Court File and Parties

Court File No.: CV-18-599612-00-CL Date: 2018-07-17 Superior Court of Justice - Ontario

Re: Polar Multi-Strategy Master Fund, Polar Long/Short Master Fund, Crown Managed Accounts SPC acting for and on behalf of Crown/Polar Segregated Portfolio and Verition Canada Master Fund Ltd., Applicants And: The Stars Group Inc., Respondent

Before: Wilton-Siegel J.

Counsel:

• Alan Mark, Jess-Ross Cohen and David Conklin, for the Applicants
• Michael Barrack and Ryan Morris for the Respondent

Heard: July 13, 2018

Endorsement

[1] The applicants, Polar Multi-Strategy Master Fund, Polar Long/Short Master Fund and Crown Managed Accounts SPC acting for and on behalf of Crown/Polar Segregated Portfolio (collectively, “Polar”) and Verition Canada Master Fund Ltd. (“Verition” and, collectively with Polar, the “applicants”), make application for, among other things, a declaration that the proposed mandatory conversion of the outstanding convertible preferred shares (the “Preferred Shares”) of the respondent, The Stars Group Inc. (“TSGI” or the “Company”), announced by TSGI on June 5, 2018 to be effective July 18, 2018 (the “Conversion”), would contravene the TSGI Articles of Continuance dated August 1, 2017 (the “Articles”), and in particular clause 10(a) of the terms of the Preferred Shares therein (the “Mandatory Conversion Provision”). In this regard, the applicants also seek a declaration that, in respect of the calculation of the “average daily volume on any 20 Trading Days (whether or not consecutive) in the 30 consecutive Trading Day period referred to above” under the Liquidity Condition (defined below) set out in the Mandatory Conversion Provision, only trading of TSGI common shares (the “Common Shares”) on the Toronto Stock Exchange (the “TSX”) may be taken into account.

The Parties

[2] The applicants, Polar and Verition, are both investment funds.

[3] TSGI, formerly named Amaya Inc., is a public corporation that is in the business of online and mobile gaming products.

The Issuance of the Preferred Shares

[4] In July 2014, in order to finance a transformative acquisition, TSGI issued approximately U.S. $1.050 billion of the Preferred Shares pursuant to separate commitment letters with each of GSO Capital Partners (“GSO”) and BlackRock Inc. (“BlackRock”), who collectively acquired more than 75% of the offering, and pursuant to a bought deal private placement with Canaccord Genuity Corp. (“Canaccord”), who bought the remainder of the offering.

[5] Polar acquired 21,702 Preferred Shares for an aggregate subscription price of $21,702,000 pursuant to a subscription agreement with Canaccord in the private placement. It currently holds 125,150 Preferred Shares, having purchased the remainder of its Preferred Shares in the secondary market. Verition holds 96,574 Preferred Shares, all of which were purchased in the secondary market. In total, the applicants hold approximately 21% of the outstanding Preferred Shares.

[6] While GSO and BlackRock are not parties to this proceeding, I draw no inference from this fact in reaching the determination in this Endorsement in view of the absence of any facts pertaining to their actions.

The Terms of the Preferred Shares

[7] The terms of the Preferred Shares are set out in the Articles. The parties are unable to identify any other preferred shares having a mandatory conversion privilege or a conversion ratio adjustment feature similar to the terms of the Preferred Shares.

[8] Unlike most preferred shares, the Preferred Shares pay no dividends in cash or shares. They are, however, convertible according to a conversion ratio set out in the Articles (the “Conversion Ratio”). The Conversion Ratio was initially set at a fixed amount. However, of critical importance, the Conversion Ratio increases by 3% every six months. In addition, the Conversion Ratio will increase by either 2% per annum or 4% per annum in the event TSGI acquires any property or business for consideration in excess of U.S. $250 million, unless the consent of holders of two-thirds of the Preferred Shares is obtained.

[9] Accordingly, the investment return on the Preferred Shares is derived from two sources: (1) appreciation in the underlying Common Shares; and (2) an increasing Conversion Ratio.

