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IN THE SUPREME COURT OF CANADA
(ON APPEAL FROM THE COURT OF APPEAL FOR ONTARIO)
B E T W E E N:
CHARON ENTERTAINMENT INC.
Appellant
- and -
PANDEMONIUM PRODUCTIONS CORP. ET AL.
Respondents
RESPONDENTS’ FACTUM
Team No. 11
2013 Canadian Corporate/Securities Moot Court Competition
TABLE OF CONTENTS
PART I – STATEMENT OF FACTS ......................................................................................... 1
A. OVERVIEW ......................................................................................................................... 1
B. RELEVANT FACTS ............................................................................................................ 3
(i) The Parties.................................................................................................................... 3
(ii) Charon’s Proposed Take-over Bid ............................................................................... 4
(iii) Pandemonium’s Directors Respond to Charon’s Take-over Bid ................................. 5
(iv) Convertible Notes Issued by Pandemonium ................................................................ 7
(v) Voting on the Rights Plan ............................................................................................ 8
(vi) Judgments Below ......................................................................................................... 8
PART II – STATEMENT BY THE RESPONDENTS ........................................................... 10
PART III – ARGUMENT .......................................................................................................... 11
A. DIRECTORS DID NOT BREACH THEIR FIDUCIARY DUTIES ................................. 11
(i) Acceptable Defence Tactics ....................................................................................... 11
(ii) Best Interests of the Corporation ............................................................................... 14
(iii) Pandemonium’s Directors Acted Within Their Ambit .............................................. 16
(iv) Burden of Proof .......................................................................................................... 18
B. CONSIDERATION FOR CONVERSION SHARES WAS VALID ................................. 18
(i) Consideration was the Convertible Notes. ................................................................. 19
(ii) The Transaction Is An Irregularity And Should Be Allowed .................................... 22
C. THE RIGHTS PLAN DOES NOT VIOLATE THE CBCA ............................................... 23
(i) The Rights Plans is Authorized by the CBCA............................................................ 24
(ii) The Rights Plan does not Breach Section 24 of the CBCA ........................................ 26
(iii) The Rights Plan is a Validly Issued Corporate Resolution ....................................... 28
D. BELIAL IS NOT ELIGIBLE TO VOTE ON THE RIGHTS PLAN ................................. 32
(i) Charon is an “Acquiring Person” ............................................................................... 32
(ii) Charon is an “Offeror” ............................................................................................... 33
(iii) Belial and Charon Acted Jointly and in Concert with Each Other ............................ 34
PART IV – ORDER SOUGHT ................................................................................................. 36
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PART I – STATEMENT OF FACTS
A. OVERVIEW
1. The current relationship between corporate law and securities law in Canada is in flux.
Recently, provincial securities commissions have aggressively employed their public interest
jurisdiction and have improperly affected the fiduciary duties of directors. This is especially
prevalent in the context of unsolicited take-over bids.
2. Prior to the enactment of National Policy 62-202, securities commissions gave directors
more flexibility in employing defensive tactics directors such as shareholder rights plans. More
recently, the securities commissions have been overstating the purpose inherent in NP 62-602
and claiming that the protection of shareholders rests at the heart of these decisions.
National Policy 62-202 – Take-Over Bids – Defensive Tactics, OSC NP 62-202 (13 March 2002)
[NP 62-202].
3. Consequently, the recent decisions of securities commissions have taken away key
powers and duties of directors used for managing corporations. These decisions have overridden
well-established jurisprudential principles of corporate law regarding the fiduciary duties of
directors.
4. This Honourable Court has, as recently as four years ago, held that the directors owe
fiduciary duties to the corporations they serve. This is a vital principle which must be honoured,
otherwise it will obstruct the ability of directors to act in the best interests of the corporation.
5. In today’s financial markets, shareholder interests have changed: shareholders have
become less loyal to corporations and more interested in making more short-term profits rather
than long-term investments. Nevertheless, directors’ focus needs to be on the long-term interests
of their corporations, to ensure that corporations remain a going concern, in order to build a
stronger and more stable economy.
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6. There is a significant divide between the perspective of the Canadian courts on directors’
fiduciary duties and the perspective of the securities commissions. The latter perspective has
limited the use of defensive tactics which have been recognized as acceptable tools for directors
to fulfill their fiduciary duties. As a result, there is substantial uncertainty on directors in the
manner in which they must carry out their fiduciary obligations.
7. The Respondents submit that it is imperative for this Honourable Court to provide
guidance on this apparent uncertainty and to set a clear precedent. The result of the financial
crisis is a global economy in which hostile take-overs are increasingly prevalent, creating many
opportunities for unfair take-over tactics to be exploited. This demands clarification of the role
of directors in the context of take-over bids and the defensive tactics which they may use to
better protect and control Canadian corporations.
8. Allocating more deference to directors in fulfilling their fiduciary obligations will ensure
the survival and competitiveness of Canadian corporations in the global market. If a clear
precedent is not set, Canada will continue to lose its national corporations to foreign corporate
raiders.
9. It is vital that this Honourable Court re-instate the Ontario Court of Appeal’s decision
(the “OCA”) (the “OCA Decision”). The OCA Decision was correct in its reasoning which
honoured the fiduciary duties of directors in the unsolicited take-over bid context. It understood
and took into account that certain defensive tactics, when enacted in good faith and when
reasonable, are essential tools for directors to fulfill their duties. The Respondent submits that
the Appellant’s appeal should be dismissed.
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B. RELEVANT FACTS
10. This appeal concerns the validity of the defensive tactics employed by the Respondent,
Pandemonium Productions Corp. (“Pandemonium”), in reaction to a proposed unsolicited
hostile take-over bid made by Charon Entertainment Inc. (“Charon”).
11. The Respondents submit that the OCA correctly held that the defensive tactics employed
by Pandemonium were valid. These defensive tactics complied with the Canada Business
Corporations Act (the “CBCA”), and Pandemonium’s Board of Directors (the “Directors”)
satisfied their fiduciary duties through their actions.
Canada Business Corporations Act, R.S.C. 1985, c. C-44 [CBCA].
(i) The Parties
12. Pandemonium is a public company incorporated under the CBCA. Pandemonium’s
common shares are listed on the Toronto Stock Exchange (“TSX”). .
13. Charon is a TSX-listed public company that held 9.8% of Pandemonium’s issued and
outstanding common shares at the time of trial. Ms. Lucinda Luficer is the Chair of Charon’s
board of directors.
14. At the time of trial, Tartarus Partners LLC and Belial Screen Idols Ltd. (“Belial”) were
Pandemonium’s largest two shareholders, holding 26.3% and 17.2% of the issued and
outstanding Pandemonium common shares, respectively.
15. Belial was also a major shareholder of Charon, holding approximately 12.5% of
Charon’s outstanding common shares. By market capitalization, Belial’s ownership stake in
Charon was worth 2.3 times more than its stake in Pandemonium.
16. The Chief Financial Officer (“CFO”) of Belial is Mr. Harry Moloch, who is the brother-
in-law of Ms. Lucinda Lucifer, the Chair of Charon.
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Shareholdings Diagram
26.3%
17.2%
9.8%
12.5%
Charon Tartarus
Belial
Pandemonium
Mr. Moloch, CFO
Ms. Lucifer, Chair
Brother-in-law
Prosperine
Securities, Broker
(ii) Charon’s Proposed Take-over Bid
17. On June 28, 2012, Charon began accumulating significant holdings in Pandemonium’s
common shares. A day later on June 29, 2012, Belial began to do the same. Up until August 6,
2012, Charon and Belial made a series of share purchases. During this short six week time
period, Charon and Belial share acquisitions totalled, respectively, 7% and 5.6% of
Pandemonium’s issued and outstanding shares. To acquire their holdings in Pandemonium
shares, Charon and Belial both used the same broker, Prosperine Securities Limited.
