Sears Holdings Corporation et al. v. Ontario Securities Commission et al. [Indexed as: Sears Holdings Corp. v. Ontario Securities Commission]
84 O.R. (3d) 61
Ontario Superior Court of Justice, Divisional
Court,
Ground, Macdonald and Hackland JJ.
October 11, 2006
Securities regulation -- Appeal -- Standard of review -- Standard of review applicable to appeal from decision of Ontario Securities Commission reasonableness simpliciter -- Decisions of securities commissions with respect to interpretation of their constituting statutes entitled to strong curial deference -- OSC decision in respect of insider bid and compulsory acquisition transaction reasonable.
SH Co. made an insider bid (the "Offer") to acquire all of the shares of SC Inc. not owned by it, to be followed by a compulsory acquisition transaction (the "SAT") whereby SH Co. would acquire all of the shares of SC Inc. not tendered to the Offer. The SAT was a "business combination" for the purposes of Rule 61-501 issued pursuant to the Ontario Securities Act, R.S.O. 1990, c. S.5, and required approval by the majority of the shares of SC Inc. not held by SH Co. and related parties. The Ontario Securities Commission found that SH Co. had not complied with its disclosure obligations under s. 98 of the Act, that a Deposit Agreement contravened s. 97(2) of the Act, and that the conduct of SH Co. with respect to the Offer was abusive and/or coercive. The OSC ruled that the Offer was cease traded until the take-over bid circular was amended to make appropriate disclosure. SH Co. appealed.
Held, the appeal should be dismissed.
The standard of review to be applied to decisions of the OSC is reasonableness simpliciter. Strong curial deference should be accorded to decisions of securities commissions with respect to interpretations of their constituting statutes. In this case, the issues involved the determination of what constitutes "a collateral benefit" or "a consideration of greater value" under s. 97(2) of the Act; a determination of a change in information "that would reasonably be expected to affect the decision of holders of the securities" under s. 98 of the Act; whether the conduct of SH Co. during the course of the Offer constituted abusive and/or coercive conduct such that the OSC was entitled to exercise its public interest jurisdiction under s. 127 of the Act; and whether the remedy structured in the OSC's Order was appropriate in view of its findings on those issues. All of those questions were matters of the interpretation and application of the Act that went to the core of the OSC's expertise. The standard of review to be applied on those issues was reasonableness simpliciter. The reasons of the OSC illustrated a careful and thorough consideration of all the evidence with respect to the disclosure or non-disclosure of certain information regarding the Offer, the negotiation and entering into of the Support Agreements and the Deposit Agreement, and the disclosure or non-disclosure in connection therewith and various aspects of the conduct of SH Co. during the course of the Offer. The OSC's findings and remedies were reasonable. It was not necessary for the OSC to find a breach of a specific section of the Act in order to exercise its public interest jurisdiction under s. 127 of the Act.
APPEAL from the decision of the Ontario Securities Commission.