[10] The Preferred Shares have no maturity or termination date nor are they redeemable by TSGI. However, the Preferred Shares contain a provision permitting TSGI to effect a mandatory conversion of the Preferred Shares into Common Shares (the “Mandatory Conversion Provision”) commencing three years after the date of issue of the Preferred Shares, which date has now been passed. The Mandatory Conversion Provision becomes operative in the event that two conditions are satisfied: (1) the Closing Sale Price (as defined) of the Common Shares exceeds 175% of the Initial Conversion Price (as defined) for at least 20 Trading Days (whether or not consecutive) in a period of 30 consecutive Trading Days (the “Price Condition”); and (2) the average daily volume on any 20 Trading Days (whether or not consecutive) in the 30 consecutive Trading Day period is at least 1.75 million Common Shares (the “Liquidity Condition”).

[11] Although the Preferred Shares are freely transferable, they are not listed for trading on any stock exchange and trade only in the exempt market.

[12] The Common Shares were listed for trading on the TSX at the time of the issue of the Preferred Shares and continue to trade on that exchange. The Preferred Shares also contained a requirement that TSGI obtain and maintain a second listing of Common Shares on one of the New York Stock Exchange, NASDAQ or the London Stock Exchange (premium listing) within 15 months of the closing date of the acquisition transaction in 2014 referred to above (the “Listing Obligation”). In fulfillment of the Listing Obligation, the Common Shares began trading on the NASDAQ Select Market (the “NASDAQ”) on June 8, 2015. The Common Shares also trade on other alternative trading platforms for which trading is reported in composite with the trading on either the TSX in the “TSX Composite” or the NASDAQ in the “NASDAQ Composite”, respectively.

The Events Giving Rise to This Proceeding

[13] On April 21, 2018, TSGI announced the proposed acquisition of Sky Betting & Gaming. This transaction will trigger a 4% increase in the Conversion Ratio described above to 10%, absent consent of the holders of the Preferred Shares which is not forthcoming.

[14] To avoid this result, TSGI issued a mandatory conversion notice to holders of the Preferred Shares on June 5, 2018 which provided that the Conversion would occur on July 18, 2018.

[15] It is not disputed that the Price Condition was satisfied on May 30, 2018. It is TSGI’s position that the Liquidity Condition was also satisfied on that date using any of the following calculations of the volume of trading: (1) the TSX Composite alone; (2) the TSX Composite plus the NASDAQ alone; (3) the TSX plus the NASDAQ Composite; and (4) the TSX Composite and the NASDAQ Composite.

[16] The applicants do not challenge these calculations. However, in their view, the Mandatory Conversion Provision requires that the Liquidity Condition be satisfied on the basis of the volume of trading on the TSX alone.

The Issue in This Proceeding

[17] The issue on this application is therefore whether the Liquidity Condition is restricted to the volume of trading of the Common Shares on the TSX alone or can include either or both of: (1) trading on the NASDAQ; and (2) trading on alternative trading platforms for which trading is reported in composite with the trading on either the TSX in the TSX Composite or the NASDAQ in the NASDAQ Composite. As a practical matter, based on the calculations of TSGI which the applicants do not dispute, the issue reduces to the second scenario which will be the subject of the remainder of this Endorsement.

Applicable Legal Principles

[18] Determination of the issue on this application requires an interpretation of the share conditions attaching to the Preferred Shares. The applicable principles for the interpretation of corporate articles and by-laws are similar to the principles that govern statutory interpretation.

