This application concerned whether 4352238 Canada Inc. ("435") validly exercised its right of first refusal ("ROFR") over SNC-Lavalin's proposed sale of shares in 407 International Inc. ("407") to OMERS.
The core issue was whether OMERS qualified as a "Competitor" under a 2002 waiver (the "Cintra Waiver"), which excluded pension funds acting "solely as a financial investor." The court found that the Cintra Waiver did not distinguish between passive and active financial investors, and that OMERS, as a pension fund, was intended to be excluded from the ROFR as a financial investor, regardless of its active investment strategy.
Consequently, 435's application was dismissed.
interesting_citations_summary: >
The decision provides a detailed analysis of contractual interpretation principles, particularly concerning the meaning of "financial investor" in a right of first refusal clause within a shareholders' agreement.
It clarifies that the parties' intent at the time of contract formation, considering the factual matrix, governs interpretation, and that a pension fund's active investment strategy does not necessarily negate its status as a "financial investor" if its primary motivation remains financial return rather than day-to-day operational control.
The court emphasized that it would not "re-write" the agreement to introduce distinctions not present in the original wording.
final_judgement: >
The application by 4352238 Canada Inc. is dismissed, as it was found to have waived its Right of First Refusal with respect to OMERS' proposed purchase of SNC-Lavalin's shares in 407 International Inc. under the terms of the Cintra Waiver.
winning_degree_applicant: 5
winning_degree_respondent: 1
judge_bias_applicant: 0
judge_bias_respondent: 0
year: 2019
decision_number: 4423
file_number: "CV-19-620222-00CL"
source: "https://www.canlii.org/en/on/onsc/doc/2019/2019onsc4423/2019onsc4423.html"
cited_cases:
legislation: []
case_law: []
keywords:
- Right of First Refusal
- Contractual Interpretation
- Financial Investor
- Pension Fund
- Shareholders' Agreement
- Commercial Law
- Infrastructure Investment
areas_of_law:
- Commercial Law
- Contract Law
---
# Court File and Parties
**COURT FILE NO.:** CV-19-620222-00CL
**DATE:** 20190802
**SUPERIOR COURT OF JUSTICE – ONTARIO**
**- COMMERCIAL LIST**
**RE:** 4352238 CANADA INC.
Applicant
**AND:**
SNC-LAVALIN GROUP INC., SNC-LAVALIN INC.
SNC-LAVALIN HIGHWAY HOLDINGS INC., 7577702 CANADA INC. and MICI INC.
Respondents
**BEFORE:** HAINEY J.
**COUNSEL:**
Mark A. Gelowitz, Allan D. Coleman, and Lia Bruschetta for the Applicant
Linda Fuerst and Fahad Siddiqui, for SNC-Lavalin Group Inc., SNC-Lavalin Inc., and SNC-Lavalin Highway Holdings Inc. (“SNC”)
Eliot N. Kolers and Alexander Rose, for 7577702 Canada Inc. and MICI Inc. (“CPPIB Respondents”)
**HEARD:** June 21, 2019
---
# Endorsement
## Background
[1] This is an application for a declaration that 4352238 Canada Inc. (“435”) has validly exercised its right of first refusal (“ROFR”) over the proposed sale by SNC of 10.1% of shares of 407 International Inc. (“407”) to OMERS and is therefore entitled to acquire 40,300,000 shares of 407 from SNC, on the same terms and conditions as in the proposed sale to OMERS.
## Facts
[2] In 1998, the Province of Ontario privatized Highway 407 ETR through the sale of the corporation it had established to oversee the highway’s design, construction, operation, maintenance and financing.
[3] 407 was incorporated for the purpose of bidding to acquire the 407 Highway ETR from the Province.
It was ultimately the successful bidder and acquired the highway for a payment to the Province of $3.113 billion.
[4] At the time of the acquisition, 407’s ownership structure was as follows:
* Grupa Ferrovial S.A. (“Grupa Ferrovial”) and Cintra Concesiones De Infrastructuras De Transporte, S.A. (“Cintra” and, together with Grupa Ferrovial, “Cintra Parties”) held 61.29% of the equity in 407;
* SNC held 22.58% of the equity in 407; and
* The Caisse de Dépot et placement du Quebec (“CDPQ”) held 16% of the equity in 407.