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Share Acquisitions Chart
Acquisitions By Charon
Acquisitions By Belial
Date Number of
Shares
Percentage of
Outstanding
Shares
Date Number of
Shares
Percentage of
Outstanding
Shares
June 28, 2012 1,410,000 1.50
June 29, 2012 1,598,000 1.70
July 3, 2012 564,000 0.60 July 3, 2012 376,000 0.40
July 11, 2912 1,692,000 1.80
July 19, 2012 1,034,000 1.10
July 23, 2012 282,000 0.30
July 24, 2012 846,000 0.90
August 2, 2012 940,000 1.00 August 2, 2012 940,000 1.00
August 6, 2012 940,000 1.00 August 6, 2012 1,222,000 1.30
Total Percentage of Shares
Acquired by Charon: 7.00%
Total Percentage of Shares
Acquired by Belial: 5.60%
18. On August 17, 2012, less than two weeks after it had stopped purchasing Pandemonium
shares through its broker, Charon announced its intention to acquire all the outstanding common
shares of Pandemonium via an unsolicited take-over bid. Under the proposed terms of the take-
over bid, Charon offered to pay $1.23 per share of Pandemonium. In the ninety day period
before Charon’s bid proposal, Pandemonium’s market share price had traded in the range of
$1.15 to $1.21.
19. Following Charon’s announcement, the market price of Pandemonium’s shares rose to a
range of between $1.25 to 1.28 per share, at which price it has remained.
(iii) Pandemonium’s Directors Respond to Charon’s Take-over Bid
20. On August 20, 2012, the Directors created a special committee of independent directors
(the “Special Committee”) to consider Charon’s proposed bid and other reasonable alternatives.
The Directors issued a press release notifying the shareholders of its actions, and provided its
opinion that Charon’s proposed price per share was inadequate.
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21. On August 20, 2012, the Directors also authorized the adoption of a shareholder rights
plan (the “Rights Plan”). The Rights Plan would be voted on during a special meeting of
shareholders on September 28, 2012. Shareholders as of September 7, 2012, except for certain
excluded persons as set out in the Rights Plan terms, could vote on the adoption of the Rights
Plan. If approved, subject to certain exceptions, the Rights Plan could be triggered by the
Directors if an entity became the beneficial owner of 20% or more of Pandemonium’s
outstanding shares.
22. The Special Committee retained counsel and hired an independent financial advisor,
Astoreth Capital Markets (“Astoreth”), to assess the fair market value of Pandemonium’s shares.
On August 30, 2012, Astoreth advised the Special Committee that a fair market valuation of
Pandemonium’s shares would be between $1.50 and $1.75, a price much higher than Charon’s
proposed offer.
23. Following consultations with Astoreth, the Special Committee reviewed all the
alternatives transactions available and entered into discussions with various possible bidders.
Based on these investigations, the Special Committee concluded that it was unlikely for
Pandemonium to be able to attract an alternative bidder or propose an alternative transaction that
would allow its shareholders to realize fair value for their shares.
24. The Directors came to a consensus at the August 31, 2012, meeting, that it was in the
long-term interests of Pandemonium’s shareholders to prevent Charon from acquiring control of
Pandemonium. The Directors concluded that this was the only option for Pandemonium to
remain an independent corporation and the best avenue to realize the greatest value for its
shareholders.
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(iv) Convertible Notes Issued by Pandemonium
25. In 2008, Pandemonium issued $28 million of convertible unsecured notes (the
“Convertible Notes”) via private placement. The Convertible Notes accrued interest of 8.6% on
a semi-annual basis and matured on December 31, 2012. On the maturity date, and only on that
day, Convertible Note holders (the “Noteholders”) had the option to convert their principal
amount into common shares of Pandemonium. The price per share for the conversion would be
85% of the 10-day average trading price of Pandemonium’s shares leading up to the maturity
date.
26. Astoreth advised the Special Committee that it would be financially advantageous for
Pandemonium to convert as many Convertible Notes to common shares, as this would
significantly improve the company’s outstanding debt levels.
27. The Special Committee held discussions with the major Noteholders and a deal was
reached: each Noteholder who irrevocably agreed to convert their Convertible Notes into
common shares in advance of the maturity date would receive one special warrant (the “Special
Warrants”) for every $2.50 of principal amount converted. Accordingly, an expedient was
adopted to allow for the amendment to the indenture governing the Convertible Notes.
28. Each Special Warrant would provide the holder with the right to purchase one common
share of Pandemonium for $1.20 at any time on or before December 31, 2012, at which time the
Special Warrants would expire. On September 6, 2012, the Noteholders who irrevocably agreed
in advance to exercise the conversion option, surrendered and delivered their Convertible Notes
to Pandemonium. This amounted to approximately 87% of the total principal amount of all the
issued Convertible Notes.
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29. After these Convertible Notes were transferred over to Pandemonium, the Directors
issued common shares and Special Warrants on the same day to participating Noteholders. Of
the Special Warrants issued, 92% were exercised immediately. As a result of the issuance of the
conversion shares and exercise of the Special Warrants, Charon and Belial’s holdings in
Pandemonium shares were diluted to 7.2% and 12.6%, respectively.
(v) Voting on the Rights Plan
30. Pandemonium held a special meeting of shareholders on September 28, 2012, to vote on
approving the Rights Plan. As an offeror who had announced an intention to acquire all of the
outstanding shares of Pandemonium, Charon was not permitted to vote at this meeting.
31. Even though Belial, had a clear conflict of interest in the outcome of the vote, as an
owner of more than 10% of Charon’s shares, Belial was able to vote at this meeting. The
resolution to adopt the Rights Plan failed, with Belial’s votes being integral to the outcome of
the vote. The result of the vote was that 51.3% of all votes cast were not in favour of adopting
the Plan, so the proposal failed. If Belial did not have authority to vote on the proposal, then its
votes would have been excluded, and the Rights Plan would have been adopted with 62% of
votes in favour.
(vi) Judgments Below
32. The trial judgment by Pluto J (the “Trial Decision”) held that the Directors breached
their fiduciary duties with the issuance of the Conversion Shares and Warrant Shares and with
the adoption of the Rights Plan. It found that the Conversion Shares contained invalid
consideration and they were set aside. The Trial Decision held that Rights Plan contravened the
CBCA as it contravened the principle of equality and it was set aside. It also held that Belial was
entitled to vote at the shareholders meeting which opposed the approval of the Rights Plan.
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33. The OCA unanimously overturned Pluto J’s judgment on all four issues. It held that the
Directors did not breach their fiduciary duties with the issuance of the Conversion Shares and
Warrant Shares and with the adoption of the Rights Plan. The OCA Decision held that the
Conversion Shares contained valid consideration and that the Rights Plan did not contravene the
CBCA. The OCA Decision also held that Belial was not entitled to vote at the shareholders
meeting which opposed the approval of the Rights Plan.
34. The Respondents seek to affirm the OCA Decision.
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PART II – STATEMENT BY THE RESPONDENTS
35. The Respondents submit that the OCA correctly ruled on the following
issues:
(1) The directors of Pandemonium did not breach their fiduciary duties in approving the
Rights Plan, and in issuing the Conversion Shares and the Warrant Shares;
(2) The issuance of the Conversion Shares was not invalid under the CBCA because the
consideration for such issuance was received by Pandemonium;
(3) The Rights Plan did not breach the provisions of the CBCA by discriminating
between shareholders of Pandemonium in prohibited manner; and,
(4) Belial acted jointly or in concert with Charon in connection with acquiring shares of
Pandemonium, and therefore was not entitled to vote on the adoption of the Rights
Plan at Pandemonium’s shareholder meeting.