[19] A court is required wherever possible to rely and give effect to the ordinary meaning of the words used in the corporate document in order to bring certainty for those who rely on it: Beechwood Cemetery C. v. Graham, [1998] O.J. No. 5289 (C.A.) at para. 43. In doing so, a court should look to the whole of the document, should endeavour to interpret the document in a manner that gives effect to all of its provisions and should adopt a purposive approach. While any interpretative exercise must remain grounded in the plain meaning of the provision at issue, a court can have regard to the “factual matrix” in which the document was negotiated or otherwise created: Creston Moly Corp. v. Sattva Capital Corp., 2014 SCC 53 at para. 56-58, which, while it deals with the interpretation of contracts, is also understood to apply in the present context. Such factual matrix is, however, limited to objective facts and does not extend to evidence of the subjective intention of the parties involved. Significantly, a court should strive to avoid an interpretation that produces an absurdity, a commercially unreasonable result or a result which is unworkable: see Holmes v. Lord Keyes, [1959] Ch. 199 per Jenkins L.J. (C. A.). A court should also avoid extrinsic evidence unless the wording is unclear or ambiguous for the reason that it is unrealistic to expect that arm’s length parties will have either the means or the capability of ascertaining the extrinsic facts: see Beechwood at para. 43.

[20] The applicants submit that there is an interpretive rule that a court should resolve any ambiguity in corporate documents in favour of investors and against the corporate issuer. They refer to the decision of Chancellor Strine in Shiftan v. Morgan Joseph Holdings, 57A. (3d) 928 (Def. Ch. 2013). Such a rule is appropriate in issues of corporate governance involving a contest between the directors or management of a corporation and its investors or shareholders. It is not, however, appropriate where the substantive contest is between two or more classes of shareholders. In this case, the substantive issue is between the current holders of Common Shares and the holders of the Preferred Shares, both of whom would be expected to make investment decisions based on the operation of the Mandatory Conversion Provision.

The Applicable Provisions of the Share Conditions

[21] The Mandatory Conversion Provision is set out in clause 10(a) of the share conditions attaching to the Preferred Shares in the Articles, the relevant portion of which reads as follows:

At any time on or after the date which is three (3) years from the Issue Date, the Corporation shall have the right, at its option, to give notice of its election to cause all or, subject to Section 10(b) below, part of the outstanding Convertible Preferred Shares to be automatically converted into that number of Common Shares for each Convertible Preferred Share to be so converted equal to the Conversion Ratio in effect on the Mandatory Conversion Date. The Corporation may exercise its right to cause a mandatory conversion pursuant to this Section 10 only if the following two (2) conditions are satisfied (the “Price/Liquidity Conditions”) (i) the Closing Sale Price of the Common Shares exceeds 175% of the Initial Conversion Price for at least 20 Trading Days (whether or not consecutive) in a period of 30 consecutive Trading Days, and (ii), save as provided for under Section 5(g) hereof, the average daily volume on any 20 Trading Days (whether or not consecutive) in the 30 consecutive Trading Day period referred to above is at least 1.75 million Common Shares (the “Liquidity Condition”); provided that the Corporation may only exercise such mandatory conversion, whether in whole or in part, if the applicable 30-day period in which the Price/Liquidity Conditions are satisfied has ended not more than 60 days before the Mandatory Conversion Date…

The condition in clause (i) above is the “Price Condition” and the condition in clause (ii) above is the “Liquidity Condition”.

[22] For the purposes of this Endorsement, the following definitions and provisions in the Articles are also relevant or are otherwise referred to:

1(g) “Closing Sale Price” of the Common Shares on any date means the closing sale price per share (or if no closing sale price is reported, the average of the closing bid and ask prices or, if more than one in either case, the average of the average closing bid and the average closing ask prices) on such date as reported in composite transactions for the Toronto Stock Exchange, or if the Common Shares are not listed on the Toronto Stock Exchange, for the other principal national securities exchange on which the Common Shares are then listed or, if the Common Shares are not listed for trading on a securities exchange on the relevant date, the last quoted bid price for the Common Shares in the over-the-counter market on the relevant date. In the absence of such a quotation, the Closing Sale Price shall be the average of the mid-point of the last bid and ask prices for the Common Shares on the relevant date from (x) each of at least three nationally recognized independent investment banking firms selected by the Corporation for this purpose, if the Common Shares are listed on the Toronto Stock Exchange, or (y) each of at least three internationally recognized independent investment banking firms selected by the Corporation for this purpose, if the Common Shares are listed on a securities exchange other than the Toronto Stock Exchange;

