(M32197, M32199, M32200)
COURT OF APPEAL FOR ONTARIO
RE:
BNY CAPITAL CORPORATION (Applicant (Respondent in Appeal)) – and – STAMOS KATOTAKIS ET AL (Respondents (Appellants in Appeal)
LINEDATA SERVICES S.A., (Applicant (Respondent in Appeal) – and - STAMOS KATOTAKIS ET AL. (Respondents (Appellants in Appeal)
STAMOS KATOTAKIS ET AL (Respondents (Appellants in Appeal) – and – WILLIAM R. WATERS LIMITED ET AL. (Respondents (Respondents in Appeal)
BEFORE:
FELDMAN J.A. (In Chambers)
COUNSEL:
Peter F. C. Howard and Timothy M. Banks
for the appellants Stamos Katotakes et al.
Norman Emblem and Michael Schafler
for the respondents Linedata Services S.A.
William Burden and Linda Knol
for the respondents William R. Waters Ltd.
Gordon McKee
for the respondent BNY Capital Corporation
R. Paul Steep
for Financial Models Company
HEARD:
February 10, 2005
E N D O R S E M E N T
1The appellant is one of three major shareholders of Financial Models Company, Inc., now a public company. FMC is the subject of a take-over bid by Linedata Services S.A.
2The shareholders’ agreement among the three major shareholders, Mr. Katotakis, Dr. Waters, and BNY Capital Corporation provides in para. 3.3 for a right of first refusal and a right of first offer. One or both of those rights were triggered in December 2004, a dispute arose and the parties moved in the Commercial List for a determination of the issues. The two issues were: (1) whether the appellant’s acceptance of the offer to sell complied with s. 96 of the Ontario Securities Act, R.S.O. 1990, c. S.5, and, if it did not, whether that failure made the acceptance ineffective and void; and (2) whether the selling shareholders were entitled to include as part of their offer to sell, a “superior proposal” condition which allowed them to increase the selling price of the shares if a superior proposal was received.
3The sell offer accepted by the appellant was at a price of $12.20. Linedata had made a takeover bid at $13.00. The appellant accepted the $12.20 offer, and in accordance with the terms of the shareholders’ agreement, made a bid for all of the shares of the company but with financing which had conditions. The respondents took the position that the wording of the conditions made the offer non-compliant with s. 96 of the Securities Act and therefore the acceptance ineffective, leaving the other shareholders free to accept the Linedata takeover bid.
4On January 21, 2005, Linedata increased its takeover bid to $14.50, and the two selling shareholders took the position that this was a superior proposal referred to in the terms and conditions of their offer, and that the appellant was obliged to meet the new price. He did not do so. The Linedata offer was extended to February 11, 2005.
5Ground J. heard the motion on February 1, 2005 in order to render his decision before February 11, 2005. On February 8, 2005, he gave oral reasons holding for the respondents on both issues: (1) the appellant’s acceptance of the sell offer was invalid because it contravened s. 96 of the Securities Act; and (2) the respondent shareholders were entitled under para. 3.3 of the shareholders agreement to include a superior proposal provision in their sell offer. The appellant had not responded that he would meet the new sale price, therefore the two shareholders were to tender their shares to Linedata.
6The appellant moved on February 9, returnable February 10, for an order staying the decision of Ground J. pending the hearing of an appeal from his order, as well as an injunction preventing the two responding shareholders from tendering their shares to Linedata on February 11. The motion was heard on February 10. The appellant asks for an expedited appeal in the week of February 21, 2005 and offered an undertaking as to damages subject to some limitations. The court is able to accommodate such an appeal if this motion were to be granted.
7The three-pronged test on this motion is (a) a serious issue to be tried; (b) irreparable harm; (c) balance of convenience. It is accepted that the stay will depend on a balance of the three factors that addresses the interests of justice in all the circumstances.
8In considering the potential merit of this appeal, the court must have in mind not only the underlying issues, but the standard of review that this court will apply. Both issues involve findings of fact by the motion judge as well as the interpretation of commercial documents and the interpretation of the Securities Act and its application to a commercial transaction. As the motion judge is a very experienced judge sitting on the Commercial List, considerable deference will be accorded to his expertise. In any event, the court will have to find a palpable and overriding error of fact or an error of law before it will interfere.
