DATE: 20010910
DOCKET: C36434
IN THE MATTER OF a “Unitholder Rights Plan” announced on May 7, 2001 by the trustees of the Labrador Iron Ore Royalty Income Fund, a trust governed by the terms of a Declaration of Trust dated October 5, 1995, in relation to potential take-over bids within the meaning of the Securities Act (Ontario)
IN THE MATTER OF the interpretation of the Declaration of Trust dated October 5, 1995 in relation to the validity of the “Unitholder Rights Plan”
COURT OF APPEAL FOR ONTARIO
RE:
RIO TINTO CANADIAN INVESTMENTS LIMITED (Applicant/ Respondent in Appeal) –and– BRUCE C. BONE, JAMES C. McCARTNEY, WILLIAM J. CORCORAN, PAUL H. PALMER and DONALD J. WORTH, each in his capacity as Trustee of the Labrador Iron Ore Royalty Income Fund (Respondents/Appellants in Appeal)
BEFORE:
OSBORNE A.C.J.O., FINLAYSON and WEILER JJ.A.
COUNSEL:
R. Paul Steep and Anthony Alexander, for the appellants
Mark A. Gelowitz and Donald Gilchrist, for the respondent
HEARD:
August 31, 2001
On appeal from the order of Justice James M. Farley dated May 30, 2001.
E N D O R S E M E N T
1The respondent Rio Tinto Canadian Investments Limited (“Rio Tinto”) brought an application in the Superior Court seeking a declaration concerning the validity of a “Unitholder Rights Plan” (the “rights plan”) announced by the Trustees of a public unit trust, the Labrador Iron Ore Royalty Income Fund. The rights plan was created by the trustees through unilateral amendments to the Declaration of Trust (the “Declaration”) that governs the trust. Farley J. held that the amendments to the Declaration permitting the creation of the rights plan and the rights plan were null and void. The Trustees have appealed that decision.
2Rights plans are one of the defensive measures permitted under Canadian securities law. In the event of a hostile or unpermitted takeover bid, unitholders have the right to subscribe for a number of shares equal to the number held by the unitholder at half-price. Rights plans are commonly adopted to encourage hostile bidders to make a “permitted bid”, namely a bid that has the approval of the directors or trustees of the public entity and to prevent “creeping” take-over bids by way of private agreements with major shareholders as opposed to all shareholders.
3Rio Tinto owns approximately 20.3% of the units of the trust. Most of its units were acquired pursuant to a failed hostile take-over bid that was below an independent valuation of the fair market value of the units. Rio Tinto’s legal right and ability to purchase further units of the trust was the direct target of the Trustees’ creation of the rights plan.
4There is no issue concerning the bona fides of the Trustees or the genuineness of their stated belief that in creating the Plan they were acting for the protection of the unitholders.
5At the time the Trustees amended the Declaration, the trustees were aware of section 3.3(b) of the Declaration which provides that no further units can be issued unless authorized by an extraordinary resolution, which requires a 75% vote by the unitholders. There is no issue that this provision of the Declaration maintained the passive nature of the Fund and prevented dilution to the original unitholders either by the Fund issuing new units for cash or as currency for an acquisition.
6Having regard to Rio Tinto’s shareholding, the Trustees were uncertain they would be able to obtain the necessary 75% approval. The Trustees therefore sought a way to overcome the Declaration’s prohibition against the issuance of new units without a 75% vote by the unitholders in order to create the rights plan. Without an ability to issue new units under the terms of the rights plan, the plan could not be implemented. In the face of this obstacle, the Trustees unilaterally purported to amend the Declaration by deleting subsection 3.3(b) and replacing it with a new subsection. The replacement subsection 3.3(b) was identical to the existing subsection with the exception of the portion underlined below:
Units may not be issued by the Fund or the Trustees, other than:
(i) pursuant to this Offering;
(ii) pursuant to Section 5.8;
(iii) pursuant to the limited circumstances contemplated in the Unitholders Rights Agreement; or
(iv) an issue of units approved by a resolution of the Unitholders passed by an Extraordinary Resolution.
[Emphasis added. Section 5.8 is not relevant to this appeal.]
7Rio Tinto contended that the amendment to the declaration of trust was null and void on the basis that the Trustees did not have the power to make this amendment under the terms of the trust. The Trustees powers to amend the trust are found in s. 12 of the Declaration. The relevant portion of Section 12 provides:
The provisions of this Declaration of Trust, except where specifically provided otherwise, may only be amended by Extraordinary Resolution; provided that the provisions of this Declaration of Trust may be amended by the Trustees without the consent, approval or ratification of the Unitholders or any other person:
(b) at any time for the purpose of:
(ii) providing, in the opinion of the Trustees, additional protection for the Unitholders;
but notwithstanding the foregoing, no such amendment shall reduce the fractional undivided interest in the Trust Assets represented by any Unit without the consent of the holder of such Unit ….
8Farley J. held that the issuance of shares pursuant to the Plan would have a diluting result overall and particularly on Rio Tinto’s holdings as a unitholder of 20.3% of the units. He declared that the Rights Plan and the Second Supplement to the Declaration of Trust were null and void since they contravened the notwithstanding proviso of s. 12.1 of the Declaration of trust.
9The appellant submits that, having regard to the purpose of the trust and to the wording of the trust as whole, the trustees had the power to amend the Declaration. The purpose of the trust was to create a public traded vehicle that would maximize value to shareholders. All the trustees have done, it is submitted, is to give the shareholders additional protection which they are entitled to do under s. 12 (b)(ii) of the Declaration. By amending the Declaration and enacting the rights plan the Trustees submit they are filling a gap that would otherwise exist and enabling the commercial expectations of the unit holders to be realized. The Trustees submit that the concluding words of s. 12, “…no amendment shall reduce the fractional undivided interest in the Trust Assets represented by any Unit without the consent of the holder of such Unit…” only mean that each individual share must have the same characteristics.
10We do not agree that this is the correct interpretation to be given to s. 12 when read in the context of the Declaration as a whole. We agree with Farley J. that the amendment to s. 3.3(b) and the rights plan violate the anti-dilution aspect of the notwithstanding clause contained in s. 12 and would require an amending resolution passed by 75% of the shareholders. Accordingly, the rights plan is ultra vires the Declaration that governs the powers of the Trustees of this public unit trust and is therefore void. In view of our decision on this fundamental issue, it is not necessary for us to consider the other bases on which Farley J. made his order.
11The appeal is dismissed with costs to the respondent, including the costs of the motion for an interim stay brought by the appellant.
Signed: “C.A. Osborne A.C.J.O.”
“G.D. Finlayson J.A.”
“Karen M. Weiler J.A.”