Cases referred to Canadian Tire Corp. (Re) (1987), 1987 4234 (ON SC), 59 O.R. (2d) 79, [1987] O.J. No. 221 (Div. Ct.), affg (1987), 10 OSCB 857, 1987 LNONOSC 47; [page62 ]Cartaway Resources Corp. (Re), [2004] 1 S.C.R. 672, [2004] S.C.J. No. 22, 238 D.L.R. (4th) 193, 319 N.R. 1, [2004] 8 W.W.R. 62, 2004 SCC 26, 28 B.C.L.R. (4th) 1, 14 Admin. L.R. (4th) 190; Committee for the Equal Treatment of Asbestos Minority Shareholders v. Ontario (Securities Commission), [2001] 2 S.C.R. 132, [2001] S.C.J. No. 38, 199 D.L.R. (4th) 577, 269 N.R. 311, 2001 SCC 37, 14 B.L.R. (3d) 1; Dr. Q. v. College of Physicians and Surgeons of British Columbia, [2003] 1 S.C.R. 226, [2003] S.C.J. No. 18, 223 D.L.R. (4th) 599, 302 N.R. 34, [2003] 5 W.W.R. 1, 2003 SCC 19, 11 B.C.L.R. (4th) 1; Law Society of New Brunswick v. Ryan, [2003] 1 S.C.R. 247, [2003] S.C.J. No. 17, 257 N.B.R. (2d) 207, 223 D.L.R. (4th) 577, 302 N.R. 1, 674 A.P.R. 207, 2003 SCC 20, 31 C.P.C. (5th) 1; Pezim v. British Columbia (Superintendent of Brokers), 1994 103 (SCC), [1994] 2 S.C.R. 557, [1994] S.C.J. No. 58, 92 B.C.L.R. (2d) 145, 114 D.L.R. (4th) 385, 168 N.R. 321, 14 B.L.R. (2d) 217 (sub nom. Ivany v. British Columbia); Pushpanathan v. Canada (Minister of Citizenship and Immigration), 1998 778 (SCC), [1998] 1 S.C.R. 982, [1998] S.C.J. No. 46, 160 D.L.R. (4th) 193, 226 N.R. 201; Robinson v. Ontario (Securities Commission), [2000] O.J. No. 648, 45 W.C.B. (2d) 485 (Div. Ct.) Statutes referred to Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) Securities Act, R.S.O. 1990, c. S.5, ss. 1.1 [as am.], 9(5), 97(2), 98, 127 [as am.] Rules and regulations referred to Ontario Securities Commission Rules, Rule 61-501
Mark A. Gelowitz, Allan D. Coleman and Shawn T. Irving, for appellants. Kelley McKinnon, for Ontario Securities Commission. Kent Thomson, Luis Sarabia and Sean Campbell, for Hawkeye Capital Management, LLC, Knot Partners Management, LLC and Pershing Square Capital Management, L.P. Paul Steep and Thomas Sutton, for Bank of Nova Scotia and Scotia Capital Inc. Peter Howard, for Royal Bank of Canada.
The judgment of the court was delivered by
Introduction
1GROUND J.: -- The appeal before this court is from a decision of the Ontario Securities Commission (the "OSC") arising out of an insider bid (the "Offer") by Sears Holdings Corporation ("Holdings") to acquire all of the shares of Sears Canada Inc. ("Sears Canada") not owned by it to be followed by a compulsory acquisition transaction (the "SAT") whereby Holdings would acquire all of the shares of Sears Canada not tendered to the Offer. The SAT is a "business combination" for purposes of Rule 61-501 issued pursuant to the Ontario Securities Act, R.S.O. 1990, c. S.5, as amended (the "OSA") and accordingly, requires approval by the majority of the shares -- of Sears Canada not held by Holdings or related parties. [page63]
2The Reasons of the OSC (the "Reasons") were issued on August 8, 2006. Among the issues dealt with by the OSC and in respect of which the decision of the OSC is appealed were:
(1) Did Holdings comply with its disclosure obligations in connection with the Offer?
(2) Did the Support Agreements entered into between Holdings and the Bank of Nova Scotia, Scotia Capital Inc. and the Royal Bank of Canada (collectively the "Banks") contravene s. 97(2) of the OSC?
(3) Did the Deposit Agreement entered into with Vornado Realty L.P. ("Vornado") contravene s. 97(2) of the OSA?
(4) Was the conduct of Holdings in connection with the Offer coercive and/or abusive? and
(5) What is the appropriate remedy to be ordered?
3The Order of the OSC dated August 8, 2006 (the "Order") provided as follows:
(1) Sears Holdings is directed to comply with Ontario Securities Law in respect of the Offer and all other offers made or to be made for shares of Sears Canada;
(2) The directors and senior officers of Sears Holdings Corporation and SHLD Acquisition Corp. are directed to cause their respective corporations to comply with and to cease to contravene Ontario Securities Law;
(3) The Offer and any other offer made or to be made for shares of Sears Canada by Sears Holdings or any affiliate thereof is cease traded until the take-over bid circular in respect of the Order or any other offer is amended to disclose:
(a) that Sears Holdings will exclude from the calculation of the required majority of the minority approval, on the anticipated second step subsequent acquisition transaction or any other offer and subsequent acquisition transaction in the future, the votes attached to the shares of Sears Canada held by or acquired from Scotia Capital Inc., The Bank of Nova Scotia and The Royal Bank of Canada which are the subject of the Support Agreements; and [page64 ]
(b) the identities and interests of the parties to the Support Agreements and a description of the material terms of the Support Agreements.
