The Ontario Securities Commission has decided to push back a crucial shareholder vote on the takeover of Hudson’s Bay Co., effectively freezing the transaction until the company releases a more detailed story on how the deal came together.
The decision, announced late Friday evening, marks a major victory for Catalyst Capital Group Inc., the private equity firm that has tried for months to thwart HBC chairman Richard Baker’s quest to take Canada’s oldest company private.
At the OSC, Catalyst was seeking an order to either block or stall the privatization offer, put forward by Baker and his group of majority shareholders.
After nine hours of closing arguments on Friday, the OSC’s three-person panel dismissed Catalyst’s request to block the deal. But the panel said it will require Hudson’s Bay to amend and reissue its circular, which was originally sent to shareholders last month to inform them about the deal. The weeks-long process of reissuing the circular means HBC has to postpone the upcoming vote at a shareholder meeting scheduled for Tuesday.
During the hearing — crammed into two days, so the OSC could make a decision before Tuesday’s vote — Catalyst complained that HBC didn’t properly inform shareholders about crucial detail. Catalyst paid particular focus to Baker’s involvement in a $1.5 billion deal to sell HBC’s European assets to Signa Holdings, while also contemplating a bid to takeover HBC using the proceeds from the sale.
In their recommendation to the panel, OSC staff said they were concerned with testimony from special committee chair David Leith, who told the OSC that Baker informed the board of directors in late March that he was thinking about buying the company, while the Signa deal was still in flux.
OSC staff said that a special committee should have started monitoring the take-private situation immediately, since Baker had evolved “from someone who had managed the company to someone who wanted to buy the company.”
There was a clear conflict
But the special committee wasn’t formally tasked with supervising the privatization process until June 9, a day before two press releases — one announcing the Signa sale, the other announcing Baker’s take-private bid — were released within minutes of each other.
That information wasn’t in HBC’s circular about the deal last month, and it should have been, OSC staff said in their remarks toward the end of the hearing. HBC released those details in a press release last week, but staff recommended HBC still needed to send out a revised circular to quell confusion.
“(We) invite you to read the circular again knowing what you now know,” OSC lawyer Rikin Morzaria told the panel. “There was a clear conflict that put Mr. Baker’s interests directly in conflict with minority shareholders.”
HBC argued that Baker’s comment to the board about privatization was merely an idea in March, far from the concrete proposal that emerged in June. And HBC did have a special committee throughout the spring, though its mandate was to watch the Signa deal, as well as the sale of HBC’s banner Lord and Taylor.
HBC lawyer Seumas Woods implored the OSC not to make an order in the case, arguing that it would give the wrong impression that the HBC board was “with their hands caught in the cookie jar.”
“Somebody merely expresses an interest and you’ve got to go down this (special committee) route? That is not a message you want to send to the markets,” Woods said, before the panel made its decision. “The mere fact that you make an order in this case is sending a message that the special committee did not do their job properly and they require adult supervision.”
Baker group lawyer Eliot Kolers said ordering a revised circular would be “a very dangerous road to go down.”
“Mr. Baker, at no time, acted in a clandestine manner,” Kolers said.
He accused Catalyst of pursuing its own economic interests and interfering in a chance for other minority shareholders to extract cash value from the struggling department store chain.
Baker’s group of majority shareholders is offering $10.30 per share in the deal, which has been approved by the HBC board of director’s special committee in charge of vetting the privatization bid. Catalyst announced a competing bid, for $11 per share, which the special committee dismissed as a non-starter last month after the Baker group declined to sell its 57 per cent stake.
“They’re holding this process hostage,” Kolers said.
The OSC will file a formal order by the middle of next week. After the panel deliberated for 15 minutes, OSC vice-chair Grant Vingoe said the order will outline what disclosures need to be included in the new circular, to be mailed to shareholders. In the interim, HBC agreed to postpone Tuesday’s shareholder meeting.