A lawsuit brought by two Canadian metals trusts to stop a hostile takeover bid by another Canadian asset manager has been denied by the Ontario Superior Court.
Central GoldTrust and Silver Bullion Trust, the precious metals funds owned by Alberta-based Central Fund of Canada, brought an application in June against Sprott Asset Management to stop its $898-million bid for the trusts, launched in April.
Central Fund claimed in its lawsuit that the Toronto-based asset manager's bid was a violation of some of its corporate governance rules, pointing to the trusts' June 24 amendments, including its compulsory acquisition threshold.
In his decision released Friday, Justice Herman Wilton-Siegel determined that some of those amendments were direct attempts by the company to insulate itself from the Sprott bid. "When the circumstances of the enactment of these amendments are considered as a whole, there is strong evidence supporting … attempting to thwart the Sprott bids," Justice Wilton-Siegel said in his decision, referencing the trustees raising the required shareholder approval for a takeover bid to 90 per cent.
The judge reasoned that, rather than enact the amendments if the Sprott bid was unsuccessful, the trustees changed the policies in the middle of the Sprott bids and without shareholder approval (using its Declaration of Trust), making it appear that it was done for the sole purpose of disrupting the bid. Similarly, when it raised its redemption feature by 5 per cent, it was determined by the court as a "defensive tactic" designed to make its shares relatively more attractive to Sprott's. As a result, the amendments were considered invalid.
As part of its suit, the trusts argued that Sprott did not disclose, as required by securities law, an alleged connection it had with trust shareholders Pekin Singer Strauss Asset Management and Polar Securities Inc., the Toronto-based hedge fund that lost its earlier proxy battle for the trusts. The court ruled that there wasn't sufficient evidence to prove a connection.
The court, however, ruled that Sprott's withdrawal rights for tendering shareholders are not clear. On that issue, the court ruled that one of Sprott's policies did not comply with the Securities Act. Sprott offered to amend the rules. Justice Wilton-Siegel outlined certain resolutions that must be undertaken for Sprott's bid to be successful.
In a counterapplication, Sprott argues that some trustees on the boards of the two companies are not independent – and not working in the best interest of shareholders – because they have financial agreements, some worth millions, with the companies' owners. Ian McAvity, the trusts' lead director, is allegedly receiving 6 per cent of the revenue of Central Fund of Canada for life, while having allegedly made $3.3-million from the arrangement between 2005 and 2014. The court, however, did not feel it was necessary to address the issue based on what had already been established in the case.
Sprott launched its bid in April, arguing that the trusts are consistently trading at a discount to its net –asset value, or the value of the underlying metal. Sprott is offering the trusts' shareholders to trade into its own similar funds at, or within 1 per cent of, its underlying value. The trusts continue to recommend that shareholders reject Sprott's offer.
Central Gold Trust said in a press release Monday that it is considering what additional steps, if any, it will take after the court decision.
Sprott is extending its offer for the trusts until Sept. 18.