behalf of Trilogy, 3 trades, involving 118,400 Chapters shares, were trades initiated through the direct matching of buy and sell orders ("Block Purchases"). The Block Purchases included:
(i) a trade on December 21, 2000, of 15,800 shares, 5,200 of which were for Trilogy;
(ii) a trade on December 21, 2000, of 189,400 shares, 63,200 of which were for Trilogy; and
(iii) a trade on January 22, 2001, of 50,000 shares for Trilogy.
13. As of January 30, 2001, Trilogy held 1,641,894 common shares of Chapters, representing 14.43% of the outstanding common shares. Since the commencement of the bid Trilogy has purchased an aggregate of 559,694 of the common shares of Chapters at an average price of $14.51 per share.
14. On January 31, 2001, a hearing was held to consider the Application.
The issue before us is whether the Block Purchases in this matter are permitted purchases within the ambit of subsection 94(3) of the Act and are therefore not prohibited under subsection 94(2). Subsection 94(2) prohibits a bidder from purchasing the shares of a target company during a take-over bid and states:
(2) An offeror shall not offer to acquire or make, or enter into, any agreement, commitment or understanding to acquire beneficial ownership of any securities of the class that are subject to a take-over bid otherwise than pursuant to the bid on and from the day of the announcement of the offeror's intention to make the bid until its expiry [emphasis added].
Subsection 94(3) provides an exception to the prohibition outlined in subsection (2), allowing for certain permitted purchases. Subsection 94(3) states:
Despite subsection (2), an offeror making a take-over bid may purchase, through the facilities of a stock exchange recognized by the Commission for the purpose of clause 93(1)(a), securities of the class that are subject to the bid and securities convertible into securities of that class commencing on the third business day following the date of the bid until the expiry of the bid, if,
(a) the intention to make such purchases is stated in the take-over bid circular;
(b) the aggregate number of securities acquired under this subsection does not constitute in excess of 5 per cent of the outstanding securities of that class as at the date of the bid; and
(c) the offeror issues and files a news release forthwith after the close of the business of the exchange on each day on which the securities have been purchased under this subsection disclosing the information prescribed by the regulations [emphasis added].
The Applicant submitted that subsection 94(3) provides a narrow exception to the general prohibition contained in subsection 94(2) and should not be interpreted so as to compromise one of the fundamental policy objectives underlying Part XX of the Act. That is, the equal treatment of the shareholders of an offeree issuer, contained in subsection 97(1) of the Act. Subsection 97(1) states:
Subject to the regulations, where a take-over bid or issuer bid is made, all holders of the same class of securities shall be offered identical consideration [emphasis added].
While Chapters did not take issue with the normal course purchases made by RBC DS on behalf of Trilogy, it did object to the Block Purchases initiated in what is commonly referred to as the "upstairs market". Chapters argued that these Block Purchases necessarily contravene subsection 97(1) because they involve offers on different terms and conditions than those pertaining to the bid. Chapters argued that, in order for the offeror to be permitted to purchase shares during the course of a take-over bid, all shareholders of Chapters must have an equal opportunity to sell their shares to the offeror in the open market. Trading in the "upstairs market" which generally involves only large blocks of shares, it was submitted, was not available to all Chapters' shareholders and therefore should not have been available to Trilogy as a means to make purchases during the course of the bid.
It was further argued that trades in the "upstairs market", irrespective of whether the purchases are subsequently completed on a stock exchange, are outside the ambit of the condition set out in subsection 94(3) requiring that trades be made "through the facilities of a stock exchange". Chapters submitted that, during the currency of a take-over bid, only normal course purchases which are initiated and executed through the electronic order book of an exchange satisfy this condition. The Block Purchases, it was argued, initiated through the direct matching of buy and sell orders in the "upstairs market" and then processed through the exchange, were inconsistent with the condition set out in subsection 94(3) and made in violation of the take-over bid rules.
Additionally, in support of its position, Chapters relied on OSC Policy 9.3 which advises that the private agreement exemption contained in clause 93(1)(c) of the Act is unavailable for purchases made during the course of a take-over bid. In particular, the Applicant referred to section 2 of Part A which states that:
Prima facie, crosses, put-throughs and any other pre-arranged trades are a form of private agreement
On this basis, Chapters argued that the Block Purchases in question constitute pre-arranged trades, are prima facie private agreements, and therefore are prohibited by subsection 94(2) and subsection 97(1).
Moreover, the Applicant submitted that section 2.1 of Proposed Rule 62-501 (the "Proposed Rule") reinforces and expands upon Part A of OSC Policy 9.3, that only trades effected in the normal course are permitted under the subsection 94(3) exception. Section 2.1 of the Proposed Rule states:
Despite subsection 94(3) of the Act, an offeror may not make purchases allowed under that subsection unless
(a) the purchases are made in the normal course on a stock exchange described in subsection 94(3) of the Act;
(b) any broker acting for the offeror does not, in connection with purchases, perform services beyond the customary broker's functions and does not receive more than the usual fees or commissions charged for comparable services performed by the broker in the normal course;
(c) neither the offeror nor any person or company acting for the offeror solicits or arranges for the solicitation of offers to sell securities of the class subject to the bid, except for the solicitations by the offeror or members of the soliciting dealer group of securities pursuant to the take-over bid; and
(d) the seller or any person or company acting for the seller does not, to the knowledge of the offeror, solicit or arrange for the solicitation to buy securities of the class subject to the bid [emphasis added].