1(k) “Conversion Ratio” means the number of Common Shares which shall be issued to the Holder of each Convertible Preferred Share upon exercise of the conversion rights as such number of Common Shares may be adjusted as provided for herein, it being understood that the Conversion Ratio in effect on the Issue Date shall be equal to the Initial Conversion Ratio;

1(l) “Conversion Ratio Adjustment Factor” means 1.03, as adjusted as provided herein;

1(y) “Initial Conversion Price” means CDN$24;

1(z) “Initial Conversion Ratio” means the ratio calculated by dividing the Initial Liquidation Preference [which was $1,000] by the Initial Conversion Price;

1(vv) “Trading Day” means a day during which trading in the Common Shares generally occurs on the Toronto Stock Exchange or, if the Common Shares are not listed on the Toronto Stock Exchange, on the principal other national securities exchange on which the Common Shares are then listed or, if the Common Shares are not listed on a national securities exchange, on the principal other market on which the Common Shares are then listed or admitted for trading. If the Common Shares are not so listed or traded, Trading Day means a Business Day;

1(xx) “VWAP” means the volume weighted average trading price of the Common Shares (or other relevant securities with respect to which VWAP is being determined) calculated by dividing the total value by the total volumes [sic] trading during the relevant period if the Toronto Stock Exchange is the principal securities exchange on which the Common Shares are listed at the relevant time. Otherwise, VWAP shall have the meaning given to it by the principal national securities exchange on which the Common Shares (or other relevant securities with respect to which VWAP is being determined) are listed at the relevant time (and in the absence thereof, VWAP shall mean the Closing Sale Price);

7 (a) In addition to the adjustments to the Conversion Ratio provided for in Section 6 above [being the anti-dilution provisions], the Conversion Ratio shall be adjusted every six (6) months from the Issue Date by multiplying the then in effect Conversion Ratio by the Conversion Ratio Adjustment Factor (the “Recurring Conversion Ratio Adjustment”).

Position of the Applicants

[23] The applicants’ position is that the words “average daily volume on any 20 days during which trading in the Common Shares generally occurs on the Toronto Stock Exchange” can only be read as referencing trading on the TSX not including any non-TSX trading included in the TSX Composite for the purposes of calculation of the requirement of the Liquidity Condition.

[24] The applicants say that certainty and ready ascertainment of the reference points used in conversion calculations are essential for a fair and informed market for convertible securities. In this case, they say this requires clarity and ready ascertainment of, among other things, the calculation of the trading history of the Common Shares for the purposes of assessing whether or not the Liquidity Condition has been satisfied at any particular time. They suggest that only their interpretation of the Mandatory Conversion Provision satisfies this requirement.

[25] In this regard, the applicants say that, in order to bring order and certainty to such calculation in the context of multiple trading platforms on which securities may trade, the Canadian convertible securities market has a long history of relying on the concept of a primary exchange. A primary exchange is the main stock exchange on which an issuer’s underlying common shares are listed and traded. In this case, the applicants say the share conditions of the Preferred Shares unambiguously implement the primary exchange concept, including for the purpose of determining the Conversion Ratio and for the Mandatory Conversion Provision, and provide that the TSX is TSGI’s primary exchange. As support for this view, they rely on the references to “the Toronto Stock Exchange” in the definitions of the “Closing Sale Price”, “Trading Day”, and “VWAP” as well as the provisions of clauses 6(f) and 8(a)(vii) of the share conditions of the Preferred Shares.

Preliminary Conclusions

[26] Before setting out my determination on the issue in this application, I propose to address three matters which inform the conclusion below.

The Requirement of Certainty and Ascertainability

[27] The applicants stress that clear and unambiguous reference points are required for the determination of price and volume thresholds if the convertible securities market is to operate in a fair, efficient and informed manner. I entirely agree. However, that does not mandate that price and volume must be determined by reference solely to a single exchange as the applicants suggest.

[28] Based on the evidence before the Court, it is equally possible to have certainty and ready ascertainment of price and volume data for the purposes of the Mandatory Conversion Provision based on transactions reported with respect to a composite index such as the TSX Composite. Under the current securities regime for securities marketplaces, including exchanges and alternative trading platforms, and given current technology, credible and reliable data is available from a variety of sources, and is required to be available, regarding all trading on such marketplaces including on a composite basis.

