Aimia and Mithaq: Ontario CMT sheds light on when it will intervene to prevent defensive tactics against activism or takeover bids

In a recent decision of the Ontario Capital Markets Tribunal, Mithaq Canada Inc. (Re), 2024 ONCMT 9, the Tribunal declined to cease trade a private placement announced by Aimia Inc. in the context of ongoing activism by Aimia’s largest shareholder, Mithaq Capital S.P.C. (Mithaq), and a takeover bid by Mithaq Canada Inc. (Mithaq Canada), a wholly-owned subsidiary of Mithaq.

In refusing to cease trade Aimia’s private placement, the Tribunal signaled an unwillingness to intervene to prevent a defensive tactic without any reasonably imminent proxy contest or takeover bid. The decision also indicates that when considering a challenge to a share issuance as a defensive tactic to a takeover bid, the Tribunal will be hesitant to consider an issuer’s overall defensive posture, including other defensive measures undertaken such as litigation tactics or shareholder rights plans, and will instead focus on the specific issuance being challenged and the target’s need for financing. Where the issuance being challenged is designed primarily to meet a serious and immediate need for financing, the Tribunal will be reluctant to grant a cease trade order even if the share issuance is dilutive, defensive in character, and materially alters the dynamics of an outstanding takeover bid.

What you need to know

• The bar for cease trading a private placement in the context of outstanding activism or a takeover bid will be high where an issuer can demonstrate that the issuance was primarily designed to address a serious and immediate need for financing.
  • A need for financing over a 12-month period can reasonably be seen as “immediate”, and the time period over which the need is measured is not restricted to the bid period.
  • Demonstrated capital requirements combined with difficulty obtaining financing from alternative sources will support a finding that an issuer has a serious and immediate need for financing. Retaining advisors, providing access to due diligence materials and engaging with regulators will also be viewed favourably.
• Whether or not activism or a takeover bid was reasonably imminent at the time a private placement is planned is relevant to the Tribunal’s assessment of whether the transaction was a defensive tactic.
  • The disclosure of potential activism or a takeover bid among a range of options will not necessarily be viewed as indicating to the issuer that such actions are reasonably imminent. In addition, where significant time has passed in the absence of a proxy contest or formal takeover bid being launched, an issuer’s pursuit of its legitimate need for capital will be given priority over shareholder concerns that the transaction is abusive.
• Applicants seeking to set aside a decision of a self-regulatory organization or stock exchange face a heavy burden.

Background

Beginning in early 2023, Mithaq became dissatisfied with Aimia’s governance. To address its dissatisfaction, Mithaq increased its shareholdings and initiated a vote “no” campaign in the lead-up to Aimia’s April 2023 AGM seeking to bring about change to Aimia’s board of directors (the Board). The election was very close with the Chair of the Board failing to be re-elected and with none of the other directors receiving more than 52.41% of the votes cast. In response to the refusal by Aimia to permit Mithaq to review the 2023 AGM proxies, Mithaq commenced an application to the Ontario Superior Court (the Proxy Review Application). In response, in May 2023, Aimia commenced litigation against Mithaq alleging that it was engaged in undisclosed joint actor conduct seeking orders preventing Mithaq from voting its Aimia shares, acquiring additional Aimia shares, or requisitioning a special shareholder meeting. A few weeks later, Mithaq increased its shareholdings in Aimia to 30.96%. Mithaq disclosed to both the market and Aimia that it was considering a range of options, including both activism and a takeover bid, and that it would challenge any private placement as an improper defensive tactic, citing that Aimia had no need for financing. At the same time, Aimia adopted a shareholder rights plan, without shareholder approval, which it announced was in response to Mithaq’s increased shareholdings.