Chapters submitted that to interpret subsection 94(3) otherwise would render subsections 94(2) and 97(1) nugatory.
To determine whether Trilogy's purchases of Chapters' shares were in contravention of the Act, it is first necessary to determine whether subsection 94(3) forms the complete basis for determining if purchases made in the course of a bid are permitted, or whether as argued by the Applicant, the availability of the exception should be limited by the requirements of subsections 97(1) and 94(7) of the Act, OSC Policy 9.3 and the Proposed Rule. Upon consideration of the arguments presented to us and a review of the relevant legislation, policies and rules, we are satisfied that subsection 94(3) provides a complete "answer" to the question presented before us.
At first blush, subsection 97(1) and subsection 94(3) might appear to be at odds with one another. Indeed, Chapters argued that the Block Purchases made by Trilogy necessarily contravene subsection 97(1) because they involve offers on different terms and conditions than the bid and thus do not satisfy the requirement of identical consideration. Clearly, this principle is of great importance in the context of a take-over bid; however, the plain meaning of subsection 94(3) permits, subject to certain conditions of which identical consideration is not one, purchases by the offeror during the currency of the bid. It should, however, be noted that all of the Block Purchases were carried out at or below the bid price under the Offer and at or below the market price at the time of the trades.
We also note, as a matter of statutory construction, that section 94 was introduced into legislation after section 97. In 1987, the take-over bid provisions of the Act underwent a comprehensive review which resulted in a number of amendments including the introduction of section 94. Subsection 97(1) preceded s.94. This latter provision is more specific and in our opinion reflects the legislative intention with respect to take-over bids.
Similarly, regarding subsection 97(1), the Applicant submitted that in light of the requirement in subsection 94(3) that purchases be made "through the facilities of a stock exchange", acquisitions made during the course of a take-over bid must be strictly normal course purchases initiated and executed through the electronic order book of an exchange and therefore trades effected through crosses or put-throughs fall outside the ambit of this subsection. On this basis, Chapters submitted that the Block Purchases initiated in the "upstairs market" and later completed through the facilities of the exchange were made in contravention of the Act. The plain meaning of subsection 94(3), however, does not support this contention. Had this been the intention of the legislature, a requirement for normal course purchases would have been expressly provided as in subsection 94(7). Subsection 94(7) carves out exceptions to the pre-bid and post-bid integration rules provided for in subsections 94(5) and (6). It states that:
Subsections (5) and (6) do not apply to trades effected in the normal course on a published market, so long as,
(a) any broker acting for the purchaser or seller does not perform services beyond the customary broker's function and does not receive more than reasonable fees or commissions;
(b) the purchaser or any person or company acting for the purchaser does not solicit or arrange for the solicitation of offers to sell securities of the class subject to the bid; and
(c) the seller or any person or company acting for the seller does not solicit or arrange for the solicitation of offers to buy securities of the class subject to the bid [emphasis added].
Subsection 94(7) explicitly requires that trades be effected in the normal course, whereas subsection 94(3) does not contain this requirement. Additionally we note that for the purposes of the TSE Rules, a trade matched between a buyer and seller directly and then completed on the facilities of the exchange is considered to be a trade through the facilities of the exchange.
In like fashion we can address Chapters' submission with respect to OSC Policy 9.3. As discussed above, the provisions in the Act pertaining to take-over bids were amended in 1987. Prior to 1987, the Act did not expressly provide for purchases by the bidder of target shares during the currency of a circular bid and in particular was silent with respect to the availability of the private agreement exemption. Part A of OSC Policy 9.3 was introduced to address this gap in the take-over bid framework and restrict the purchases made by the bidder during a circular bid. Subsequently, these legislative gaps were effectively filled by the introduction of both subsection 94(2), which expressly prohibits purchases by the bidder of the target's shares during a bid, and subsection 94(3) which carves out exceptions to this general rule.
Both the Applicant and the Respondent submitted arguments with respect to the significance of the Proposed Rule regarding purchases made by the bidder of the target's shares during the course of a take-over bid. We have considered the Proposed Rule in the context of this case. It was circulated for comment approximately five years ago and never finalized. In light of the passage of time and the specific facts before us in this matter, we are of the opinion that we should not exercise our discretion in the manner submitted by the Applicant.
As indicated above, we find it sufficient, in this matter, to rely on subsection 94(3) as the basis for determining whether the Block Purchases were permitted. We were not satisfied on the evidence before us that shareholders were harmed by the Block Purchases. Accordingly, the Application was dismissed.
Moreover, since the Proposed Rule remains outstanding, we would request Staff to review the Proposed Rule 62-501 and make a recommendation as to whether or not it should be revised or adopted.
March 9, 2001.
D. Brown, H. I. Wetston, R. S. Paddon, M. T. McLeod