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Ed Waitzer, former chair of the Ontario Securities Commission, says Rio Tinto PLC’s RIO-N side deal with two dissident shareholders in its pursuit of Turquoise Hill Resources Ltd. TRQ-T is illegal under Canadian securities law, and that there’s a good chance the OSC will block the deal as currently structured.

Under the agreement, they would be paid out 80 per cent of the takeover amount being offered to all Turquoise Hill shareholders soon after the deal closes, and following a ruling from an arbitrator, the remaining 20 per cent, plus interest, and potentially much more.

In exchange, Pentwater and SailingStone, which had both been vociferously opposed to the $4.2-billion acquisition of Turquoise by Rio, agreed to withhold their shares in the coming shareholder meeting.

The development meant that Turquoise was far more likely to get the votes it needs for the deal to succeed. The threshold for success is at least 50 per cent of votes cast by the minority shareholders. Rio already owns 51 per cent of Turquoise and is attempting to buy the remaining 49 per cent that it doesn’t own for $43 a share in cash.

Jeff Banfield, partner with Bahamas-based hedge fund Caravel Capital Investments Inc., which is a Turquoise Hill shareholder, was outraged when he found out about the deal with the dissidents, telling The Globe and Mail that he was “obliterated with shock,” as he pushed for every minority shareholder to receive the same offer.

Caravel subsequently lodged a complaint with both the OSC and Quebec’s l’Autorité des marchés financier (AMF) on fairness grounds.

Now Mr. Waitzer, who has owned shares in Turquoise Hill for many years, is joining the list of minority shareholders aghast at being left out of the potentially sweetheart deal the dissidents are getting.

“Everybody should be treated the same,” he said in an interview. “Had I known, I would have made that deal in a heartbeat.”

He says Canadian securities law is clear that every shareholder should be treated equally, and it is a tenet that has been reaffirmed on several occasions.

He thinks the OSC might order Turquoise not to close the transaction, or at the very least delay the deal, until the commission has a chance to review it.

“One way or another, my expectation would be that they will intervene,” he said.

Days before the side deal with the dissidents was unveiled, a special committee of Turquoise Hills’ board asked Rio if it would offer the same deal to all minority shareholders, but it rejected that idea.

Still, Rio insists that dissent rights are perfectly legal, and allow any shareholder to use the court system, or an arbitrator, to argue that a takeover offer isn’t fair, and potentially be awarded a higher amount.

Both Rio and Turquoise Hill declined to comment.

Mr. Waitzer said the arrangement that Rio has orchestrated with the dissidents closely resembles a case in Canada involving Canadian Tire Corp. in the 1980s that went to an OSC panel for a fairness ruling. The regulator ruled that “you can’t get cute” about avoiding the principle of equal treatment for shareholders on takeover deals, he added. The case has been cited consistently since then, and was upheld by an appellate court.

Mr. Waitzer said it’s very likely that the OSC and the AMF will take the complaints made by Caravel seriously from a public-interest viewpoint and potentially make a move before the shareholder vote at Turquoise that is scheduled for Tuesday. The OSC declined to comment for this story, and the AMF did not immediately respond to a request for comment.

Mr. Waitzer had a long legal career as a partner with blue-chip Bay Street law firm Stikeman Elliott, but he also has a deep history with Turquoise Hill. About a decade ago, he was the arbitrator in a dispute involving Turquoise Hill, then called Ivanhoe Mines and run by Robert Friedland, and Rio. Both parties were fighting for control of the Oyu Tolgoi mine and Mr. Waitzer ruled in favour of Rio.

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