SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

RE: IN THE MATTER OF A PROPOSED PLAN OF ARRANGEMENT involving Lakeside Steel Inc., JMC Steel Group, Inc. and 2312522 Ontario Inc.

BEFORE: D. M. Brown J.

COUNSEL: J. Kaufman, for the Applicant, Lakeside Steel Inc.
A. Rose, for JMC Steel Group, Inc.

HEARD: March 29, 2012

REASONS FOR DECISION

I. Application to approve a plan of arrangement

[1] Lakeside Steel Inc. seeks a final order approving a plan of arrangement pursuant to section 182 of the Ontario Business Corporations Act. Yesterday I granted the final order; these are my Reasons for so doing.

II. The proposed plan of arrangement and the interests being arranged

[2] Lakeside Steel is a diversified steel pipe and tubing manufacturer for oil and gas, mining, automotive and commercial industrial supply products. Incorporated under the OBCA, Lakeside Steel’s shares are listed on the TSX Venture Exchange.

[3] The proposed plan of arrangement resulted from arm’s length negotiations between Lakeside Steel and JMC Steel Group, Inc., a manufacturer of steel tube. 2312522 Ontario Inc. is an Ontario corporation and a wholly-owned subsidiary of JMC Steel; it was incorporated for the purposes of this plan of arrangement and acts as the Purchaser.

[4] Under the plan Lakeside Steel will amalgamate with Lakeside Steel Corporation, [1] one preferred share will be issued to 231, the common shareholders will receive from 231 a cash payment of $0.2983 for each share, in-the-money option holders will receive a cash payment equal to the amount by which the consideration for a common share exceeds the exercise price payable under the option, warrant holders will receive $0.03983 for each Lakeside Steel warrant, and the Employee Share Purchase Plan will be cancelled.

[5] As described in the February 15 and March 27, 2012 affidavits of Mr. Norman Findlay, an independent director of Lakeside Steel, as well as in the detailed factum filed by Lakeside Steel, on January 25, 2012, Lakeside Steel and JMC Steel entered into an Arrangement Agreement.

[6] On February 21, 2012, I granted an Interim Order for the process leading up to and including the holding of the special meeting of Lakeside Steel Shareholders on March 26, 2012 (the “Meeting”).

[7] That Meeting was held. A quorum was present. Approximately 57.52% of the holders of issued and outstanding shares were present in person or by proxy. The Arrangement Resolution was approved by 98.78% of all of the votes cast by the Shareholders and was approved by 98.45% of the Minority Shareholders. As set out in the Circular, the Arrangement Agreement provided for dissent rights. No Lakeside Steel Shareholder exercised dissent rights. The Meeting Materials contained the Notice of Application; no person appeared on the return of the application to oppose the Final Order sought.

III. Governing principles

[8] The principles to be considered by a court in deciding whether to approve a plan of arrangement were set out by the Supreme Court of Canada in BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, [2008] 3 S.C.R. 560. In sum, to grant a final order approving an arrangement a court must be satisfied that:

(i) The proposal constitutes an “arrangement” within the meaning of the OBCA;

(ii) The applicant has complied will all statutory and court-mandated requirements;

(iii) The application has been put forward in good faith; and,

(iv) The arrangement is fair and reasonable.

A. Is the proposed transaction an “arrangement”?

[9] The proposed transaction is an “arrangement” within the meaning of sections 182(1)(c), (f), (h) and (i) of the OBCA, and the applicant is a “corporation” within the meaning of that Act.

B. The statutory and court-ordered procedures

[10] The affidavit sworn by Mr. Findlay on March 27, 2012, established that Lakeside Steel had satisfied the procedural requirements contained in the Interim Order. The evidence filed satisfied me that Lakeside Steel had met and complied with the procedures for an arrangement imposed by the OBCA.

C. Analysis for fairness and reasonableness

C.1 Was the application put forward in good faith?

