March 28, 2013
Court Endorses Creative Cost-Sharing Plan for Unfunded Dissenting Shareholders
Justice Leitch of the Ontario Superior Court of Justice recently released a decision in Rooney v. Arcelormittal S.A. i that will have a major impact on a group of dissenting shareholders, and could have far-reaching implications for securities litigation in general where there is a companion class action. Justice Leitch’s decision arises from the litigation surrounding the takeover of Baffinland Iron Mines Corporation (“Baffinland”) by a consortium consisting of Nunavut Iron Ore Aquisition Inc. and ArcelorMittal S.A. (the “Consortium”). Baffinland’s sole business was the development of one of the world’s largest undeveloped iron ore deposits.
In connection with the take-over of Baffinland, a small group of shareholders dissented their shares (the “Dissent Group”). The Dissent Group consists of an unfunded group representing less than 0.8% of the previously outstanding common shares of Baffinland. As long-term investors, the Dissent Group believe that Baffinland’s iron ore deposit, once developed, will yield significant gains to its investors. The Dissent Group had no intention of selling their shares before such gains were realized.
The take-over of Baffinland resulted in two proceedings with overlapping issues and common litigants:
- a proposed class action (the “Class Action”), in which the proposed class (the “Class”), which includes the Dissent Group, seeks damages for alleged misrepresentations made by the defendants, including the Consortium, in connection with the take-over bid process; and
- a statutorily-mandated and court-ordered dissent and appraisal proceeding between the Consortium and the dissenting shareholders to fix the fair value of the Baffinland shares (the “Valuation Application”).
At the heart of both the Class Action and the Valuation Application is the issue of the determination of the fair value of the Baffinland shares. The substance of both proceedings is the question of whether Baffinland shareholders have disposed of or were forced to dispose of their shares at an undervaluation.
Given that Baffinland owned one of the largest iron ore deposits in the world, which is located in a remote region and has yet to be brought into production, it is anticipated that the valuation evidence upon which fair value will be based will have unique characteristics not found in the valuation of ongoing enterprises with a substantial earnings history. For this reason, both the Dissent Group and the putative Class will require sophisticated expert valuation assistance to be able to fairly present their case on fair value. The costs of preparing such sophisticated expert evidence will be hundreds of thousands of dollars.
The Dissent Group stands to receive proceeds in an amount equal to the fair value of their limited shareholding only. Individually, the members of the Dissent Group held from as few as 100 shares up to about 150,000 shares. The high costs of preparing an expert valuation will overwhelm the projected proceeds to be realized by each of the dissenting shareholders, even when acting as a group. As a consequence, it is impractical and economically unjustified for the dissenting shareholders to exercise their rights of dissent and appraisal if they are forced to act alone.
As in all dissent and appraisal cases, the dissenters will not be paid for their shares that have been taken up by the acquiring company until the fair value of those shares is fixed by the Court. In order to exercise their dissent and appraisal rights, dissenters must do so on an unfunded basis. This case, with its particularly small Dissent Group and their very limited shareholding, highlights a systemic tension in dissent and appraisal cases generally: unless the exercise of dissent and appraisal rights can be justified on a costs/ benefit basis, those rights are rendered effectively moot, and dissenters will be denied access to justice.
TGF represented the Dissent Group and, working in concert with class counsel from Siskinds LLP, devised a creative strategy to the access to justice issue. The Dissent Group proposed synchronizing its Valuation Application with the Class Action to engender opportunities for costs-sharing over a broader base of funded litigants, such that the Dissent Group’s costs would be minimized. In an effort to synchronize the proceedings, the Class sought a temporary stay of the Valuation Application, pending the resolution of the certification motion in the Class Action. The synchronization of the two related proceedings would facilitate a husbanding of resources over a larger group, avoid duplicative and excessive costs, and promote judicial economy.
The Consortium vigorously opposed the stay, arguing that it would suffer prejudice if a stay were granted as it would be denied its right to move forward expeditiously with the Valuation Application. The Consortium further argued that neither the Class nor the Dissent Group would suffer any prejudice in the absence of a stay. The Dissent Group argued that the Consortium’s opposition to the stay motion was a strategic posture designed to force a small, unfunded group to shoulder enormous litigation costs in a manner that was contrary to the interests of justice.
Justice Leitch rejected the Consortium’s submission that it would suffer prejudice as a result of the proposed stay. On the contrary, Justice Leitch accepted the Dissent Group’s submission that the Consortium would, in fact, benefit from a stay of the Valuation Application because it has already taken up all the dissenting shares and is entitled to retain this consideration until fair value is fixed by the Court.
Justice Leitch noted that the only parties who could suffer potential prejudice as a result of the proposed stay of the Valuation Application are the dissenting shareholders because their receipt of the proceeds of their Baffinland shares will be deferred. The Dissent Group supported the stay notwithstanding that prejudice because the costs-sharing benefits of proceeding in tandem with the Class Action for an overall maximization of net return to the larger group far outweighed the inconvenience of deferring the receipt of their proceeds.
Notably, the Dissent Group was not required to demonstrate impecuniousness or show that they would not be able to pursue their dissent and appraisal rights absent a stay; it was sufficient to demonstrate that the pursuit of their rights would not make sense economically if they were precluded from implementing their costs-sharing plan. Justice Leitch granted the temporary stay of the Valuation Application noting that in the absence of a stay, being forced to proceed with the Valuation Application on their own “could deny the [Dissent Group] access to justice.”
Justice Leitch’s considered decision emphasizes the importance of economic access to justice in securities litigation. By granting the temporary stay of the Valuation Application, Justice Leitch ensured that the important statutory right of dissent and appraisal was not defeated for purely economic reasons in the context of David and Goliath-style litigation.
The Consortium is seeking leave to appeal the decision. The leave motion is pending.
The full text of Justice Leitch’s decision can be found at: http://www.canlii.org/en/on/onsc/doc/2013/2013onsc6062/2013onsc6062.html
i 2013 ONSC 6062 (Ont. S.C.J. Mar 06, 2013)