[29] Accordingly, I do not accept the applicants’ argument that reliance on the trading data of a named exchange as the principal exchange in respect of the Preferred Shares is necessary in order to have clear and unambiguous reference points for the determination of the price and volume thresholds in the Mandatory Conversion Provision upon which all market participants, including the holders of Preferred Shares, can make investment decisions.

The Purpose of the Liquidity Condition

[30] The parties agree that the commercial purpose of the Liquidity Condition is an important consideration in the interpretation of that Provision. However, they have radically different views of that purpose.

[31] TSGI says that the purpose of the Liquidity Condition is to ensure that there is sufficient liquidity in the Common Shares to permit holders of the Preferred Shares to sell the Common Shares that they receive on a mandatory conversion at a price that is no less than approximately 175% of the Initial Conversion Price or $42 per share.

[32] The applicants submit that there are several problems with this alleged purpose. First, they say there is no evidence of any such intention or purpose at the time the terms of the Preferred Shares were negotiated. Second, they say that, as a practical matter, they have hedged their Common Share positions already with the result that they are not exposed to, or concerned with, any risk of a decline in the price of the Common Shares on a mandatory conversion. They suggest that many other investors of Preferred Shares would have implemented a similar strategy. Third, the applicants say that a continuous trading volume of 1.75 million Common Shares would not provide any meaningful protection to holders of the Preferred Shares given that, after the Conversion, there would be approximately 250 million Common Shares outstanding, of which 51.98 Common Shares would be issued on the Conversion at the current Conversion Ratio. The applicants suggest that, in fact, their more restrictive approach limiting trading to the TSX provides greater price protection to the holders of the Preferred Shares.

[33] The applicants suggest that the purpose of the Liquidity Condition was to act as a barrier against the Company’s exercise of the Mandatory Conversion Provision as long as possible in order to maximize the investment return of the holders of the Preferred Shares. They say that the uniqueness of this provision is a reflection of the unequal bargaining power of GSO and BlackRock at the time of negotiation of the Preferred Share transaction. On this basis, they argue the Liquidity Provision should be interpreted in the most restrictive manner possible.

[34] I am not persuaded that the purpose of the Liquidity Condition is to present a high bar to the exercise of the Mandatory Conversion Provision for the following reasons.

[35] First, the Mandatory Conversion Provision is a right in favour of TSGI. The Liquidity Condition is a limitation on the exercise of that right in favour of the holders of Preferred Shares. It establishes the market conditions under which the Company may exercise the Mandatory Conversion Provision. In this context, it is significant that the Company’s right is not triggered permanently if the Price Condition and the Liquidity Condition are satisfied. The Mandatory Conversion Provision may only be exercised if the mandatory conversion occurs within sixty days from the end of the thirty-day period used in the calculation of the Price Condition and the Liquidity Condition. If the Company fails to exercise its right upon satisfaction of these Conditions within such time-frame, the right lapses. It cannot be exercised again until these Conditions are satisfied on a future occasion.

[36] This feature of the operation of the Mandatory Conversion Provision strongly suggests that it is intended to benefit the holders of the Preferred Shares by establishing the short-term market conditions in which any mandatory conversion will occur. This, in turn, suggests that the Liquidity Condition is intended to provide some price protection to the holders of the Preferred Shares regarding the price at which they would be able to sell the Common Shares received on the mandatory conversion of their Preferred Shares if they choose to do so at that time.

[37] Second, if the parties had intended that the Liquidity Condition was to act as a bar to the Company’s exercise of the Mandatory Conversion Provision, they would surely have provided for a more direct and assured means of achieving such a bar. Moreover, GSO and BlackRock had bargained for a prohibition of the exercise of the right for a period of three years. If the Liquidity Condition operates as restrictively as the applicants suggest, there would appear to have been no need for the three-year prohibition. More generally, there is no logical or principled connection between the Liquidity Condition in a provision that grants the Company a right to force conversion of the Preferred Shares and the objective of prevention of the exercise of that right.