[11] Lakeside Steel demonstrated that it was putting the application forward in good faith. The evidence filed by Lakeside Steel described how the company responded to an unsolicited offer by JMC Steel in late 2011 to purchase all outstanding shares of the company. The Board struck a Special Committee to consider the offer and other options, and the Special Committee retained independent counsel, as well as a financial advisor, Blair Franklin Capital Partners Inc. As a result of JMC Steel’s insistence that it would only engage in exclusive negotiations, the company negotiated “fiduciary out” and termination fee provisions to allow an opportunity for other potential unsolicited acquirers and competing offers to emerge.

[12] During the negotiations JMC Steel reduced the price it was prepared to pay for the shares of Lakeside Steel citing challenges concerning the company’s finances, cash flow and working capital. In response to a concern expressed by a shareholder over the lowered price, the Special Committee instructed Blair Franklin to pursue due diligence on other sources of debt financing, and it considered a strategic proposal by a third party (“Company B”, later joined by “Company C”) brought forward by the concerned shareholder.

[13] By mid-January, 2012, Lakeside Steel was facing the prospect that its main lender might not extend its credit facilities past the end of the month.

[14] On January 19 the Special Committee recommended that the Board enter into an arrangement agreement with JMC Steel. The reasons for its recommendation were set out in Mr. Findlay’s first affidavit.

[15] Meanwhile the concerned shareholder had asserted a claim against Lakeside Steel for the payment of certain fees. JMC Steel stated it would not pay those fees. Lakeside Steel negotiated a settlement of the shareholder’s claim, with the result that the $0.30/share offer of JMC Steel was reduced, after the company had paid the shareholder’s claim, to an effective net price of $0.2983/share. The consideration offered to Shareholders represented a premium of approximately 326% over the closing price of the Company’s shares on the TSX-V of $0.07 on December 15, 2011, the last trading day prior to the announcement of negotiations with JMC Steel.

[16] The Special Committee was told by Blair Franklin that it was prepared to deliver a fairness opinion for an arrangement at that effective price per share. Blair Franklin delivered an opinion to that effect as of January 24, 2012.

[17] After announcing its negotiations with JMC Steel in late December, Lakeside Steel did not receive any third party offers.

[18] On January 24 the Board approved entering into an arrangement agreement with JMC Steel, which happened the following day. After making a public announcement of the arrangement, the Board removed the concerned shareholder as the Chair and CEO of Lakeside Steel.

[19] In paragraphs 64 and 65 of his February 15, 2012 affidavit Mr. Findlay reviewed in detail the factors considered by the Special Committee and the Board in deciding to recommend the plan of arrangement. Those factors indicated that the Board gave extensive thought to the strategic options available to the company, as well as the benefits and alternatives available to the company and its Shareholders and the risks which they faced.

C.2 Does the arrangement have a valid business purpose?

[20] For similar reasons the Arrangement has a valid business purpose.

C.3 Are the objections of those whose legal rights are being arranged under the arrangement being resolved in a fair and balanced way?

[21] The Board unanimously determined that the Arrangement was in the best interests of Lakeside Steel and its Shareholders. The Board sent to all Shareholders and affected option and warrant holders a detailed Circular explaining the purpose of the Arrangement and describing the Arrangement. The Circular explained that the Arrangement Agreement made provision for dissent rights, and the Circular described how a Shareholder could exercise dissent rights. The Meeting Materials also included a copy of the Notice of Application in this proceeding.

[22] As noted above, at the special meeting held on March 26, 2012 Shareholders overwhelmingly voted in favour of the Arrangement resolution, including support by a majority of the minority. No Shareholder exercised dissent rights, and no person appeared to oppose this application.

[23] Taken together, all this evidence supported a finding that the Arrangement was fair and reasonable.

IV. Conclusion and orders

[24] For these reasons, I approved the Arrangement, and I signed the draft Final Order filed by Lakeside Steel.

______ (original signed by) _____________
D. M. Brown J.

Date : March 30, 2012

[1] Lakeside Steel Corporation is a wholly-owned subsidiary of Lakeside Steel. The Plan of Arrangement was amended on March 23, 2012 to include this step; I do not regard the amendment as material for the purposes of amending the Circular.