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TSX pulled into CI, Scotiabank poison pill spat

Rick Waugh, left, president and CEO of Scotiabank, chats with Donald Reimer of Reimer World Corp. at the bank's annual meeting in Halifax on Tuesday, April 5, 2011. THE CANADIAN PRESS/Andrew Vaughan

Two of the country's biggest financial companies are embroiled in an increasingly nasty public spat - and the Toronto Stock Exchange will have to step in as the referee.

Bank of Nova Scotia is the largest shareholder of mutual fund company CI Financial Corp., with a 37-per-cent stake. CI is in the process of trying to renew its shareholder rights plan, a device that companies put in place to try to prevent any one investor from gaining control without paying a takeover premium.

Shareholders will vote on the plan at CI's annual meeting on June 22. Scotiabank wants to vote against it in the hope of striking it down.

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But CI argues that the bank is not entitled to cast a ballot because only independent shareholders are allowed to vote on renewing the plan, and Scotiabank doesn't qualify.

Killing the CI poison pill could be worth considerable money to Scotiabank. The existing shareholder rights plan prevents any shareholder from selling more than 10 per cent of the shares at one time, to prevent a creeping takeover. However, if Scotiabank wants to divest its stake in CI, the inability to sell those shares as a block could hurt the return. The plan also prevents Scotiabank from acquiring more shares, should it want to own more of the firm.

Speaking at Scotiabank's annual meeting in Halifax this week, chief executive officer Rick Waugh said CI is trying to infringe on the bank's rights as a shareholder. That prompted a pointed response from CI, including a press release on Wednesday attacking the bank's position.

CI says that the bank has asked the TSX to rule that the bank can vote the shares. However, CI said the firm "strongly disagrees with the bank's position and is in discussions with the Toronto Stock Exchange."

CI went on to accuse Mr. Waugh of making inaccurate statements, and pointed out that Scotiabank voted in favour of the poison pill in 2008.

"The comments made by Mr. Waugh regarding CI's shareholder rights plan are inaccurate. CI is not denying the bank a fundamental right. Rather, it is complying with the terms of its shareholder rights plan."

Mr. Waugh said this week that CI's plan goes against the rights afforded to shareholders in public companies.

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"One of the great things about publicly traded companies is you get a shareholder vote. … That is to me a principle of property rights - the right to vote," he said. "And I find it very strange, just because we happen to be a large shareholder, we are denied that fundamental right."

The decision falls to the TSX because it must approve shareholder rights plans, also known poison pills, for companies that are listed on the exchange.

Scotiabank agreed to support CI's board of directors when it put the poison pill in place in late 2008. Shareholders voted on it not long after, in accordance with TSX rules. Scotiabank had just agreed to acquire its large stake in CI from Sun Life Financial for $2.3-billion.

At the time, Scotiabank was exempted, or grandfathered, from the poison pill and therefore was not treated as a so-called "independent" shareholder. That's still the case.

Now, with the plan up for renewal, things are not nearly as friendly. Scotiabank no longer wants to be excluded from the vote.

Under the terms of the plan, only shareholders defined as independent get to vote on the renewal of the pill, unless the TSX has a rule that requires otherwise.

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CI argues in its statement that "There is no rule of the Toronto Stock Exchange which deals with this type of situation."

But a review of the TSX regulations suggests it's not that clear. Scotiabank is now seeking a ruling from the stock exchange.

There's no doubt that TSX rules require a vote the first time a poison pill is implemented. The TSX's view is that "security holders of the listed issuer should have the opportunity to decide whether the continued existence of a plan that has been adopted by the board of directors of the listed issuer in the normal course of affairs … is in the security holders' best interests."

In the case where a large shareholder like Scotiabank is grandfathered, the TSX rule calls for two votes. One vote requires majority approval from all shareholders, and one requires majority approval by "a vote of security holders that excludes the votes of the exempted security holder and its insiders." But again, there is no clear reference to a renewal vote.

TMX spokeswoman Carolyn Quick said the exchange could not comment because it does not discuss cases involving specific companies. Scotiabank did not comment on CI's press release.

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