9In order for the appellant to succeed on the appeal, the trial judge will have to be reversed on both issues. Although the issues raised were both interesting and arguable at first instance, given the standard of review that will be applied by this court, the merits of the appeal do not present a strong factor.
10The appellant says that he will suffer irreparable harm because if the other shareholders tender their shares to Linedata, he will have lost control of the company, and that the purpose of the right of first refusal was to allow him the ability to retain control. The respondents say that the appellant had the ability to retain control by agreeing to meet the superior proposal price. In any event, he will suffer no irreparable harm because he can sell his shares for $14.50 per share, over $2.00 more than he is offering to other shareholders.
11On the other hand, the Linedata bid expires today. Linedata is not obliged to extend its bid. It appears likely that if the stay were granted, Linedata would extend its bid to accommodate the appeal because it remains anxious to obtain the company, but it is not obliged to do so. If it did not extend its bid, then the other shareholders, including the 18 per cent of shares owned by the public, would lose the opportunity to tender to the higher bid and would only have the option of holding their shares, or selling their shares to the appellant for the lower price of $12.20. Ultimately dissenting shareholders rights may later come into play.
12If the appellant were then to lose the appeal, the respondents would have to look to the appellant’s undertaking as to damages to recoup their loss. The value of that undertaking, the court is told, is based on the value of the appellant’s shares in FMC. Those shares were relatively illiquid and trading at something over $8.00 per share prior to these events. If the appellant obtains control of the company, those shares will be subject to the financing used for the bid. In court, counsel advised that the appellant will obtain the undertaking of the financier of the bid to support the undertaking as to damages up to the price of $14.50 per share if the appellant’s bid is successful. That undertaking has now been provided.
13Counsel for BNY stated that it was neutral and simply wanted to know to whom to tender its shares. However, he suggested that there is a new claim for damages raised on the appeal for the first time, and if his client is now exposed to damages, then the stay should be granted and the appeal heard. Otherwise, if the stay is not granted, the appeal should be quashed. In its factum, the appellant suggests that if the stay is not granted the appeal becomes nugatory. However, it would not be appropriate for the court to quash the appeal on this motion without full argument.
14In my view, weighing all of the factors, the balance of convenience favours the appellant. First, it appears, based on the history of the events to date, that Linedata would want to extend the deadline for its bid for two or two and one half weeks to accommodate a stay. It extended its bid once before in order to accommodate the hearing before the Commercial List judge. In that event, the potential for damage is minimized. Linedata is concerned that another bidder may now intrude and cause it to have to increase its bid and that that loss is not covered by the undertaking. However, in that event, presumably the other respondents will suffer no damage, and Linedata will be able to seek damages from the appellant and the value of his shares.
15If Linedata does not extend its bid past today, and the appellant loses its appeal, then the respondents would have to call on the undertaking. In light of the apparent value of the shares, although there is some risk, it appears that prima facie, the appellant has significant assets to back the undertaking he gives to the court for this indulgence.
16In terms of the appellant’s claim that the loss of the right he asserts to acquire control of the company constitutes irreparable harm, in one sense it is not, because his shares currently have significant value, and to the extent he is somehow entitled to obtain control, and then obtain a premium for control, that is quantifiable and its loss is compensable in damages. However, that raises again the issue addressed by counsel for NYB, which is whether, if a stay were granted, the appellant could proceed with the appeal and/or with a claim for damages. I am not in a position to decide that issue on this motion.
RESULT
17The application for a stay of the judgment of Ground J., an interim and interlocutory injunction preventing the respondent shareholders, Waters and BNY, from tendering their shares to the Linedata bid, and for an expedited appeal to be heard during the week of February 21st. is granted. The undertakings as to damages filed by the appellant and by ABRY Partners LLC are conditions of this order and form part of it. In order to ensure the enforceability of the ABRY commitment, the appellant is to immediately provide the ABRY undertaking in the form of an undertaking to the court that it will make the funds available to the appellant as set out in its letter. The appeal will be heard on February 22, 2005. The appellant shall have 1.5 hours for oral argument, the respondents 1.5 hours. All material is to be filed by February 17, 2005. Costs of this motion shall be determined by the panel hearing the appeal.
18I wish to thank counsel for all parties for their helpful oral submissions and for their material prepared on very short notice.
Signed: “K. Feldman J.A.”