[5] In April 1999, the Cintra Parties, SNC, CDPQ and 407 entered into a unanimous shareholders’ agreement (“407 USA”).
Under the terms of the 407 USA the parties were granted various rights, including a ROFR with respect to any offers by third parties to purchase shares of 407 from the existing shareholders.
[6] In 2002 SNC agreed to sell a portion of its interest in 407 to the Cintra Parties for $178 million.
Part of the consideration for the sale was a waiver of rights by the Cintra Parties with respect to the ROFR in the 407 USA.
Specifically, the Cintra Parties agreed to waive the ROFR provided the sale of shares by SNC was not made to a competitor of the Cintra Parties (“Cintra Waiver”).
[7] In April 2019, SNC gave notice to 435 pursuant to the 407 USA that SNC had reached an agreement to sell 40,300,000 of its common shares in 407 to Somerset Acquisition LP (“Somerset”), a special purpose vehicle of OMERS (“Third Party Offer”).
[8] In the notice of the Third Party Offer SNC took the position that 435’s ROFR under the 407 USA had been waived with respect to the Third Party Offer because of the Cintra Waiver.
SNC asserted that neither Somerset nor OMERS was a “Competitor” within the meaning of the Cintra Waiver.
[9] In May 2019, 435 delivered its notice to SNC under the 407 USA notifying SNC that 435 was exercising its ROFR with respect to the Third Party Offer to acquire the 40,300,000 common shares of 407.
[10] In May 2019, SNC and the CPPIB Respondents advised 435 that they intended to proceed with the sale to OMERS and not to recognize 435’s ROFR.
## Issue
[11] The sole issue on this application is whether 435 validly exercised its ROFR under the 407 USA with respect to the Third Party Offer.
The determination of this issue requires me to decide whether OMERS is a “Competitor” of the Cintra Parties as defined in the Cintra Waiver.
## Positions of the Parties
[12] 435 submits that the respondents have the onus of establishing that OMERS is not a “Competitor” within the meaning of the Cintra Waiver.
It argues that although OMERS is a pension fund, it is not a pension fund that holds its competing interests “solely as a financial investor” which the Cintra Waiver requires for OMERS to be excluded from the definition of “Competitor”.
As a result, 435 submits that it validly exercised its ROFR in the 407 USA with respect to the Third Party Offer and it is therefore entitled to acquire the 40,300,000 common shares of 407 on the same terms as the Third Party Offer.
[13] The respondents submit that 435’s ROFR has been waived by it in respect of the Third Party Offer because OMERS does not have competing interests with 435.
Further, even if OMERS has competing interests with 435, it is a pension fund, and it is therefore excluded from the ROFR because it is solely a “financial investor” in 407.
The fact that OMERS is an active investor does not mean that it is not a “financial investor” within the meaning of the Cintra Waiver.
## Analysis
[14] The Cintra Waiver provides as follows:
> 27.
Waiver
> (a) Each of the Purchasers and 407 Toronto, for itself and on behalf of its Permitted Transferees, agree that if, after the completion of the sale of the Interest to the Purchasers, SNC-Lavalin Inc., or any wholly owned subsidiary, (“SNC”) proposes to sell, transfer or assign, directly or indirectly, (whether a legal or beneficial interest) any of its remaining shares of 407 International to a Third Party, as defined in the 407 International Shareholders’ Agreement and such Third Party, or any person which controls such Third Party, does not have competing interests with Cintra, Grupo Ferrovial, or any of their subsidiaries, in relation to construction, operations, asset management of, and investment in, road or airport infrastructure projects other than solely as a financial investor such as a pension or superannuation fund (a “ Competitor ”), and that such Third Party, or any person which controls such Third Party, is not a Governmental Entity, other than solely as a financial investor such as a pension or superannuation fund, then neither the Purchasers nor 407 Toronto will exercise any of their respective pre-emptive rights, rights of first refusal, priority rights or piggy-back rights under the 407 International Shareholders’ Agreement (the “ Rights ”), and the Purchasers and 407 Toronto will cause their Permitted Transferees not to exercise any such Rights, in respect of such shares of 407 International that SNC proposes to sell to such Third Party.