On October 5, Mithaq Canada made an all-cash offer for all outstanding shares of Aimia at $3.66 per share and sought a declaration from the Superior Court in its Proxy Review Application that the Board was not elected at the 2023 AGM. On October 13, Aimia announced that it intended to complete a private placement to a group of undisclosed investors, and to close the transaction on October 19. The private placement would be for an equal number of Aimia common shares and share purchase warrants with the share price of $3.10 per share (and warrants exercisable at $3.70), which together represented 24.9% of the then-outstanding Aimia common shares. After the Toronto Stock Exchange (TSX) approved the private placement without requiring Aimia to obtain shareholder approval, Mithaq Canada sought orders from the CMT cease trading the private placement as a defensive tactic and, in the alternative, reversing the TSX’s decision.

The CMT decision

The Tribunal confirmed that it has broad, but not unlimited, discretion to intervene to cease trade a private placement implemented as a defensive tactic to a takeover bid. That discretion is informed by the purposes of the Securities Act and its takeover bid provisions, including the protection of the bona fide interests of shareholders of the target company and providing an open and even-handed bid environment. To guide its exercise of discretion in respect of Mithaq Canada’s request to cease trade the private placement as a defensive tactic in response to the bid, the Tribunal affirmed the test set out in Hecla Mining Company (Re).

The Hecla test involves two parts. First, the Tribunal considers if the private placement is “clearly not” a defensive tactic designed, in whole or in part, to alter the dynamics of the bid process. If the private placement has a material impact on the bid environment, the burden falls to the issuer at this stage. If the private placement is “clearly not” a defensive tactic, then it will not be cease traded unless some other independent and sufficient reason for it to do so exists. On the other hand, if it cannot be said that the private placement is “clearly not” a defensive tactic, the Tribunal undertakes the second part of the analysis: to balance the corporate objectives of the private placement against facilitating shareholder choice. To resolve this question, a number of factors are considered, including:

1. whether the private placement would benefit shareholders;
2. the extent to which the private placement alters the pre-existing bid dynamics;
3. whether the private placement investors are related to the target, or to each other, in such a way as to enable the target’s board to summarily reject the bid or a competing bid;
4. whether the views of other shareholders should influence the Tribunal’s decision; and
5. whether the target’s board appropriately considered the interplay between the private placement and the bid.

Leaving open the possibility that the standard may be refined in a future case, the Tribunal applied the standard from Hecla that it should only block a private placement where there is “a clear abuse of the target shareholders and/or the capital markets”.

On the facts before it, the Tribunal determined as follows:

• The private placement did have a material effect on the bid environment, because it posed a serious impact on Mithaq Canada’s ability to satisfy the minimum tender condition. In addition, the Tribunal accepted Mithaq Canada’s argument that the $3.70 exercise price of the warrants might discourage other potential bidders for Aimia or might even discourage Mithqa Canada from improving its $3.66/share offer price.
• Aimia could not demonstrate that the private placement was “clearly not” a defensive tactic. While the primary purpose of the private placement was a good faith, non-defensive business strategy to respond to Aimia’s demonstrated “serious and immediate” need for financing¹, the private placement could also reasonably be seen to have taken on a defensive aspect in response to Mithaq’s activism, particularly once the takeover bid was announced on October 3, 2023. The Tribunal further concluded that the private placement was not planned in response to, or in anticipation of, Mithaq Canada’s activism or takeover bid because at the time of planning in early June 2023 there was no ongoing proxy contest and a bid was not “reasonably imminent”. In Mithaq’s disclosure to the market and Aimia that activism and a takeover bid for Aimia were among a range of possibilities being considered, the bid was only “one among a range of options” Mithaq was considering at the time. In addition, Mithaq’s activism and pursuit of litigation regarding the 2023 AGM results were not viewed by the Tribunal as equivalent to an ongoing proxy contest, and no bid was formally commenced for several months after the possibility of a bid was first disclosed by Mithaq. As a result, the Tribunal determined it would be unreasonable to prevent Aimia from pursuing financing options in the intervening time period. On the other hand, the Tribunal also concluded that although the private placement was “part of a good faith, non-defensive business strategy” when planned in early June 2023 as Mithaq’s activism continued, Aimia relied on the private placement to help resist that activism. As a result, the Tribunal concluded that Aimia had failed to establish that the private placement was “clearly not” a defensive tactic.
• On balancing the corporate objectives served by the private placement against the facilitation of shareholder choice, the Tribunal concluded that the private placement was not a “clear abuse” of Aimia shareholders or the capital markets. The Tribunal found that the private placement would benefit shareholders even though it was dilutive and priced at a discount because the issuance of shares helped Aimia meet its serious and immediate need for financing. Further, while the Tribunal accepted Mithaq Canada’s position that the private placement materially interfered with Mithaq’s ability to achieve the minimum tender condition, and thus lessened the likelihood that the bid would succeed, that impact was “overwhelmed” by the fact that almost all steps in planning the private placement preceded the announcement of the bid.
• Of note, on balancing corporate objectives and shareholder choice, the Tribunal determined that no deference was owed to the evaluation and work undertaken by the Special Committee of Aimia’s board as a result of deficiencies in its governance processes. In particular, the Special Committee did not appear to have considered the extent to which the private placement might affect shareholder choice in respect of the bid or whether there were ways to amend the private placement to make it more compatible with the bid (or an improved Mithaq Canada bid or competing bid). Nevertheless, these deficiencies coupled with the impact that the private placement had on the bid dynamics were insufficient to outweigh the benefit the private placement presented to Aimia shareholders in the form of financing.