[38] Third, conversely, there is a financial rationale for the Liquidity Condition although I acknowledge that it is also not overly beneficial in the present circumstances. The Articles provided that the Mandatory Conversion Provision could not be exercised for three years. Thereafter, they provided that the Company could exercise the Mandatory Conversion Provision to retire what was acknowledged to be high-cost capital subject to certain conditions that would, in general terms, provide a minimum gain of $18 per Common Share to a holder of Preferred Shares, to the extent that the holder had not already taken its profit by another transaction. The evidence suggests that the Liquidity Condition would, in practice, have provided some protection for a period of time after the issuance of the Preferred Shares. The fact that the significance of that protection diminished over time as additional Common Shares were issued by TSGI does not detract from the fact that, at the time of issuance of the Preferred Shares and for a period of time thereafter that could not be predicted, the Liquidity Condition did provide some price protection to the holders of the Preferred Shares. Moreover, on the record before the Court, the fact that some holders of Preferred Shares chose to lock into market prices before any mandatory conversion does not mean that the price protection afforded by the Liquidity Condition was not of potential benefit to others or that such strategy could confidently have been assumed for all holders of Preferred Shares as of the time of issuance of the Preferred Shares.

The Determination of the Price Under the Price Condition

[39] I agree with the applicants that the Court should also be guided in the interpretation of the Liquidity Condition by the operation of the Price Condition. However, I do not accept the applicants’ position that the Price Condition enshrines the principal exchange concept in the Price Condition in the interest of certainty and ready ascertainability.

[40] The Price Condition requires demonstration that the Closing Sale Price of the Common Shares shall have exceeded $42 for at least 20 Trading Days (whether or not consecutive) in a period of 30 consecutive Trading Days. For this purpose, the relevant portion of the definition of “Closing Sale Price” is the reference to the closing sale price per share on the relevant date as reported in composite transactions for the Toronto Stock Exchange.

[41] The Company submits that the italicized words refer to the TSX Composite index and, accordingly, that the definition contemplates that the pricing information for purposes of the determination of the price shall include all trading on the alternative trading platforms that are aggregated and reported in the TSX Composite together with all trading on the TSX. The applicants argue that there is no evidence on the meaning of these words and that they are intended to refer to the entirety of the data reported with respect to each trade on the TSX.

[42] I conclude, for the reasons set out below, that the words “composite transaction for the Toronto Stock Exchange” are intended to refer to all trades reported in the composite reporting of trades conducted on the TSX and on all alternative trading platforms that are aggregated for purposes of the TSX Composite index.

[43] First, in my view, this interpretation is required by the plain meaning of the words “composite transactions”. If the intention had been to limit the transactions to transactions effected through the TSX alone, it would have been unnecessary to add the word “composite”. Moreover, I do not agree that the words “composite transactions” refer to the entirety of the data reported with respect to each trade made on the TSX. That would require a term such as “composite data.”

[44] Second, in my view, this interpretation makes commercial sense in that it reflects the commercial reality of modern trading systems. As Mr. Trapp acknowledged in his cross-examination, trading regulations require that trades be effected on the trading platform that offers the highest price at any time. Moreover, programme trading automatically searches all the alternative trading platforms aggregated in the TSX Composite index to identify the best price. In these circumstances, I think that the parties would have intended the Closing Sale Price to reflect industry practice for sales transactions unless specific wording to the contrary was used.

[45] Third, I do not accept the applicants’ submission that the reference to the TSX in the definition of Trading Days evidences on intention that the relevant trading for the purposes of the Price Condition is to be restricted to trading on the TSX. This approach is not consistent with the plain meaning of the words. The defined term “Trading Day” serves the more the limited purpose of establishing the days for which any trading qualifies for consideration. Moreover, I do not see any difficulty with the possibility that trading might be excluded on days on which the TSX was shut down, particularly given the expectation that the largest quantum of the trading would be expected to occur on the TSX. It would be unreasonable to require inclusion of such days, particularly if trading on alternative trading platforms were aggregated for such purpose.

