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Sprott hostile bid raises eyebrows over governance of dual-share firms

Toronto-based Sprott has asked an Alberta court to allow all shareholders in Calgary-based Central Fund of Canada Ltd. to vote on a plan that see their holdings exchanged for units in a new company, Sprott Physical Gold and Silver Trust.

LISI NIESNER/REUTERS

Money manager Sprott Inc. is attempting the corporate finance equivalent of a Hail Mary pass in its $3.1-billion (U.S.) hostile bid of rival Central Fund of Canada Ltd.

The takeover is likely to fall short, according to lawyers watching this contest, but if Sprott does win out, it would change the landscape for the long list of Canadian companies that feature dual classes of shares.

Sprott and Central Fund (CFCL) both run portfolios that invest in gold and silver bullion. Last week, Sprott launched a bid for Calgary-based CFCL that asks an Alberta court to give owners of non-voting shares in the target company the right to vote on its offer.

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Such a decision would be unprecedented, say lawyers familiar with this deal, as the court would effectively be stripping control of the company from owners of CFCL's voting shares. Lawyers see it as an aggressive interpretation of Alberta laws that govern shareholder votes under what's known as a "plan of arrangement," which is how Sprott pitched its offer. However, courts have made unprecedented decisions in recent Canadian takeovers, which is why this one is drawing enormous interest in the legal community.

Sprott, and its lawyers at Stikeman Elliott LLP and Burnet Duckworth & Palmer LLP, are taking this fight to the courts after two years of attempting to buy CFCL from its founders, the Spicer family, and being repeatedly rebuffed. The Spicer clan controls CFCL through their ownership of the company's 40,000 voting common shares. Outside shareholders own 252-million Class A Central Fund shares, with no voting rights.

CFCL chief executive officer Stefan Spicer made it clear that he is not impressed with Sprott's latest tactics, saying in a press release last week that the takeover offer utilizes "Alberta corporate legislation in a manner contrary to the accepted practice … which is generally a consensual agreement between willing parties."

"This is nothing more than a hostile attempt to take over management of Central Fund and its property," said Mr. Spicer. While CFCL is still reviewing its options in dealing with the Sprott offer, lawyers familiar with the case predict the fate of this takeover will be decided by a judge in the Alberta Court of Queen's Bench.

The most likely outcome of that hearing is a decision in favour of the Spicer family that preserves the status quo at CFCL, according to lawyers following the deal.

However, heads are still spinning in finance circles over a decision last year by the Yukon Court of Appeal that blocked Exxon Mobil's planned $2.3-billion takeover of InterOil Corp., despite 80 per cent shareholder approval for the friendly bid. The deal eventually went through, but the court's intervention changed the way bankers write fairness opinions on transactions.

In the battle for CFCL, a court decision in Sprott's favour that gives unanticipated power to owners of non-voting shares would raise questions about governance at any company with a dual share structure. That would include everything from iconic family-controlled businesses – Canadian Tire, Rogers Communications and Power Corp. – to newly-public companies, such as Shopify and Canada Goose.

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Again, a decision that overturns dual-class shares is not the expected outcome, and even a surprise decision in Sprott's favour would be focused on the facts of this case, which will feature an Alberta judge weighing in on a Calgary fund manager. But the implications of Sprott's offer make this long-running takeover contest compelling viewing for the legal crowd.

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About the Author
Business Columnist

Andrew Willis is a business columnist for the Report on Business at The Globe and Mail, based in Toronto.He has been in business communications and journalism for three decades. More

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