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PART III – ARGUMENT
A. DIRECTORS DID NOT BREACH THEIR FIDUCIARY DUTIES
36. The Respondents submit that the directors of Pandemonium did not breach their
fiduciary duties as set out in the CBCA and relevant jurisprudence. In approving the Rights Plan,
and in issuing the Conversion Shares with the Special Warrants, the Directors demonstrated that
they satisfied their duties owed to the corporation. The use of these acceptable defence tactics
helped demonstrate that the Directors’ fiduciary obligations satisfied the business judgment rule
and they were performed according to the best interests of Pandemonium.
(i) Acceptable Defence Tactics
37. The Canadian government’s Competition Policy Review Panel (the “Competition Panel”)
recognized our nation’s divide on the directors’ role when faced with an acquisition proposal
(Compete to Win). It found that Canada has been experiencing a “hollowing-out” of its
publicly-traded enterprises due primarily to foreign take-overs (Compete to Win). To this end,
the Competition Panel has recommended strengthening the role of corporate directors to provide
them with more useful tools “when exercising their fiduciary duties in regard to an acquisition
proposal” (Compete to Win).
Competition Policy Review Panel, Compete to Win: Final Report (Ottawa: Public Works and
Government Services Canada, 2008) at 1, 17, 76 [Compete to Win].
38. Canadian securities commissions have become very active in supervising and restricting
the activities of directors when exercising their fiduciary duties. This has encroached on existing
corporate law principles which defer to the directors when exercising their duties owed
(Compete to Win). It is in stark contrast to the US securities regulator which continuously leaves
to the US courts the regulation of directors’ decisions (Compete to Win). It is of utmost
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importance that this divide be resolved, as Canadian corporations need to remain competitive in
today’s globalized economy.
Compete to Win, supra para 37 at 77.
39. Hostile take-over bids occur far less often than friendly acquisition transactions
(Nicholls). However, a recent increase in the number of highly-valued hostile transactions has
been attributed to the aftermath and the continuing effect of the financial crisis (Nicholls). This
recent trend requires corporations to have fair access to employ legitimate defensive tactics to
protect against exploitative take-over bids. Recent decisions by securities commission have
made this very difficult.
Christopher C. Nicholls, Mergers, Acquisitions, and Other Changes of Corporate Control, 2nd
Ed
(Toronto: Irwin Law 2012) at 17, 31 [Nicholls].
40. The aggressive stance by securities commission to look out solely for shareholder
interests while turning a blind eye to other affected constituents has left the courts hesitant to
clarify this area of law. This has resulted in a lack of clarity in regards to the role of directors in
the hostile take-over context:
Had leave been granted, it is possible that there might have been a resolution of
the conflicting Canadian judicial and regulatory positions around the defensive
actions a board of directors of a company is entitled to take in the face of a hostile
take-over bid. (Shay)
Ralph Shay, “Supreme Court of Canada Declines Invitation to Address Hostile Take-Over Bid
Issues”, Securities Law Newsletter (June 2012) at 1.
41. The OCA correctly recognized that shareholder rights plans have a well-defined role in
defensive tactics in the face of hostile take-over bids (OCA Decision). They are an acceptable
defensive tactic used by company’s directors, when exercised in good faith and for the best
interests of the corporation (Nicholls).
Pandemonium Productions Corp et al v Charon Entertainment Inc (2013), (Ont CA) at para 8
[OCA Decision].
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Nicholls, supra para 39 at 209-213.
42. It is also an acceptable tactic to issue shares for reasons other than to raise capital,
whether by conversion or through the use of special warrants (Teck). These tactics are already
heavily restricted and supervised by securities legislation and the securities commissions. The
Respondents submit that this Honorable Court should not allow securities regulators to overstep
their boundaries. They should not be permitted to use their mandate to prevent the purposeful
use of these accepted tactics.
Teck Corp v Millar (1972), 33 DLR (3d) 288 at para 90, [1973] 2 WWR 385 (BCSC) [Teck].
43. NP 62-202 is another forceful regulation which goes further than corporate law in
limiting possible conduct of directors of a target company. Accordingly, one of the Competition
Panel’s recommendations was for the securities commissions to repeal NP 62-202 and to have
the courts solely oversee the duties of directors in a take-over bid context (Compete to Win).
Compete to Win, supra para 37 at 78.
44. Canada’s rich jurisprudence in setting out the role and duty of directors is well-
entrenched and should persist. As illustrated with NP 62-202, securities commissions hold a
strong “managerial passivity” view, where the belief is that “only shareholders should be
concerned about how to respond to hostile takeover bidders” (Nicholls).
Nicholls, supra para 39 at 216-217.
45. The problem with this view is that frequently, shareholders are primarily concerned with
the value of their short-term investment and not what is best for the corporation in the long-term.
This is why Canadian corporate law holds an “ultimate shareholder choice” view, supporting an
important role for the directors of target companies “with a clear recognition that it is the
shareholders, and not the directors, who must ultimately decide whether or not a take-over bid
should succeed or fail” (Iacobucci)( Nicholls).
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Frank Iacobucci, “Planning and Implementing Defences to Take-Over Bids: The Directors’ Role”
(1980) 5 Can Bus LJ 131 at 171.
Nicholls, supra para 39 at para 16.
46. The important role of directors in a take-over context will not be recognized if their
ability to use acceptable defensive tactics is limited. This may only be clarified if the divide
between the perspectives of Canadian courts and securities commissions is resolved.
Frank Iacobucci, “Planning and Implementing Defences to Take-Over Bids: The Directors’ Role”
(1980) 5 Can Bus LJ
Nicholls, supra para at para 16.
(ii) Best Interests of the Corporation
47. Canadian jurisprudence concerning directors’ fiduciary duties has shaped the scope of
these duties in various contexts. These duties are codified in the CBCA. Subsection 102(1)
establishes the directors’ duty to manage the corporation. It requires the directors to be pro-
active and inform themselves of all material information reasonably available. The fiduciary
duties of directors are set out in subsection 122(1) of the CBCA as follows:
Every director and officer of a corporation in exercising their powers and
discharging their duties shall
(a) act honestly and in good faith with a view to the best interests of the
corporation...
CBCA, supra para 11, ss 102(1), 122(1).
48. Teck set the foundation for examining the nature and extent of directors’ duties as
follows:
The directors must act in good faith. Then there must be reasonable grounds for their
belief. If they say that they believe there will be substantial damage to the company’s
interests, then there must be reasonable grounds for that belief
In effect, the case sets out a test to determine whether directors are acting in a corporation’s best
interests. (Icahn Partners).
Teck, supra para 42 at para 113.
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Icahn Partners LP v Lions Gate Entertainment Corp, 2010 BCSC 1547 at para 153, 75 BLR (4th
)
212.
49. This Honourable Court adopted this test in Peoples, which espoused the business
judgement rule and affirmed that “in determining whether directors have acted in a manner that
breached the duty of care, it is worth repeating that perfection is not demanded” but that courts
are capable of determining whether a decision was reasonable (Peoples). In this instance, this
Honourable Court confirmed that “directors’ duties are not owed to the shareholders but to the
corporation” in such circumstances. (Peoples).
Peoples Department Stores Inc (Trustee of) v Wise, 2004 SCC 68 at paras 67, 68, [2004] 3 SCR
461 [Peoples].