(4) The Offer for shares of Sears Canada by Sears Holdings and its affiliate SHLD is cease traded until the Take-Over Bid Circular in respect of the Offer is amended to disclose:
(a) the existence and terms of the release granted to Vornado pursuant to the Vornado Deposit Agreement;
(b) the grant by Sears Holdings of an identical release to all shareholders of Sears Canada who have tendered or will tender to the Offer or whose shares are acquired under the second step subsequent acquisition transaction; and
(c) that Sears Holdings will exclude from the calculation of the required majority of the minority approval, on the anticipated second step subsequent acquisition, the votes attached to the shares of Sears Canada held by or acquired by Sears Holdings from Vornado pursuant to the Vornado Deposit Agreement.
4The appellants (collectively "Holdings") submit that the OSC erred in law in numerous respects in finding that Holdings had not complied with its disclosure obligations under s. 98 of the OSA, that the Support Agreements and the Deposit Agreement contravene s. 97(2) of the OSA and that the conduct of Holdings with respect to the Offer was abusive and/or coercive and that the OSC further erred in law in fashioning the remedy incorporated into the Order.
Standard of Review
5The first issue to be determined by this court is the standard of review applicable to an appeal to this court from a decision of the OSC. In our view, in applying a functional and purposive approach and applying the factors set out in Pushpanathan v. Canada (Minister of Citizenship and Immigration), 1998 778 (SCC), [1998] 1 S.C.R. 982, [1998] S.C.J. No. 46, 160 D.L.R. (4th) 193 and in Dr. Q. v. College of Physicians and Surgeons of British Columbia, 2003 SCC 19, [2003] 1 S.C.R. 226, [2003] S.C.J. No. 18, 223 D.L.R. (4th) 599, the Supreme Court of Canada has clearly confirmed that the standard of review to be applied to decisions of the OSC is reasonableness simpliciter. In Committee for the Equal Treatment of Asbestos Minority Shareholders v. Ontario (Securities Commission), 2001 SCC 37, [2001] 2 S.C.R. 132, [2001] S.C.J. No. 38, 199 D.L.R. (4th) 577, Iacobucci J. stated at p. 152 S.C.R., p. 592 D.L.R.: [page65 ]
... it cannot be contested that the OSC is a specialized tribunal with a wide discretion to intervene in the public interest and that the protection of the public interest in a matter falling within the core of the OSC's expertise. Therefore, although there is no privative clause shielding the decisions of the OSC from review by the courts, that body's relative expertise in the regulation of the capital markets, the purpose of the Act as a whole and s. 129(1) in particular, and the nature of the problem before the OSC, all militate in favour of a high degree of curial deference. However, as there is a statutory right of appeal from the decision of the OSC to the courts, when this factor is considered with all the other factors, an intermediate standard of review is indicated. Accordingly, the standard of review in this case is one of reasonableness.
6The Supreme Court has also directed that strong curial deference should be accorded to decisions of the securities commissions with respect to interpretation of their constituting statutes. In Re Cartaway Resources Corp., 2004 SCC 26, [2004] 1 S.C.R. 672, [2004] S.C.J. No. 22, 238 D.L.R. (4th) 193, at p. 14 (QL), Le Bel J. stated at paras. 45 and 46:
This Court recognized in Pezim, supra, at pp. 593-94, that the Commission has special expertise regarding securities matters. The core of this expertise lies in interpreting and applying the provisions of the Act, and in determining what orders are in the public interest with respect to capital markets. In this case, the question of whether general deterrence is an appropriate consideration in formulating a penalty in the public interest falls squarely within the expertise of the Commission . . . .
Although courts are regularly called on to interpret and apply general questions of law and engage in statutory interpretation, courts have less expertise relative to securities commissions in determining what is in the public interest in the regulation of financial markets. The courts also have less expertise than securities commissions in interpreting their constituent statutes given the broad policy context within which securities commissions operate.