The Tribunal also rejected Mithaq Canada’s position that the Board’s pattern of entrenchment, including its litigation against Mithaq, its refusal to permit the proxy review, and its adoption of a shareholder rights plan (without shareholder approval), was material to the Tribunal’s assessment. In particular, the Tribunal was not prepared to assess the private placement as a defensive tactic in response to Mithaq’s efforts to achieve a change of control through the Proxy Review Application. In reliance on the Eco Oro decision, Mithaq invoked the Tribunal’s public interest jurisdiction to intervene on the basis that Aimia planned the private placement to thwart Mithaq’s continued activism efforts seeking a proxy review and challenging the 2023 AGM results. In declining to do so, the Tribunal reasoned that the facts of Eco Oro where a proxy contest was ongoing and a shareholder meeting imminent were distinguishable because Mithaq’s proxy review, including the declaration it sought that the Board was not elected, was being advanced through litigation, a process that was more unpredictable than the urgent proxy contest in Eco Oro. Relatedly, the Tribunal determined that it was not inclined to prejudge issues that the parties have asked the Court to adjudicate and therefore it was unwilling to equate Mithaq’s 2023 AGM litigation with an ongoing proxy contest.

In connection with Mithaq’s alternative relief asking the CMT to set aside the TSX decision, the Tribunal confirmed that applicants face a heavy burden in seeking to set aside a TSX Listing Committee decision not to require shareholder approval of a share issuance. While a finding that a private placement is not an improper defensive tactic does not necessarily preclude the Tribunal from setting aside a decision of the TSX, the Tribunal will generally adopt a restrained approach when asked to interfere with such a decision. In this case, the Tribunal concluded that the TSX Listing Committee had sufficiently considered the applicable legal principles. There was also no new and compelling evidence to justify the Tribunal’s intervention. While the TSX had not considered the fact that the private placement investors had decided not to tender to Mithaq Canada’s bid (as disclosed in Aimia’s Director’s Circular), that fact was not compelling evidence as to whether the private placement would “materially affect control” of Aimia. The private placement investors had not entered into any agreement with Aimia regarding tendering to the bid, and the evidence from the lead investor was that a different decision might be made on an improved or competing bid.

Finally, the Tribunal refused Aimia’s cross-application seeking an order to prevent Mithaq from relying on the exemption in section 2.2(3) of NI 62-104. That exemption permits a bidder to, subject to satisfying the specified conditions, acquire up to 5% of the outstanding securities of the class of securities subject to the bid through market purchases. The Tribunal dismissed Aimia’s cross application holding that, where a takeover bid is made in good faith, a bidder should not be prohibited from accessing the exemption. There was no evidence to establish that Mithaq Canada’s bid was not made in good faith and none of the bid conditions that Aimia pointed to undermined the bona fides of the bid.