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Turquoise Hill Resources Ltd. TRQ-T is indefinitely postponing the shareholder vote on the proposed $4.2-billion takeover of the company by Rio Tinto PLC RTPPF as Quebec’s top securities regulator, the Autorité des marchés financier (AMF), studies whether a backdoor deal Rio cut with dissident shareholders is legal.

“The AMF considers the transaction as currently structured to raise public interest concerns,” Montreal-based Turquoise Hill said in a release on Wednesday.

The development casts a whole new layer of uncertainty over a huge mining takeover that has captivated the industry and caused turmoil for merger and arbitrage traders on both sides of the Atlantic.

Rio already owns 51 per cent of Turquoise Hill and has control over several board seats. The giant Anglo-Australian miner is offering to buy the 49 per cent it doesn’t already own.

London-based Rio last week said it had reached an agreement with Pentwater Capital Management LP and SailingStone Capital Partners LLC, under which the two U.S. investors would be paid out 80 per cent of the $43-a-share takeover amount being offered to all Turquoise Hill shareholders and, after a ruling from an arbitrator, the remaining 20 per cent, plus interest, and potentially much more. The arrangement could see the two firms walk away with tens of millions in extra profits.

The Globe and Mail first reported concerns over the fairness of the side deal when a Turquoise Hill stakeholder, Caravel Capital, last week said it was “obliterated with shock” over the treatment of other minority shareholders. Caravel promptly filed complaints with the Ontario Securities Commission and the AMF on fairness grounds.

Ed Waitzer, former head of the OSC, subsequently told The Globe the deal as structured was almost certainly not legal. Canadian securities law has consistently enshrined the concept that all minority shareholders be treated equally in a takeover scenario, he said.

Even before the regulator stepped in, Turquoise Hill itself sensed the side deal with the activists might be problematic. A special committee of Turquoise Hill’s board asked Rio if it would be willing to offer the preferential terms it was offering to the two U.S. firms to all minority shareholders. Rio, however, quashed the idea.

The special committee was formed in March, after Rio made its initial takeover offer, with a mandate to ensure minority shareholders were being treated fairly.

Turquoise Hill on Wednesday said the special committee is again in talks with Rio to try to “address the differential treatment of minority shareholders,” with the view to possibly arriving at new deal terms.

Shares in Turquoise Hill fell by 0.2 per cent on Wednesday to close at $41.50 apiece on the Toronto Stock Exchange, 3.5 per cent below the Rio offer, suggesting significant uncertainty over whether the deal will close as it is currently structured.

Arbitrage traders in the United States and the United Kingdom have been particularly active in the shares of Turquoise Hill in recent weeks. The classic arbitrage trade is to buy shares in the target company. It’s normal for the share price of a target to trade at a slight discount until a deal closes. Transactions can fail for several reasons, including regulatory action.

If a deal is successful, shares of the target will trade up to the full value of the takeover offer. If a deal fails, it often causes the target’s stock to fall significantly, underlining why arbitrage trading can be a risky proposition.

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