50. More recently, in BCE Inc v 1976 Debentureholders, this Honourable Court went further
described that “directors owe a fiduciary duty to the corporation, and only to the corporation” .
It went on to expand that a director’s fiduciary duty is not restricted to short-term outlooks or
solely share value but is rather owed to the “long-term interests of the corporation” (BCE).
(2008), SCC 69 at paras 66, 68, [2008] 3 SCR 560 [BCE].
51. This differs significantly from the U.S. perspective of how directors should act in light of
a hostile take-over. The duty of directors in this context was initially stated in the Revlon case
and quickly became known as the “Revlon duty” in the corporate world: when a sale of a
company is inevitable the duty of directors is to maximize shareholder value (Revlon). While
performing this duty directors in the U.S. have also been given the green light to utilize the “just
say no” defence tactics and block a hostile take-over bid altogether (Nicholls).
Revlon, Inc v MacAndrews & Forbes Holdings, Inc (1986), 502 A 2d 173 (Del 1986) at para 182
[Revlon].
Nicholls, supra para 2 at 266.
52. In Canada, the Revlon duty in a take-over context has been rejected by the OCA.
Similarly, the courts have not accepted “just say no” defence tactics (Maple Leaf). Rather, in
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order to fulfill its obligation towards the business judgment rule, the courts have accepted tactics
that delay a hostile bid rather than block it altogether (Nicholls). The BCE decision dealt with a
hostile take-over situation and clarified that the business judgement rule is the proper
application in this context, in stating the following:
What is clear is that the Revlon line of cases has not displaced the fundamental
rule that the duty of the directors cannot be confined to particular priority rules,
but is rather a function of business judgment of what is in the best interests of the
corporation, in the particular situation it faces.
Maple Leaf Foods Inc v Schneider Corporation (1998), 44 BLR (2d) 115, 42 OR (3d) 177.
Nicholls, supra para 39 at 233.
BCE, supra para 50 at para 87.
53. In applying the business judgment rule, this Honourable Court held that the court’s
analysis is to be limited to the view of the objectively reasonable individual (Peoples). Secondly,
it is not the Court’s role to second guess directors’ acts, as long as it satisfies the business
judgment rule (Peoples). Deference to the business decisions of directors has been recognized.
Peoples, supra para 49 at paras 57, 67.
(iii) Pandemonium’s Directors Acted Within Their Ambit
54. Directors correctly authorized the adoption of the Rights Plan, which is a commonly
accepted defence mechanism for target companies in a hostile take-over bid. The Directors
undertook two important steps to ensure that their decisions were in line with the best interests
of the corporation and that there were no conflicts of interest.
55. First, on August 20, 2012, the Directors created the independent Special Committee to
consider the bid and any alternatives to it (Trial Decision). Second, the Special Committee
retained independent counsel in addition to Astoreth as financial advisor. These steps have been
recognized in hostile take-over situations as mechanisms for directors to fulfill their duties while
avoiding any conflicts of interests (CW Shareholdings).
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Charon Entertainment Inc v Pandemonium Productions Corp et al (2012), (Ont CT J) Pluto J at
para 15 [Trial Decision].
CW Shareholdings Inc v WIC Western International Communications Ltd, [1998] 160 DLR (4th
)
131at para 44, 38 BLR (2d) 196.
56. After receiving independent advice, the Directors reasonably and honestly formed the
belief that market conditions would become more favourable in the future for their corporation
(Trial Decision). They considered both what was best for the corporation to continue to grow
independently as well as the share value for the corporation’s shareholders.
Trial Decision, supra para 55 at para 19.
57. By considering the long-term interests of Pandemonium above, the Directors set out to
transfer as many of the Convertible Notes into common shares of the corporation as possible.
They were advised by the Special Committee that this was “financially advantageous to
Pandemonium” and found it was in Pandemonium’s best interest to pursue it “for that reason
alone” (Trial Decision).
Trial Decision, supra para 55 at para 24.
58. Pandemonium would not have been able to pay the outstanding debt due from the
Convertible Notes. Therefore it followed the acceptable mechanics of a share conversion and
invited more shareholders to convert their notes with the additional issuance of the Special
Warrants. This tactic does not breach their duty to the corporation and is in compliance with
TSX’s policy guidelines (TSX Policy).
“Corporate Finance Manual”, TSX Venture Exchange (29 February 2012) Policy 4.1 Private
Placements at 5 [TSX Policy].
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(iv) Burden of Proof
59. Pursuant to 347883 Alberta Ltd v Producers Pipelines Inc, the burden of proof lies with
the directors to establish that:
(a) in good faith they perceived a threat to the corporation, (b) they acted after
proper investigation, and (c) the means adopted to oppose the take-over were
reasonable in relation to the threat posed...(Producers Pipelines).
Pandemonium has satisfied this burden in the following manner. First, the Special Committee
concluded that Charon’s proposed price was inadequate as the Directors had faith that
Pandemonium would recover economically in more favourable conditions (Trial Decision).
Second, the Directors used the independent opinion that fair market value was significantly
greater than Charon’s bid (Trial Decision). Third, the Directors executed the defensive tactics
following proper rules and procedures and were reasonable in response to the threat of the
unsolicited take-over bid.
[1991] 80 DLR (4th
) 359 at 12, 4 WWR 577.
Trial Decision, supra para 55 at paras 19, 17.
60. The Respondents submit that the OCA did not err in holding that directors of
Pandemonium have established that they met their fiduciary duties and that their actions were
not in breach of those duties. In addition, the defensive tactics employed by the Directors were
legitimate.
B. CONSIDERATION FOR CONVERSION SHARES WAS VALID
61. The Respondents submit that the consideration for the Conversion Shares was the
Convertible Notes. Satisfying the requirements of the CBCA, the Convertible Notes qualify as
property with a value not less than the Conversion Shares. In the alternative, the issuance of the
Conversion Shares should not be set aside as the CBCA deems the corporation liable for the
transaction, and the transaction should be given a purposeful approach.
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(i) Consideration was the Convertible Notes.
62. Subsection 25(3) of the CBCA states:
A share shall not be issued until the consideration is fully paid in money or in
property or past services that are not less in value than the fair equivalent of the
money that the corporation would have received if the share had been issued
money.
The Conversion Shares were issued in exchange for the Convertible Notes. They were
surrendered, endorsed for transfer and delivered to Pandemonium jointly with the signed notices,
irrevocably electing to convert them into common shares (Trial Decision).
CBCA, supra para 11, s 25(3).
Trial Decision, supra para 55 at para 26.
63. The consideration for the issuance of the Conversion Shares was the Convertible Notes.
The significance of the returned notes has great value for Pandemonium. The Convertible Notes
were delivered to Pandemonium, hence they have been negotiated between Pandemonium and
the original Noteholders (Trial Decision).
Trial Decision, supra para 55 at para 30.
64. The definition of delivery under the Bills of Exchange Act (the ”BEA”) “means transfer
of possession, actual or constructive, from one person to another” (BEA). Therefore, on
September 6, 2012, possession passed to Pandemonium and it effectively became the holders of
the Convertible Notes. For the purposes of the BEA, s. 186(1) allows the provisions of the BEA
to apply to notes.
Bills of Exchange Act, RSC 1985, c B-4, s 2, s 186(1) [BEA].
65. The BEA defines holder as “the payee or endorsee of a bill or note who is in possession
of it, or the bearer thereof” (BEA). In addition, according to s. 59 of the BEA, the Convertible
Notes were negotiated as they were transferred from the Noteholders to Pandemonium upon
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delivery. The negotiation of the Convertible Notes is central: the value inherent in them was
handed over to Pandemonium and the Noteholders have no further claim regarding the payment
of the principal amount of the convertible debentures.