[15] The parties agree that the overriding objective of the court when tasked with interpreting a contract is to determine “the intent of the parties and the scope of their understanding”, guided by the following fundamental principles of contractual interpretation:
> (a) The court should determine the intention of the parties in accordance with the language they have used in the written document, based upon the “cardinal presumption” that they have intended what they have said;
> (b) The court should read the text of the written agreement as a whole, giving the words used their ordinary and grammatical meaning, in a manner that gives meaning to all of its terms and avoids an interpretation that would render one or more of its terms ineffective;
> (c) The court should read the contract in the context of the surrounding circumstances known to the parties at the time of its formation.
The surrounding circumstances, or “factual matrix”, include facts that were known or reasonably capable of being known by the parties when they entered into the contract, such as facts concerning its genesis, its purpose, and the commercial context in which it was made; and
> (d) Finally, the court should read the text in a fashion that accords with sound commercial principles and good business sense, avoiding a commercially absurd result, objectively assessed.
[16] On a plain reading of the Cintra Waiver the definition of “Competitor” has the following two component parts, both of which must be present for the waiver not to apply to the Third Party Offer:
> (a) The proposed purchaser or the person who controls the proposed purchaser must have “competing interests with any of the Cintra Parties (including their subsidiaries) in relation to construction, operations, asset management of, and investment in, road or airport infrastructure projects”; and
> (b) Any competing interests must be held “other than solely as a financial investor such as a pension or superannuation fund”.
[17] The parties disagree as to whether the competing interests referred to in the Cintra Waiver must be in relation to all of “construction”, “operations”, “asset management of” and “investment in” road or airport infrastructure projects.
[18] The respondents submit that the competing interests must be in relation to all of these activities. 435 submits that a proper interpretation of the Cintra Waiver demonstrates that the parties’ intention was to include within the definition of “Competitor” any party that had competing interests in any one of the “construction of”, or “operations of”, and “asset management of” – and an “investment in” – airport and road projects, other than solely as a financial investor.
[19] Irrespective of the determination of what constitutes competing interests under the terms of the Cintra Waiver, the fundamental question that I must determine on this application is whether OMERS would hold its interest in 407 “solely as a financial investor” if it acquires the shares from SNC pursuant to the Third Party Offer.
[20] It is for this reason that I will first consider and determine this issue.
[21] It is clear from a plain reading of the Cintra Waiver that the parties intended that a pension fund would constitute a third party purchaser with a competing interest held solely as a financial investor which would exclude it from 435’s ROFR.
[22] Further, there is no dispute that OMERS is a pension fund.
My reading of the Cintra Waiver makes it clear to me that a pension fund is a prima facie example of an entity that the parties agree would hold its interest in 407 solely as a financial investor and would not trigger 435’s ROFR.
[23] However, 435 submits that merely establishing that a third party purchaser is a pension fund is not the end of the inquiry because of the following:
> (a) If a pension fund holds its competing interests solely as a financial investor, then it is not a Competitor;
> (b) If a pension fund holds any competing interests other than solely as a financial investor, then it is a Competitor.
[24] 435 submits that I must interpret the Cintra Waiver in a manner that implements the objective contractual intent of the parties at the time they signed the agreement in 2002.
[25] At paras 54 and 55 of its factum 435 makes the following submissions about the changes in the investing strategies of Canadian pension funds since 2002:
> 54.
In 2002, Canadian pension funds were predominantly passive, or purely financial, investors.
This is still true for smaller pension or superannuation funds in Canada and worldwide.
However, beginning in the mid to late 2000s and evolving to the present, large Canadian pension funds moved away from their traditional approach as solely passive investors, to being active owners-managers, particularly in the emerging private market for infrastructure assets.
This is, in fact, now a defining feature of the investment strategy of large Canadian pension plans.
> 55.
Today, the portfolios of most large Canadian pension funds include direct investments in real estate, private equity and infrastructure, where they take meaningful ownership positions in the assets they invest in – anything from a minority stake with the right to board representation, to 100% ownership and control of a company.