7In Pezim v. British Columbia (Superintendent of Brokers), 1994 103 (SCC), [1994] 2 S.C.R. 557, [1994] S.C.J. No. 58, 114 D.L.R. (4th) 385, the Supreme Court further confirmed that strong curial deference should also be accorded to the interpretation of definitions in the constituting legislation of securities commissions. Iacobucci J. stated at p. 595 S.C.R., p. 408 D.L.R.:
It must also be noted that the definitions in the [Securities] Act exist in a factual or regulatory context. They are part of the larger regulatory framework discussed above. They are not to be analyzed in isolation but rather in their regulatory context. This is something that requires expertise and falls within the jurisdiction of the Commission. This is yet another basis for curial deference.
8In the case at bar, the issues involve the determination of what constitutes "a collateral benefit" or "a consideration of greater value" under s. 97(2) of the OSA; a determination of a [page66 ]change in information "that would reasonably be expected to affect the decision of holders of the securities", under s. 98 of the OSA; whether the conduct of Holdings during the course of the Offer constituted abusive and/or coercive conduct such that the OSC was entitled to exercise its public interest jurisdiction under s. 127 of the OSA; and whether the remedy structured in the OSC's Order was appropriate in view of its findings on these issues.
9In our view, all of these questions are matters of the interpretation and application of the OSA that go to the core of the expertise of the OSC and are reflective of the purposes of the OSA, as set out in s. 1.1, "to provide protection to investors from unfair, improper or fraudulent practices" and "to foster fair and efficient capital markets and confidence in capital markets". The standard of review to be applied to the appeal before this court on these issues is, therefore, the standard of reasonableness simpliciter.
10As to the meaning of "reasonable", we adopt the statements of Iacobucci J. in Law Society of New Brunswick v. Ryan, 2003 SCC 20, [2003] 1 S.C.R. 247, [2003] S.C.J. No. 17, 223 D.L.R. (4th) 577, at paras. 55 and 56:
A decision will be unreasonable only if there is no line of analysis within the given reasons that could reasonably lead the tribunal from the evidence before it to the conclusion at which it arrived. If any of the reasons that are sufficient to support the conclusion are tenable in the sense that they can stand up to a somewhat probing examination, then the decision will not be unreasonable and a reviewing court must not interfere (see Southam, supra, at para. 56). This means that a decision may satisfy the reasonableness standard if it is supported by a tenable explanation even if this explanation is not one that the reviewing court finds compelling (see Southam, supra, at para. 79).
This does not mean that every element of the reasoning given must independently pass a test for reasonableness. The question is whether the reasons taken as a whole, are tenable as support for the decision. At all times, a court applying a standard of reasonableness must assess the basic adequacy of a reasoned decision remembering that the issue under review does not compel one specific result. Moreover, a reviewing court should not seize on one or more mistakes or elements of the decision which do not affect the decision as a whole.
11In Cartaway Resources, supra, LeBel J. stated at para. 50:
In applying the standard of reasonableness, the reviewing court should not determine whether it agrees with the determination of the tribunal. Such a conclusion is irrelevant . . . The focus should be on the reasonableness of the decision or the order, not on whether it was a tolerable deviation from a preferred outcome.
Analysis
12In our view, a review of the reasons of the OSC illustrates a careful and thorough consideration by the OSC of all the [page67 ]evidence with respect to the disclosure or non-disclosure of certain information regarding the Offer, the negotiation and entering into of the Support Agreements and the Deposit Agreement and the disclosure or non-disclosure in connection therewith, and various aspects of the conduct of Holdings during the course of the Offer. Based upon the authorities referred to above, we cannot conclude that any finding of the OSC or any decision of the OSC reflected in the Reasons was not arrived at reasonably.