BEA, supra para 64, ss 2, 59.
66. It is evident that Pandemonium is the legal owner of the Convertible Notes as of
September 6, 2012. The transfer of the Convertible Notes was endorsed by the Noteholders and
any doubt is eradicated by accompanying signed notices irrevocably converting them.
67. Moreover, as holder of the Convertible Notes, Pandemonium also have the rights
attached to them. Subsection 73(a) of the BEA sets out the rights and powers of the holder of a
bill: “he may sue on the bill in his own name” (BEA). Pandemonium may even choose to re-
negotiate the Convertible Notes with third parties in the future.
BEA, supra para 64, s 73(a).
68. In order to adequately analyze the exchange of the issuance of Conversion Shares for the
Convertible Notes, a purposeful approach must be taken when interpreting section 25 of the
CBCA (Sullivan). Subsection 25(5) follows that:
For the purposes of this section, property does not include a promissory note, or a
promise to pay, that is made by a person to whom a share is issued, or a person
who does not deal at arm’s length, within the meaning of that expression on the
Income Tax Act, with a person to whom a share is issued.
Ruth Sullivan, Sullivan on the Construction of Statutes, 5th ed (Markham: LexisNexis Canada Inc,
2008) [Sullivan].
CBCA, supra para 11, s 25(5).
69. It is clear the in order for consideration to properly pass for the issuance of shares,
property shall not include a promissory note made by a party to whom a share is issued. The
Convertible Notes constituted a promise to pay the principal amount upon maturity if the option
for the Conversion Shares is not exercised. The Convertible Notes were made by Pandemonium,
- 21 -
not the Noteholders, to whom the Conversion Shares were issued. It is the intention of the
CBCA to include promissory notes made by the person who issued the shares. In this instance,
that person is Pandemonium. Therefore, Convertible Notes constitute acceptable property under
s. 25(3) of the CBCA.
70. The consideration of the returned Convertible Notes may also be recognized in the
process of financial accounting. Once the Convertible Notes were returned to Pandemonium, the
obligation to pay back the principal amount was extinguished. This is recognized by debiting the
“debentures payable” account and it cannot be overturned as the Convertible Notes are
irrevocable (Kieso).
Donald E. Kieso et la, Intermediate Accounting, 8th
ed (Mississauga: John Wiley & Sons Canada,
Ltd., 2007) at 953.
71. The issued Conversion Shares are not transferred to the Noteholders until December 31,
2012. Any discrepancy in this apparent delay in conversion may be compared to the mechanics
of subscription receipts which are held in trust until the set date:
In a subscription receipt offering, the subscriber pays in full for a subscription
receipt that is automatically exchanged for an underlying security of the issuer
upon closing of the acquisition. The proceeds of the offering are held in trust until
the acquisition closes and the subscription receipts are exchanged for the
underlying securities. (Torys Report)
John Emanoilidis & Jamie Becker, “Extendible Convertible Debentures”, Torys LLP Capital
Markets 2012 Mid-Year Report (June 2012) at 18.
72. Interest on the convertible debentures is still owed by Pandemonium on December 31,
2012. Due to the exchange of the Convertible Notes for the Conversion Shares, the payable
interest has become a separate collateral contract, detached from the transaction of September 6,
2012. It is a promise to pay by Pandemonium and any claim made by the Noteholders in relation
to interest owed is separate from any claim on the principal amount of the convertible debenture.
- 22 -
The latter right has been extinguished with the delivery of the Convertible Notes to
Pandemonium for the Conversion Shares.
(ii) The Transaction Is An Irregularity And Should Be Allowed
73. Subsection 118(1) of the CBCA states:
Directors of a corporation who vote for or consent to a resolution authorizing
the issue of a share under section 25 for a consideration other than money are
jointly and severally, or solidarily, liable to the corporation to make good any
amount by which the consideration received is less than the fair equivalent of the
money that the corporation would have received if the share had been issued for
money on the date of the resolution.
CBCA, supra para 11, s 118(1).
74. The Conversion Shares were issued in exchange for the Convertible Notes. Therefore
the consideration was not money and as a consequence the remedial effect of subsection 118(1)
of the CBCA applies. The Directors authorized the issuance of the Conversion Shares on
September 6, 2012, and they are liable if the consideration is deemed inadequate. The directors
would then need to honour the payment of the principal amount of the convertible debenture
upon the maturity date of December 31, 2012.
75. This situation is different from the facts set out in Javelin International Ltd (Receiver of)
v Hillier, which was applied in Justice Pluto J’s judgment (Trial Decision). In that case the
Javelin shares were issued in 1970 in exchange for shares of another corporation. However,
there was a material error in the price of the shares recorded in the financial books of the
company (Javelin). Additionally, the transaction was performed almost twenty years prior to
the trial and there were changes in ownership of the shares in the meantime (Javelin).
Trial Decision, supra para 55 at para 49.
40 BLR 249 at paras 21, 20, [1988] RJQ 1848 (Que Supt Ct (Civ Div)) [Javelin].
- 23 -
76. Therefore, due to the time lapse and ownership change the application of subsection
118(1) would have been difficult. Consequently, the shares of 1970 became a nullity. The
complexities of the facts in Javelin are not comparable in this case at bar.
77. In the alternative, if the remedial effect of subsection 118(1) does not apply, the
appropriate avenue would be to apply a flexible approach pursuant to Pearson Finance Group
Ltd. v Takla Star Resources Ltd. This approach was endorsed in the OCA Decision.
2002 ABCA 42, [2002] AJ No 212 [Pearson].
78. The issuance of the Conversion Shares on September 6, 2012, was the Noteholders’
preferred choice. The transaction also benefitted Pandemonium as there was evidence that they
would otherwise have financial difficulty in paying the debt (Trial Decision). Pearson
recognized the situation that when nullifying a transaction would provide very little benefit to
the parties, it should not be used (Pearson). Considering the situation at hand, both parties
involved in the transaction benefit from it, and setting it aside would not be in their favour.
Trial Decision, supra para 55 at para 24.
Pearson, supra at 77 at para 19.
79. In conclusion, the issuance of the Conversion Shares had valid consideration and any
invalidity to the transaction would fall liable to the corporation. In the alternative, the
transaction should be given a flexible approach and should be allowed due to the benefit which
it confers to the parties involved.
80. The Respondents submit that the OCA did not err in finding that the transaction should
not be set aside.
C. THE RIGHTS PLAN DOES NOT VIOLATE THE CBCA
81. The Respondents submit that the OCA correctly found that the Rights Plan was valid for
three reasons. First, the CBCA specifically authorizes Pandemonium’s Directors to create rights
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to acquire additional shares, which is exactly what the Rights Plan attempted to do. Second, the
Rights Plan does not discriminate between shareholders in away that is contemplated or
prohibited by section 24 of the CBCA. Third, the Rights Plan is a corporate resolution between
Pandemonium, its trustee for the plan, and Pandemonium’s shareholders. Any discrimination
that exists in the Rights Plan falls outside the scope of section 24.
OCA Decision, supra para 41 at para 20.
(i) The Rights Plans is Authorized by the CBCA
82. Pursuant to the CBCA, directors have the authority to issue rights to acquire their
corporation’s shares. This authority is broad and flexible, and grants directors the ability fix
conditions set out in the rights. Subsections 29(1) and 29(2) are clear examples of the flexibility
of this power. They allow directors to control the transferability of any issued rights, and to
separate or attach rights to or from the corporation’s other securities.
CBCA, supra para 11, ss 29(1)(2).