[26] According to 435 this shift in the Canadian pension fund landscape has been particularly prevalent in the infrastructure sector because few other entities have the scale, cashflow, internal talent and long-term focus of large Canadian pension funds, like OMERS, to viably invest in and manage major privatized infrastructure projects.
[27] 435 submits that while in 2002, a pension fund was a “useful example” of an entity that may act “solely as a financial investor”, today large Canadian pension funds, like OMERS, are “some of the world’s most successful and prolific active investors and managers in airport and road infrastructure investments-in direct competition with the interests of Cintra”.
[28] According to 435, the following are examples of competitive interests held by OMERS other than as a financial investor:
> (a) OMERS owns a 65.1% interest in the corporation that manages and operates the Confederation Bridge toll road.
As a result, OMERS has de jure control over the Confederation Bridge toll road;
> (b) OMERS is one of three Canadian pensions funds that owns and operates the Chicago Skyway concessionaire without the intervention of any third party individual operator.
In OMERS’ bid for this project it stated as follows:
>
> [OMERS] expressed its excitement at ‘the prospect of owning and operating’ the Chicago Skyway toll road, and confirms that Borealis Infrastructure (now OMERS Infrastructure) has ‘significant experience investing in and managing transportation assets, including the Detroit River Tunnel …and the Confederation Bridge’ and ‘a team of 80+ investment professionals that source and execute transactions and manage assets’; and
>
> (c) OMERS has participated in several consortia to bid on road infrastructure projects, including, the 407 East Extension Phase 1 in Ontario, the Sea to Sky Highway in British Columbia, the Indiana Toll Road in the United States and the Queensland Motorway and Westconnex toll road in Australia.
According to 435, OMERS has competed directly with Cintra in adverse consortia in relation to these bids.
[29] OMERS’ former president and CEO, Michael Nobrega, described how OMERS has changed since 1998 as follows:
> At the time, OMERS was essentially a passive investor.
We were basically a small Canadian pension fund operating in the province of Ontario and relying on external manager[s] to provide our investments.
Today [March 2014], we are a fully integrated professional organization, both in terms of investments and pension administration.
[30] According to 435, since 2004 OMERS has “touted” its progressive transition from a traditional passive investor to an owner-oriented active investor.
In its 2004 Annual Report OMERS explained this transition as follows:
> First, we are making the transition to a new asset mix strategy that relies less on more volatile public markets and more on alternative assets such as infrastructure investments (like bridges and energy companies), private equity and real estate…
>
> Second, we will take a more owner-oriented approach to our investments rather than the passive investor approach that we and many other institutional investors have taken in the past.
This approach has led to the in-house and hands-on business model we now have in place, with management of real estate infrastructure and private equity under OMERS control.
>
> And third, as a result of the first two changes, it is imperative that we have executives and senior managers with extensive business and investment experience.
That new team is now in place.
[31] According to 435, OMERS’ current strategy of owning and managing road and airport infrastructure projects includes influence over governance through representation on the projects’ boards of directors as well as participating in setting strategy and direct control with management teams.
[32] For all of these reasons, 435 submits that “while OMERS is a pension fund, it does not hold its competing interests in road and airport projects solely as a financial investor”.
[33] 435 argues that OMERS is an active owner and asset manager in the road and airport infrastructure market and competes directly with Cintra in these markets.
[34] According to 435, a plain reading of the Cintra Waiver makes it clear that the parties did not intend that the ROFR would be waived simply because the proposed purchaser is a “pension fund” without further examination of whether the pension fund in question holds interests “other than as a financial investor” and is therefore a “Competitor”.
According to 435 the phase “solely as a financial investor” is the determinative phrase in deciding whether a party is a “Competitor” within the meaning of the Cintra Waiver.
[35] Because OMERS actively and directly invests in road and airport infrastructure projects and participates in the management and operation of those projects, 435 submits that it “long ago stepped out of the shoes of being solely a financial investor.
It is a “Competitor”.
[36] The respondents submit that the parties expressly excluded “pension funds” from the definition of “Competitor” as a specific example of the larger category of excluded “financial investors”.
