In Canadian securities law, while the big fights make headlines, as we saw in last year's proxy fight between Orange Capital LLC and Partners Real Estate Investment Trust, the small ones often make law. So it's not a surprise that Bay Street's biggest law firms, are all over the proxy fight between activist Ryan Morris of Meson Capital Partners LLC, Nightscape Capital (UK) LLP and Aberdeen International Inc.
The battle over Aberdeen is loaded with securities law issues – from whether Aberdeen's change of control payments are potentially oppressive to shareholders to whether the chair of a special meeting is really independent – and one of the most interesting is how the fight exposes a tension in the definition of the word "insider." If this part of the fight gets to court, it will make for another leading securities law case from another relatively small conflict.
Aberdeen is a small cap mining company going through some rough times. Its share price has fallen over the past couple of years, and its CEO, Stan Bharti – who is also the head of junior miner advisory firm and Aberdeen consultant Forbes & Manhattan – spent much of the fall running a two-minute drill to reinvigorate the company.
The first step was supposed to be the sale of a huge portion of Aberdeen's assets to Landmark Equity Advisors LLC in order to add more cash to Aberdeen's already cash-rich balance sheet (Mr. Morris objects to this transaction on the grounds that it could trigger relatively lavish change of control payments for Aberdeen management.) Some of this cash was going to be used to fund an investment in African Thunder Platinum Ltd., a junior mining company out of Mauritius, and not a funding vehicle for a sequel to a Ben Stiller movie, much to my disappointment. On November 24, Aberdeen closed a private placement of stock and warrants (that is, a placement of shares not open to the public) for more than 10 per cent of the company's shares outstanding. Aberdeen claims that, with the Landmark sale dragging, the purpose of the private placement was to fund the African Thunder acquisition. Mr. Morris claims that this transaction was done to protect the company from activists by putting the shares in friendly hands.
Mr. Morris' argument, as best as I can reconstitute it from his press releases, court documents and dissident circular, is this: TSX listing rules require that minority shareholders approve of private placements where more than 10 per cent of a company's shares are issued to insiders; however, shareholders were not given the opportunity to vote on the Aberdeen private placement, even though more than 10 per cent of Aberdeen's shares were issued to insiders. This, Mr. Morris believes, constitutes oppressive conduct to shareholders, and the remedy should be that Aberdeen's insiders are disallowed from voting those shares during the special meeting where Aberdeen's directors are up for election against Mr. Morris's dissident slate.
This is reasonable if Aberdeen actually issued shares to insiders. So who did Aberdeen issue shares to? The first are Mr. Bharti and fellow director George Faught, who are both undoubtedly insiders of Aberdeen, though they only account for about two per cent of the shares purchased in the private placement. The next two are more complicated. Sulliden Mining Capital Inc. bought almost half of the private placement, because and is a related party of Aberdeen for accounting purposes four per cent of Sulliden is currently owned by Aberdeen, and four Aberdeen directors, including Mr. Bharti, were on Sulliden's board during the private placement. The remainder of the private placement was bought by 2378083 Ontario Inc., a company owned by one Fred Leigh who shares office space with Forbes & Manhattan. Though Mr. Leigh shares office space with Forbes, and Forbes provides Aberdeen with advice, he has stated that he does not provide consulting services to Aberdeen.
Despite all these links, neither Sulliden nor 2378083 appear to be "insiders" or even "related parties" under the Securities Act, which, broadly speaking, limits its definitions of the terms to officers, directors and other large stakeholders who exercise control over an entity. Neither Sulliden nor Mr. Leigh hold enough shares in Aberdeen, nor do they exercise enough control over Aberdeen to be insiders (nor is Sulliden an Aberdeen affiliate; neither is a subsiadiary of the other, despite Sulliden's share holdings in Aberdeen).
Case closed? Not quite. Sections 11 and 143(1) of the Securities Act allow the Ontario Securities Commission to designate a person or company an insider if that person or company would be expected to have access to material information about a company.
This certainly seems a reasonable assumption with respect to Sulliden. Mr. Bharti is a director of both Sulliden and Aberdeen and will have information about both. But Mr. Bharti is not Sulliden, and mutual directors do not insiders make. (Such a rule would be impractical in the overlapping world of Canadian directors). And, similarly, if Mr. Leigh wasn't providing Aberdeen with consulting services or he couldn't be expected to come across material information about Aberdeen in the ordinary course of his business, he's not an insider. And Mr. Morris needs to find a way to get both Sulliden and 2378083 designated as insiders to reach the 10 per cent required to trip the TSX rule.
Indeed, both the TSX and OSC let the private placement close, suggesting that they didn't find Mr. Morris's arguments terribly persuasive. There's always appeal to the courts – and Mr. Morris may yet make those arguments in front of Justice Wilton-Siegel if he loses his proxy fight at the upcoming shareholder meeting and the matter goes in front of the bench – but I can't say I'm optimistic about his chances.
If Mr. Morris wants to win on the definition of insider, he's going to need to throw his lawyers at it. And then this small proxy fight may answer a more searching question: how many lawyers does it take to convince one judge to count to 10 per cent?
Adrian Myers is a lawyer at Torkin Manes LLP.
Adrian Myers