83. Section 29 is written in broad textual terms, and contains no enumerated restrictions on
when rights can be issued. Since there are no such restrictions, the directors’ decision to issue
rights is only limited by the requirement that they fully satisfy their fiduciary duties. The
correct test to assess whether directors have satisfied their fiduciary duties is the business
judgment rule (Peoples).
CBCA, supra para 11, ss 29, 122(1).
Peoples, supra para 49 at para 64.
84. In a hostile take-over situation, the business judgment rule allows directors to consider
the consequences that would result if the corporation is acquired. Where directors reasonably
believe that “there will be substantial damage to the company’s interests if the company is taken
over,” they may exercise their corporate powers to defeat the take-over attempt (Teck). The
- 25 -
courts will defer to the directors’ decisions if the directors honestly believed that they were
acting in the best interests of the company (Olympia). In the case at bar, the Directors satisfied
their fiduciary duties pursuant to the business judgment rule.
Teck, supra para 42 at para 99.
Re Olympia & York Enterprises Ltd. and Hiram Walker Resources Ltd. (1986), 59 OR (2d) 255,
37 DLR (4th) 193.
85. In the context of shareholder rights plans, directors are obligated to continue meeting
their fiduciary duties. They must limit the application of rights plans to situations where they
reasonably believe it is necessary to preserve the best interests of the corporation. In so doing,
they must always conduct reasonable due diligence and investigation before issuing rights under
a rights plan.
86. If triggered, Pandemonium’s Rights Plan grants rights to all shareholders other than to an
entity attempting to acquire the corporation through a hostile take-over. Each right simply gives
eligible shareholders the option to purchase additional shares of Pandemonium at a fixed price
during a fixed period of time. Thus, the Directors complied with section 29 of the CBCA in
issuing rights to acquire shares of the company, vis-à-vis the Rights Plan.
CBCA, supra para 11, s 29.
87. Any use of the Rights Plan by the Directors, other than in the furtherance of the
corporation’s best interest, would be invalid. The Directors only created the Rights Plan in
response to an imminent threat of a hostile take-over bid by Charon. They did not issue any
rights to shares in a discriminatory manner.
88. Section 29 of the CBCA granted Pandemonium the ability to create the Rights Plan and
the Directors satisfied their fiduciary duties. The Right’s Plan is therefore valid.
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(ii) The Rights Plan does not Breach Section 24 of the CBCA
89. Subsections 24(3) and 24(4) of the CBCA state the following:
24(3) Where a corporation has only one class of shares, the rights of the holders
thereof are equal in all respects and include the rights
(a) to vote at any meeting of shareholders of the corporation;
(b) to receive any dividend declared by the corporation; and
(c) to receive the remaining property of the corporation on dissolution.
24 (4) The articles may provide for more than one class of shares and, if they so
provide,
(a) the rights, privileges, restrictions and conditions attaching to the shares of
each class shall be set out therein; and
(b) the rights set out in subsection (3) shall be attached to at least one class of
shares but all such rights are not required to be attached to one class.
CBCA, supra para 11, ss 24(3)(4).
90. The principle of implied exclusion is a well-entrenched canon of statutory interpretation
(Zeitel). It states that “when a [legislative] provision specifically mentions one or more items but
is silent with respect to other items that are comparable, it is presumed that the silence is
deliberate and reflects an intention to exclude the items that are not mentioned” (Sullivan).
Zeitel v Ellscheid, [1994] 2 SCR 142 at para 19, [1994] S.C.J. No. 38.
Sullivan, supra para 68 at 244.
91. Subsection 24(3) lists three specific rights that must belong to all shares, where only one
class of shares has been issued. These three rights are the core rights that constitute a share (Dey
& Yalden). Subsection 24(4) allows a corporation to have more than one class of shares, and to
attach other "rights, privileges, restrictions and conditions" to one or more classes of shares, as
long as at least one class has the rights set out in subsection 24(3). Thus, section 24, read as a
whole, does not require that the same rights be attached to all shares of a class, outside of the
three core rights of subsection. 24(3).
Keeping the Playing Field Level: Poison Pills and Directors' Fiduciary Duties in Canadian Take-
Over Law, Peter Dey and Robert Yalden, (1991) 17 Can. Bus LJ 252 at 898 [Dey & Yalden].
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92. Rights issued under a shareholder rights plan are different from the core rights that must
attach to a share. With respect to the rights that a constitute a share, this Honorable Court has
observed the following:
… a share is a "bundle" of interrelated rights and liabilities…. The Canada
Business Corporations Act defines and governs the rights to vote at
shareholders' meetings, to receive dividends, to inspect the books and records
of the company, and to receive a portion of the corporation's capital upon a
winding up of the company... (Sparling).
Sparling v Caisse de depot et placement du Quebec, [1988] 12 SCR 1015 at 1024-5, 55 DLR
(4th) 63.
93. In contemplating the validity of the Rights Plan, the OCA held that, because of the open-
ended language of subsection 24(4) in attaching other rights, the CBCA in fact provides
directors with the flexibility to decide what rights it may confer to shareholders (OCA Decision).
OCA Decision, supra para 41 at paras 18-19.
94. The discrimination between shares of a class that is prohibited by subsection 24(3) of the
CBCA does not apply to a shareholder rights plan. Given the flexibility provided to directors to
issue rights, pursuant to section 29, the Respondents submit that this Honorable Court should
uphold the OCA’s interpretation of section 24.
OCA Decision, supra para 41 at para 17.
95. In finding that the Rights Plan did not violate section 24 of the CBCA, the OCA correctly
held that the principle of equality between shareholders derived from Crain and McClurg is
inapplicable to shareholder rights plans.
Re Bowater Canadian Ltd. v R.L. Crain Inc. (1987), 62 O.R. (2d) 752 (C.A.) [Crain].
McClurg v Canada, [1990] 3 SCR 1020 [McClurg].
96. In Crain, the OCA invalidated a corporation’s attempt to grant different voting powers to
certain shares, depending on the identity of the holder. Similarly, in McClurg, this Honorable
Court invalidated a corporate action to pay unequal dividends to shareholders.
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Crain, supra para 95.
McClurg, supra para 95.
97. The Crain and McClurg cases specifically dealt with the power to vote and to receive
dividends, respectively. These are rights that must be attached to the shares of a class, as per
subsection 24(3), when there is one class of shares. Section 24 does not explicitly require that all
shares of a class be equal in relation to all the rights attached to them, beyond the three
enumerated requirements of subsection 24(3). Crain and McClurg are therefore readily
distinguishable from the facts of this case.
CBCA, supra para 11, s 24(3).
98. The flaw in extending the principle of equality between shareholders from Crain and
McClurg is that it would infringe upon the flexible power of Pandemonium’s Directors to issue
options, rights, and warrants to acquire new shares, as granted by section 29. These flexible
powers allow a corporation to raise additional capital.
CBCA, supra para 11, s 29.
99. The Rights Plan only issues rights to acquire additional shares of Pandemonium when it
is facing an extraordinary situation of being the target of a hostile take-over bid. The right to
acquire additional shares of a corporation falls outside the scope of subsection 24(3), as it is not
one of the three enumerated constitutive rights. The rights that must be attached to all shares of a
class are thus distinct from those rights created in a Rights Plan.
(iii) The Rights Plan is a Validly Issued Corporate Resolution
100. The CBCA allows directors to act through the creation of corporate resolutions. This is
precisely what Pandemonium’s Directors did. A shareholder rights plan is a corporate resolution
that creates a relationship between the corporation, its rights trustee, and its shareholders.
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101. Section 15 and 16 of the CBCA grant directors the general authority to conduct the
business affairs of the corporation they serve. Subsection 16(3) states that “[n]o act of a
corporation, including any transfer of property... is invalid by reason only that the act or transfer
is contrary to its articles or this Act”.