As a pension fund, the respondents submit that OMERS is, by definition, not a “Competitor”.
They point out that there is no evidence that OMERS “is anything other than a pension fund”.
[37] Further, the respondents submit that 435’s position that the Cintra Waiver only excludes pension funds that follow a passive investment strategy would require the court to “re-write” the agreement.
At para 58 of the respondents’ joint factum they make the following submission with respect to 435’s position:
> 58.
This approach is directly contrary to the principles of contractual interpretation.
Essentially, the Applicant asks the Court to re-write the exclusion from the definition of “Competitor” to read “other than solely as a passive financial investor such [as] a pension or superannuation fund following a passive investment strategy .” As noted above, as a matter of law, there is no basis on which this Court could re-write the contract in that manner.
Had the parties intended to limit the exclusion only to entities following passive investment strategies, they could have said so in section 27.
They did not.
[38] I agree with the respondents’ submissions.
The Cintra Waiver does not distinguish between passive and active financial investors.
There is no reason why the factual matrix with respect to the Cintra Waiver should be limited to the activities of Canadian pension funds as 435’s expert, Professor Ambachtsheer, did in arriving at his expert opinion supporting 435’s position.
Further, Professor Ambachtsheer was not provided with the 407 USA or any understanding of CDPQ’s investment in 407 before preparing his initial expert report.
As a result, his characterization of CDPQ’s investment in 407 in 1999 as “passive” was made without the knowledge that CDPQ had the right to nominate directors and approve 407’s auditors and budget.
Under cross-examination he agreed that CDPQ’s investment in 407 was an example of an “active” investment by a pension fund.
[39] The Cintra Parties are Spanish entities and they and SNC are engaged in infrastructure business on a worldwide basis.
Further, the Cintra Waiver refers to pension funds generally.
There is, therefore, no basis for limiting the factual matrix relating to the Cintra Waiver to the activities of Canadian pension funds as Professor Ambachtsheer has done in his expert report.
[40] Further, the evidence establishes that a number of Canadian pension funds were engaged in active investing in infrastructure projects when the parties entered into the Cintra Waiver in 2002.
These active investments include the following:
> (a) Before 2002 the Ontario Teachers Pension Plan (“OTTP”) had adopted an active investor model and was engaged in high profile private market transactions such as the acquisition of an interest in Maple Leaf Sports and Entertainment and the privatization of Cadillac Fairview Corporation Limited;
> (b) OMERS, through its subsidiary Borealis, engaged in direct, active investments in the Detroit Tunnel in 2001 and in long-term care facilities in 2000; and
> (c) CDPQ, a pension fund manager, was a direct participant in 407 in 1999 with investor rights that allowed it to influence the strategic direction and management of the company.
[41] In light of this evidence, 435’s position cannot be supported that based upon the factual matrix in 2002, when the parties excluded “pension funds” from the definition of “Competitor” they meant only to exclude pension funds following a passive investment strategy.
[42] I accept the expert evidence of Mark Weisdorf, who has extensive infrastructure investment experience, that the term “financial investor” has had the same recognized meaning within the infrastructure investment industry for over 30 years.
[43] According to Mr. Weisdorf at page 4 of his expert report,
> …The term “financial investor” is used to refer to an investor that is motivated to realize a financial return on its investment – such as a pension fund or superannuation fund, insurance company, sovereign wealth fund, endowment, foundation, or private equity fund – and seeks a certain minimum level of return based on a given risk profile.
>
> While a financial investor may use ownership rights as an investor to protect or promote its financial interest, a financial investor does not typically “run the businesses” in which it invests or provide the suite of services required to run the investee company’s day-to-day operations.
Instead, financial investors use their skills to maximize risk-adjusted returns by sourcing, selecting, investing, overseeing and disposing of their investments at what they consider to be the optimal time.
>
> In the infrastructure context, a financial investor is a capital provider that does not provide design, architectural, engineering construction, operations and/or maintenance services to the infrastructure project.
[44] At page 5 of his expert report Mr. Weisdorf compares the size of the workforce and market capitalization of Cintra and SNC to that of OMERS.