13We are further of the view that, while one might argue that the Release granted pursuant to the Deposit Agreement was not a "collateral benefit" or that the consultation provision of the Support Agreements did not constitute "consideration of greater value", that does not mean that the determinations of the OSC on these questions were unreasonable even if the members of this court might have come to a different conclusion. The standard of review of reasonableness encompasses "the right to be wrong". This would also apply to the determination by the OSC that granting the opportunity to the Banks to negotiate the terms of an amendment to the Offer to guarantee that they would avoid being subject to the "stop loss" provisions of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) constituted a collateral benefit even though the amendments might equally benefit other shareholders.
Abusive and Coercive Conduct
14With respect to the finding of the OSC that the conduct of Holdings during the course of the Offer was abusive and coercive, we believe that it is settled law that it is not necessary to find a breach of a specific section of the OSA in order for the OSC to exercise its public interest jurisdiction under s. 127 of the OSA. In Re Canadian Tire Corp. (1987), 1987 4234 (ON SC), 10 OSCB 857, 1987 LNONOSC 47 the Commission stated at p. 933 OSCB:
Equally clearly in our view, the Commission should act to restrain a transaction that is clearly abusive of investors and of the capital markets, whether or not that transaction constitutes a breach of the Act, the regulations or a policy statement.
The appeal from this decision was dismissed by the Divisional Court (1987), 1987 4234 (ON SC), 59 O.R. (2d) 79, [1987] O.J. No. 221 (Div. Ct.).
15In the case at bar, paras. 307, 308 and 310 of the Reasons provide as follows:
In view of the fact that we have found that the Vornado Agreement and the Support Agreements were entered into in contravention of subsection 97(2) of the Act, it is unnecessary for us to make a finding that the conduct of Sears Holdings in connection with their insider bid or the bid itself was "abusive" in order to support the exercise of our public interest jurisdiction under section 127 of the Act. [page68 ]
Although it is unnecessary for us to do so, we find that elements of the conduct of Sears Holdings in pursuing their Offer were coercive and abusive of the minority shareholders of Sears Canada and the capital markets generally. Our finding in this regard is based on the detailed analysis and assessment of the conduct of Sears Holdings considered in totality as described in detail above.
In this case, had we found that subsection 97(2) had not, technically, been contravened and despite the absence of a finding of joint actor status, we would nonetheless have determined that an order under section 127 of the Act was warranted to ensure that the votes attached to the shares that are the subject of the Support Agreements as well as the votes attached to the shares acquired by Sears Holdings pursuant to the Vornado Agreement ought not to count in the majority of the minority vote required on the SAT.
16In finding that the conduct of Holdings in pursuing its Offer was coercive and abusive of the minority shareholders of Sears Canada and of the capital markets, the OSC carefully reviewed the totality of the conduct of Holdings including the following: the failure of Holdings to disclose, in the press release announcing the Offer, the price protection provision contained in the Lock-Up Agreement with Natcan Investment Management Inc.; the failure to provide a copy of the Natcan Lock-up Agreement to the Special Committee or to the OSC; the very public attack on the valuation prepared by Genuity Capital Markets ("Genuity") and the rather veiled attack on the integrity and competence of Genuity without disclosing the communications between Holdings and Genuity; the misleading reference in the Offer to there being no contracts or understandings with any shareholder; the treatment by Holdings of the Special Committee by calling into question the good faith and bona fides of the Special Committee and incorrectly attributing certain comments to members of the Special Committee which were taken out of context and the refusal to supply relevant information to the Special Committee; the issuance of a press release on March 20, 2006 threatening to eliminate the "recent practice of Sears Canada paying quarterly dividends" when in fact such dividends had been paid for 20 years and indicating that there would not be a liquid market for the shares of Sears Canada if the Offer did not succeed; and the issuance of the press release of April 3, 2006 announcing the increase in the offering price to $18 without disclosing the identity of the "certain shareholders" who had entered into Support Agreements or the terms of such agreements.
17In our view, it was eminently reasonable, and in fact almost inevitable, for the OSC to conclude that such heavy- handed tactics [page69 ]were abusive of the minority shareholders of Sears Canada and of the capital markets and should not be condoned at least in the Canadian capital markets. In Canadian Tire, supra, the Commission stated at pp. 930-31 OSCB:
The ambit of the Commission's power under section 123 [now s. 127] is not hedged or confined by particular examples or by particular criteria, as is true elsewhere in the Act. Rather, the Legislature has vested in the Commission the power to intervene where it has been demonstrated that such intervention is necessary to fulfill the Commission's mandate to regulate the capital markets in the public interest.