CBCA, supra para 11, ss 15, 16(3).
102. The Rights Plan does not discriminate among shares in a way that is prohibited by the
CBCA. The Rights Plan was validly created by a corporate resolution of the Directors, pursuant
to their section 15 and 16 powers. The Rights Plan, when created, does not automatically grant
any rights to acquire Pandemonium shares (Rights Plan). If rights are ever issued under the
Rights Plan, they are not subject to the share equality requirements.
Pandemonium Shareholder Rights Plan Agreement , s 2.2, s 3.1(b), s 1.1 [Rights Plan].
103. When a rights plan is first created, no rights can be issued or exercised. Pandemonium’s
Rights Plan only authorized the Directors to issue rights if a “flip-in event” occurred, which then
triggers the Rights Plan (Rights Plan). A flip-in event occurs when a hostile entity acquires
beneficial ownership of 20% or more of Pandemonium’s voting shares (Rights Plan).
Rights Plan, supra para 102, s 1.1, s 5.2.
104. After the flip-in event occurs, the rights are granted to all shareholders, which attached to
the shares until the “separation time” (Rights Plan). The separation time occurs after a fixed
number of business days after an entity acquires beneficial ownership of 20% of
Pandemonium’s voting shares, or when there is take-over bid. In the separation time, the rights
granted through the Rights Plan are detached and are transferable apart from the common shares
(Rights Plan).
Rights Plan, supra para 102, s. 1.1 (kk) “Separation Time”.
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105. Throughout the separation time, the rights to acquire additional shares of Pandemonium
are only available to shareholders other than the hostile bidder or persons acting in conjunction
with that bidder. It is only in this extremely rare and unique situation that the Rights Plan
discriminates between shareholders based on their identity.
106. Any discrimination that results is purely in response to the hostile bid. It can arise if the
bidder is offering shareholders less than the assessed value of their shares, or if the outcome to
Pandemonium from being acquired is not in the best interests of the corporation.
107. Even when a flip-in event occurs, the Directors may use their discretion to waive the
application of the Rights Plan or to exempt the bidder from the Rights Plan’s terms (Rights
Plan). Where the Directors do not choose to waive the Rights Plan, the shareholders who were
granted rights have the option, but not the obligation, to exercise their rights to buy additional
shares of Pandemonium. Where shareholders are not receptive to the defensive tactics
employed by the Directors in response to the take-over bid, they are free to leave their rights to
expire unexercised.
Rights Plan, supra para 102, s 1.1 “Flip-in Event”, s. 3.1, s. 5.2.
108. If a flip-in-event occurs and directors choose not to waive a shareholder rights plan, the
securities commissions will step in to ensure that the plan is valid. The securities commissions
have a well-established history of terminating rights plans that harm the public by hindering the
efficiency of the capital market system (Neo Material).
Re Neo Material Technologies Inc. et al., (2009) 32 OSCB 6941 [Neo Material].
109. Securities commissions have frequently allowed shareholder rights plans to remain in
effect where there is a real and substantial possibility that more time would yield an alternative
transaction for shareholders to consider (Inmet). Securities commissions are diligent in
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exercising their powers, and will cease trade a rights plan if there is no possibility of alternative
transactions within a reasonable time period (Icahn).
Inmet Mining Corporation and Petaquilla Minerals Ltd, 2012 BCSECCOM 442 at para 14.
Re Icahn Partners LP, 2010 LNBCSC 395, 2010 BCSECCOM 432 at para 56.
110. After weighing the consequences to the company, directors may decide to waive the
application of a shareholder rights plan and allow a bid to be put directly to the shareholders.
Subject to fulfilling their fiduciary duties, directors must always consider the terms of the
bidder’s offer, and how the acquisition will impact the corporation.
111. Given the Directors’ fiduciary duties, and the waiver provisions built into the Rights
Plan, it is clear that the Rights Plan is only meant to be used as a defensive measure against
exploitative and unfair bids. The Rights Plan is not meant to block all bids from being put to
shareholders.
112. Any discrimination that exists between shareholders is tempered by the active role of the
Ontario Securities Commission (“OSC”) in evaluating the Rights Plan and cease trading the
rights issued therein if harm would result to the public.
113. The announcement by Charon on August 17, 2012, demonstrated a clear intention to
acquire all of the outstanding shares of Pandemonium. As result of the dilution of Charon and
Belial’s shareholdings following the issuance of the Conversion Shares and Special Warrant
Shares, Charon’s shareholdings fell to below 20% of Pandemonium’s shares. Therefore, at the
time that the Rights Plan was proposed, no flip-in event had occurred.
Trial Decision, supra para 55 at paras 1, 60.
114. Since no flip-in event had occurred, all of Pandemonium’s shareholders were treated
equally. Only if a flip-in event were to occur, followed by a choice by the Directors not to waive
the Rights Plan, would rights then be granted resulting in discrimination between shares.
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115. Any potential discrimination flowing from the Rights Plan is only a precautionary
measure that may never even be implemented, since the Rights Plan is triggered in very limited
situations. Even if it is ever used, the Rights Plan will already be overseen by the OSC, which
will prevent abuse by the Directors. In such a take-over situation, the discrimination between
shares that results clearly outside of the scope of the requirement of equality between shares.
D. BELIAL IS NOT ELIGIBLE TO VOTE ON THE RIGHTS PLAN
116. The OCA correctly concluded that Belial should not have been able to vote on the Rights
Plan at the special meeting of shareholders on September 28, 2012. In rendering its decision, the
OCA found that Belial was ineligible to vote by virtue of section 1.6 of the Rights Plan (OCA
Decision).
OCA Decision, supra para 41 at para 24.
Rights Plan, supra para 102, s 1.6.
117. Belial was not eligible to vote, and any votes cast by it at the shareholders meeting were
invalid and should be disqualified. After removing Belial’s votes from the tally, the correct
result is that the Rights Plan was adopted with 62% of the votes in favor (Trial Decision). In the
alternative, a second vote should have been held, with no participation by Belial.
Trial Decision, supra para 55 at para 34.
(i) Charon is an “Acquiring Person”
118. Only entities that are classified as “Independent Shareholders” are eligible to vote on the
Rights Plan. Independent Shareholders are defined as entities holding Pandemonium’s voting
shares other than persons belonging to the categories listed in subsection. 1.1(v) (Rights Plan).
Rights Plan, supra para 102, s 1.1 (v) “Independent Shareholders”.
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119. Among the defined categories of subsection 1.1(v), an Independent Shareholder does not
include any “Acquiring Person”, “Offeror”, or “Associate or Affliate of any Acquiring Person…
or any Offeror” (Rights Plan).
Rights Plan, supra para 102, s 1.1 (v) “Independent Shareholders”.
120. The definition of “Person” includes any corporation (Rights Plan). An “Associate” of a
corporation is a Person that beneficially owns securities carrying more than 10% of all the
voting rights attached to that corporation’s issued securities (Rights Plan). An “Acquiring
Person” is any Person who “beneficially owns” 20% or more of Pandemonium’s outstanding
voting shares (Rights Plan). In addition to the shares that they own directly, a Person is deemed
to “beneficially own” shares that are owned by their Associates (Rights Plan).
Rights Plan, supra para 102, at s 1.1(v), (a), (z), (v)(i), (v)(iii), (v)(iv).
121. Belial and Charon are both corporations and are therefore Persons. Belial is an Associate
of Charon as Belial owns 12.5% of the issued and outstanding common shares of Charon, which
represents more than 10% of Charon’s voting rights.