It is significant to note that Cintra has approximately 95,000 employees and a market capitalization of approximately EUR $16.2 billion and SNC has approximately 52,000 employees and a market capitalization of approximately CAD $4.2 billion.
By way of comparison, OMERS has approximately 3,000 employees for approximately CAD $97 billion in net assets under management.
I agree with Mr. Weisdorf’s conclusion that “these statistics reflect the fact that pension funds are not typically in a position to engage in the construction of infrastructure projects or provide the day-to-day operations of a completed infrastructure project”.
[45] I also accept Mr. Weisdorf’s conclusion at pp. 6-7 of his expert report that a financial investor’s active management of its investment, by way of shareholder voting rights and nomination of representatives to a board of directors does not mean that it “ceases to be considered a ‘financial investor’”.
[46] At page 7 of Mr. Weisdorf’s expert report he concludes as follows:
> The definition of a ‘financial investor’ in the infrastructure context is not based on whether the investor manages its investments directly or retains a competent third-party investment manager, or how actively its investments are managed.
Nor is the definition based on how much of an infrastructure project it owns or controls.
Instead, an investor that is solely a financial investor can be identified by the fact that it is motivated to realize a financial return on its investment; it does not construct and/or operate the infrastructure project or provide day-to-day operational services.
As noted above, its expertise is in the sourcing, selecting, investing, overseeing and disposing of its investments.
[47] The respondents also adduced expert opinion evidence from Mr. Hugh O’Reilly, a pension expert.
At para 61 of his expert report, Mr. O’Reilly concludes that the development of a more active and direct approach to investing does not change the fact that funds like OMERS are, and have been for the last twenty years, pension funds “engaged solely in investment activity and are not in the business of operating the companies in which they invest”.
[48] At para 62 of his expert report Mr. O’Reilly concludes as follows:
> 62.
The defining features of pension funds have not fundamentally changed over the last twenty years.
The purpose of these funds is to invest in various asset classes as opposed to operating a particular business or type of business.
In the case of infrastructure projects, pension funds bring the money to a consortium.
That money is provided with certain ownership and oversight rights.
However, the objective of pension funds remains the maximization of financial returns for the benefit of their beneficiaries.
Their business is not to conduct the day-to-day operations of the infrastructure company.
That was true in 2002 and it remains true today.
[49] In light of the evidence of Mr. Weisdorf and Mr. O’Reilly, I have concluded that when the parties referred to a pension fund as an example of an entity that would purchase shares in 407 “solely as a financial investor”, they did not distinguish between pension funds engaged in either a passive or an active investing strategy.
I find on the evidentiary record before me that it was well known to the parties in 2002, when the Cintra Waiver was executed, that pension funds that invested in infrastructure projects actively managed their investments either directly or indirectly by a third party manager.
This would include OMERS both in 2002 and today.
[50] I have applied the fundamental principle of contractual interpretation determining the intent of the parties and the scope of their understanding by reading the language that they used in the document based upon the “cardinal presumption” that they intended what they said in the context of the surrounding circumstances known to them at the time.
In doing so, I have concluded that the parties to the Cintra Waiver intended that a pension fund, such as OMERS is today, should be excluded from the ROFR because OMERS’ proposed purchase of SNC’s shares is “solely as a financial investor”.
[51] 435’s submissions with respect to the “Macquarie Waiver” do not assist me in interpreting the Cintra Waiver because I must focus upon the language contained in that document not the language used in a separate contract between the parties.
[52] Further, it is not necessary for me to decide whether OMERS’ competing interests must be in relation to all of the activities referred to in the Cintra Waiver as the respondents submit or any one of them as 435 submits because OMERS is excluded from the ROFR because it is solely a financial investor.
## Conclusion
[53] For all of these reasons 435’s application is dismissed because it waived its ROFR with respect to OMERS’ proposed purchase of SNC’s shares in the Cintra Waiver.
## Costs
[54] If the parties cannot settle the costs of the application, which I urge them to do, they may schedule a 9:30 a.m. attendance with me to deal with costs.
[55] I thank counsel for their very helpful submissions.
---
HAINEY J.
Date: August 2, 2019