Remedy
18With respect to the appropriateness of the remedy contained in the Order, the OSC in its Reasons acknowledged the well-known principle that remedies granted pursuant to s. 127 of the OSA must be preventative and protective rather than punitive and, in our view, carefully crafted the Order in compliance with this principle. In particular, even having found abusive and coercive conduct on the part of Holdings, the Commission did not issue a full cease trading order but rather a compliance order and an order that trading be ceased until the Offer was amended to provide for a release to all tendering shareholders similar to the Release granted to Vornado and to exclude from the calculation of the majority of the minority approval the shares to be acquired by Holdings pursuant to the Support Agreements and the Deposit Agreement.
19Even if we had found, as submitted by Holdings and the Banks, that there was no direct connection between the remedy and the findings of the Commission with respect to disclosure, collateral benefit and abusive conduct, the authorities are clear that there need not be such direct connection. In Pezim, supra, Iacobucci J. stated at p. 607 S.C.R., p. 417 D.L.R.:
The respondent's arguments that there must be a rational link between the conduct of the persons in question and the order made by the Commission must be rejected. As we have seen, s. 144 of the [Securities] Act [the B.C. equivalent of s. 127] gives the Commission a broad discretion to make orders that it considers to be in the public interest. Thus, a reviewing court should not disturb a Commission's order unless the Commission has made some error in principle in exercising its discretion or has exercised its discretion in a capricious or vexatious manner.
20In addition, this court should be loathe to interfere with a remedy or sanction fashioned by the OSC and a high degree of deference should be paid to the OSC's determination in that regard. In Robinson v. Ontario (Securities Commission), [2000] O.J. No. 648, 45 W.C.B. (2d) 485 (Div. Ct.), this court stated at para. 24:
The Commission is in a much better position than this court to determine the gravity of the breaches of the Securities Act that have been found, and to [page70 ]assess the risk to the public from the future conduct of the persons involved. Such determinations are squarely within the core jurisdiction of the Commission. The Commission is entitled to deference. We are not persuaded that any of the decisions as to penalty was unreasonable, and there will be no order disturbing the penalties that have been imposed by the Commission.
21Accordingly, we find the OSC's determination of the remedies contained in the Order to be entirely reasonable and find no basis to exercise our jurisdiction under s. 9(5) of the OSA to amend or vary the Order.
Impact on the Banks
22Counsel for the Banks have submitted to this court that the effect of the Order is to disenfranchise the Banks which are innocent of any wrongdoing and, to some degree, to expropriate the value of their interests in Sears Canada. We have some difficulty with this submission. The Banks continue to be able to vote their shares of Sears Canada; the only effect of the Order is that such votes will not be counted in calculating the majority of the minority for purposes of approval of the SAT. In addition, if the transaction is not completed, the Banks continue to hold their shares of Sears Canada which presumably continue to have a substantial market value. In addition, if the Sears Canada shares are acquired in a subsequent transaction, the Banks will still be able to avoid the application of the "stop loss" provisions of the Income Tax Act.
23In any event, this court has held that the Order issued in the public interest may impact on the innocent. In Canadian Tire, supra, this court held at pp. 101-02 O.R.:
It was argued that the order was a "blunt instrument" striking the innocent as well as the culpable. It was suggested that the Dealers were the victims of the Billeses and vice versa and that, in any event, Martha should be regarded as separate from her brothers. The answer to that, in my opinion, is that the Commission's overriding concern was to protect the interests of the public over the interests of the immediate parties to the transaction. It is difficult to see how any other action than what it took would be appropriate. No one suggested any that would, in my opinion, have been adequate.
Disposition
24The appeal is dismissed.
Costs
25Any party wishing to make submissions as to the costs of this appeal may do so by way of brief written submissions to this court on or before October 27, 2006.
Appeal dismissed. [page71 ]