[46] Accordingly, based on the record before the Court, I conclude that the more reasonable interpretation of the Price Condition requires that all trades reported in the TSX Composite index be taken into consideration in determining whether the Price Condition has been satisfied, whether such trading occurs on the TSX or is made on an alternative trading platform whose trading is also aggregated and reported for the purposes of that index.

Analysis and Conclusion of the Issue in this Proceeding

[47] The issue for the Court’s determination is the interpretation of clause 10(a) of the Articles and, in particular, the Liquidity Condition in sub-clause (ii) therein.

[48] Both parties argue that the plain meaning of this provision is clear although they urge different interpretations. There are two possible interpretations of the Liquidity Condition: (i) an interpretation which restricts the volume of trading taken into consideration to trading on the TSX; and (ii) an interpretation which takes into consideration all trading on a recognized exchange and on all alternative trading systems whose data is aggregated and reported on a composite basis with trading on that exchange.

[49] For the following reasons, I am of the view that the correct interpretation of the Liquidity Condition is the latter and, accordingly, that all transactions reported in the TSX Composite are to be included in the trading volume used to assess whether the Liquidity Condition has been satisfied.

[50] First, focusing solely on the plain language of the provision, the Liquidity Provision does not specify the exchanges or other alternative trading platforms on which trading must take place in order to be used in the calculation of the average daily volume thereunder. As TSGI argues, the applicant’s interpretation of the Liquidity Condition requires that the words “of trading on the TSX” be read into the Liquidity Condition. As such, the plain meaning of the Liquidity Condition suggests an intention that a broader concept of trading would be applicable.

[51] Second, when the Mandatory Conversion Provision is considered in its entirety, it is reasonable to assume that the trading environment contemplated by the Price Condition should inform the trading environment from which the volume of trading is derived for the purposes of the Liquidity Condition. Given the determination above, this necessarily implies that all trading reported for the purposes of the TSX Composite should be included.

[52] Third, this interpretation furthers the purpose of the Liquidity Condition as determined above. It recognizes that, above the threshold, a holder of Preferred Shares is presumed to have adequate “price protection” if the holder chooses to sell into the market some or all of the Common Shares received on the mandatory conversion. For this purpose, it is reasonable to have regard to the Canadian market as a whole, rather than to concentrate on a subset of the market. It is the short-term conditions of this market that are relevant to such a holder of Preferred Shares. In other words, the Liquidity Condition is a proxy for satisfactory market conditions in the market into which an investor is most likely to sell Common Shares if the decision is made to do so. That market is not restricted to the TSX.

[53] Fourth, as mentioned, an effect of the Listing Obligation was to diminish the volume of trading taken into consideration for the purposes of the Liquidity Condition regardless of which interpretation of that provision is adopted. This consequence would have been understood from the outset. Nevertheless, there is no evidence that the Listing Obligation in the Articles was conceived of as an additional bar to the Company’s exercise of the Mandatory Conversion Provision. Rather, the applicants agree that this provision was directed toward the more traditional purpose of providing greater liquidity to the Common Shares even though trading on this exchange would not be counted for the purposes of the Liquidity Condition.

[54] Fifth, I consider that this interpretation of the Liquidity Condition is commercially reasonable. In particular, as discussed already, it reflects the commercial reality of the current trading environment for the Common Shares, which is not limited to trading on the TSX, and is consistent with the purpose of the Mandatory Conversion Provision.

[55] In this regard, the applicants have tendered an affidavit of a former Canaccord partner who was involved in the private placement of the Preferred Shares described above. His evidence addresses his belief regarding the reasonableness of the applicants’ interpretation based on the understanding of investors with whom he says he has discussed the matter, who are investors, or who were prospective investors, in the Preferred Shares. While I accept that evidence from independent third parties in the market as to how a reasonable investor would understand the Liquidity Condition to operate could be relevant, I have not accepted this evidence. Apart from the issues of hearsay evidence, and without suggesting any bad faith on the part of any individual, there is an obvious potential for the influence of self-interest on the part of both the investors spoken to, and Canaccord itself as the underwriter of the Preferred Shares, that makes such evidence unreliable.