122. Charon beneficially owns 27% of the outstanding voting shares of Pandemonium, which
is comprised of 9.8% owned by Charon directly, and 17.2% owned by its Associate, Belial.
Since Charon beneficially owns more than 20% of Pandemonium’s outstanding voting shares,
Charon is an Acquiring Person. As an Acquiring Person, Charon cannot vote on the Rights Plan,
and as an Associate of Charon, Belial is not an Independent Shareholder and also cannot vote.
(ii) Charon is an “Offeror”
123. Charon may no longer be an Acquiring Person because of the dilution that occurred to its
holdings in Pandemonium shares as a result of the issuance of the Conversion Shares and
exercise of the Special Warrants. Even after this dilution occurred, Belial and Charon were still
not Independent Shareholders, and were therefore still ineligible to vote on the Rights Plan.
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124. After the additional Conversion Shares were issued, Belial and Charon’s ownership in
Pandemonium’s voting shares was diluted to 12.6% and 7.2%, respectively. This put Charon’s
combined beneficial ownership of Pandemonium’s shares below the 20% threshold, rendering
Charon not an Acquiring Person.
125. An “Offeror” is a Person who has announced an intention to make a take-over bid for
Pandemonium’s shares. Charon is an “Offeror”, as it announced an intention to make a take-
over bid on August 17, 2012. As an Offeror, Charon is not eligible to vote on the Rights Plan.
Rights Plan, supra para 72, s 1.1(v), (a), (z), (d).
126. Belial’s ownership in Charon’s voting shares was unchanged, so it is still an Associate of
Charon. As an Associate of a Charon, an Offeror, Belial cannot be an Independent Shareholder
of Pandemonium. For this reason, Belial is ineligible to vote on the Rights Plan, even after the
dilution of its shareholdings in Pandemonium.
(iii) Belial and Charon Acted Jointly and in Concert with Each Other
127. It is a question of fact whether two persons are acting jointly or in concert with each
other. Under section 1.6 of the Rights Plan, a person who has an agreement, arrangement, or
understanding with another person, for the purposes of acquiring any voting shares of
Pandemonium, is deemed to be acting jointly or in concert with that other person (Rights Plan).
The agreement or understanding does not need to be formal nor put in writing, and that does not
change whether two persons have acted jointly or in concert with each other (Rights Plan).
Rights plan, supra para 102, s 1.6.
128. The language of section 1.6 of the Rights Plan matches that of the Ontario Securites Act,
which states that a person is deemed to be acting jointly or in concert with another person or
company if “they have an agreement, commitment or understanding with an “Offeror” to
acquire securities of the same class” (OSA). An “Offeror” is defined in the OSA as either a “a
- 35 -
company making a formal bid”, or “a person or company that makes a take-over bid, or an offer
to acquire securities” of another corporation (OSA).
Ontario Securities Act, RSO 1990, c s 5, s 91(1), s 1(1).
129. For the six week period between June 28, 2012 and August 6, 2012, Belial and Charon
both went on a shopping-spree for Pandemonium shares. During this six week period alone,
Belial and Charon respectively acquired 7% and 5% of the total outstanding shares of
Pandemonium .
130. Looking at the totality of all the circumstances surrounding the share purchases, a clear
pattern emerges. Charon and Belial made large-scale purchases of Pandemonium’s shares
during the same time six-week period. Several of these purchases occurred either on the exact
same day, or one day apart each other. All of the share purchases made by Charon and Belial
were done through the same securities broker, Prosperine Securities Limited.
131. Furthermore, Charon and Belial commenced and halted their campaign of acquisitions
together. In the end, both companies acquired more than the 5% ownership in Pandemonium.
The Respondent submits that this raises the presumption, which has not been rebutted, that
Belial and Charon acted jointly and in concert when they purchased Pandemonium’s shares
132. As Belial acted jointly and in concert with Charon in acquiring Pandemonium’s shares,
Belial should not be allowed to vote on the Rights Plan.
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Solicitors for the Respondent
PART IV – ORDER SOUGHT
133. For all the foregoing reasons, the Respondents request an order upholding the OCA
Decision.
ALL OF WHICH IS RESPECTFULLY SUBMITTED this 12th
day of February, 2013.
_______________________________
Solicitors for the Respondent
SCHEDULE A – TABLE OF AUTHORITIES
LEGISLATION
PAGE NUMBER
Canada Business Corporations Act, R.S.C. 1985, c. C-44. 3, 8-11, 14, 18-29
Ontario Securities Act, RSO 1990, c S.5 35
Bills of Exchange Act, RSC 1985, c B-4 19, 20
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1, 13
JURISPRUDENCE
PAGE NUMBER
347883 Alberta Ltd v Producers Pipelines Inc, [1991] 80 DLR (4th) 359,
4 WWR 577.
17, 18
BCE Inc v 1976 Debentureholders, (2008) SCC 69, [2008] 3 SCR 560. 15, 16
Charon Entertainment Inc v Pandemonium Productions Corp et al
(2012), (Ont CT J) Pluto J.
8, 16-19, 22, 23,
32
CW Shareholdings Inc v WIC Western International Communications
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16, 17
Icahn Partners LP v Lions Gate Entertainment Corp, 2010 BCSC 1547,
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14, 15
Inmet Mining Corporation and Petaquilla Minerals Ltd, 2012
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31
Javelin International Ltd (Receiver of) v Hillier, 40 BLR 249,[1988] RJQ
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22, 23
Maple Leaf Foods Inc v Schneider Corporation (1998), 44 BLR (2d) 115,
42 OR (3d) 177.
15, 16
McClurg v Canada, [1990] 3 SCR 1020, 76 DLR (4th) 217. 27, 28
Pandemonium Productions Corp et al v Charon Entertainment Inc
(2013), (Ont CA).
23, 24, 27
Pearson Finance Group Ltd v Takla Star Resources Ltd, 2002 ABCA 42,
[2002] AJ No 212
23
Peoples Department Stores Inc (Trustee of) v Wise, 2004 SCC 68, [2004]
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15, 16, 24
Re Bowater Canadian Ltd v RL Crain Inc (1987), 62 OR. (2d) 752 (Ont
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27, 28
Re Icahn Partners LP, 2010 LNBCSC 395, 2010 BCSECCOM 432. 31
Re Neo Material Technologies Inc. et al., (2009) 32 OSCB 6941. 30
Re Olympia & York Enterprises Ltd and Hiram Walker Resources Ltd.
(1986), 59 OR (2d) 255, 37 DLR (4th) 193.
25
Revlon, Inc v MacAndrews & Forbes Holdings, Inc (1986), 502 A 2d 173
(Del 1986).
15, 16
Sparling v Caisse de depot et placement du Quibec, [1988] 12 SCR 1015,
55 DLR (4th) 63.
27
Teck Corp v Millar (1972), 33 DLR (3d) 288, [1973] 2 WWR 385
(BCSC).
13, 13, 24, 25
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26
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PAGE NUMBER
“Corporate Finance Manual”, TSX Venture Exchange (29 February
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17
Christopher C. Nicholls, Mergers, Acquisitions, and Other Changes of
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Ed (Toronto: Irwin Law 2012).
12-16
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Donald E. Kieso et la, Intermediate Accounting, 8th
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21
Frank Iacobucci, “Planning and Implementing Defences to Take-Over
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13, 14
John Emanoilidis & Jamie Becker, “Extendible Convertible Debentures”,
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21
Pandemonium Shareholder Rights Plan Agreement. 29, 30, 32-34
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Law”, (1991) 17 Can Bus LJ 252.
26, 27
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12
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(Markham: LexisNexis Canada Inc, 2008).
20, 26