[56] Sixth, the applicants have provided the Court with copies of certain provisions of all of the convertible securities transactions over the past ten years which they have identified above a $50 million threshold. They rely on the fact that each of these securities use a principal exchange concept, typically the Toronto Stock Exchange. I am not persuaded, however, that this evidence is relevant for the issue in the present proceeding. All of such provisions deal with price not liquidity. As a matter of principle, there is no necessary reason why liquidity should be restricted to a principal exchange, to the extent such a concept remains appropriate, as opposed to an aggregate concept based on the composite reporting of a principal exchange.

[57] More specifically, all of the applicants’ examples pertain to the determination of price for the purposes of anti-dilution provisions. In that context, it is not necessary to capture all of the trading volume of the underlying common shares. The volume of trading is material only to the extent that it is sufficient to establish that the price determined is credible. The implicit assumption is that a sufficient volume of trading will occur on the named exchange to satisfy the requirement for a reliable price. This is evidenced, for example, by the fact that, in the case of a dual-listed security, typically only the volume on the Canadian exchange will be used for the purpose of determining the price in order to avoid the complexities of foreign-exchange calculations. In circumstances of a U.S. dollar-denominated security, the American exchange data may be used exclusively. The applicants’ evidence contains examples of each case.

[58] Further, the determination of the volume of trading for the purposes of the Mandatory Conversion Provision has no counterpart in any of the examples of convertible securities provided to the Court. As mentioned, the terms of the Preferred Shares in this respect are unique. There is no reason why the approach to the determination of volume for the calculation of whether or not the Liquidity Condition has been satisfied should be governed by the approach to the determination of price in the anti-dilution provisions of other convertible securities. Accordingly, I am not persuaded that the use of a principal exchange concept in other convertible securities is determinative of the intention of the parties in this case, as the applicants argue.

[59] Seventh, the applicants submit that the Company uses the TSX transaction data for the VWAP calculations under the Preferred Shares notwithstanding the absence of any specific reference to the TSX in the definition of VWAP. They suggest that these circumstances reflect a larger intention that references to the volume of trading for other purposes in the Articles should be calculated based solely on TSX trades. However, the VWAP calculations are used for the purposes of adjustments to the anti-dilution provisions under various scenarios. As discussed above, it is not necessary for such purposes to capture all trading in the Common Shares over the specified period. It is only necessary to be satisfied that the volume and pricing of the transactions considered fairly reflect the market price of the Common Shares in the relevant period.

[60] Lastly, while it could be argued that the Liquidity Condition should also be interpreted to include all trading on the NASDAQ, I conclude that is not the better interpretation in the present context for two reasons. First, a listing on another major exchange was expressly contemplated in the Articles. Accordingly, if trading on that exchange had been contemplated for the purposes of the Liquidity Condition, the parties could have expressly stated this intention. Second, the applicants’ interpretation might be supported by the need to avoid an interpretation that carries with it a real potential for manipulation. However, the evidence before the Court does not suggest that the parties contemplated, much less intended to address, a serious risk of manipulation of the marketplace for trading in the Common Shares with a view to subverting the normal operation of the Liquidity Condition.

Conclusion

[61] Based on the foregoing, the application is dismissed. The applicants also assert that, by proceeding to effect the Conversion in circumstances where it is not permitted by the Articles, TSGI will have engaged in activity that is oppressive or unfairly prejudicial to or unfairly disregards the interests of the applicants, within the meaning of s. 248(1) of the Business Corporations Act, R.S.O. 1990, c. B-16. The applicants acknowledge however that this is not an independent claim but rather is based entirely on their assertion regarding the requirements of the Mandatory Conversion Provision which are the subject of this application. Accordingly, this claim is also denied given the foregoing determination.

[62] If the parties are unable to agree on costs, and are also unable to agree on a process for providing the Court with their costs submissions, they shall have thirty days to submit costs submissions not exceeding five pages in length together with a costs outline in the form required by the Rules of Civil Procedure.

Wilton-Siegel J. Date: July 17, 2018