Teachers argues against private placement voting rights

The $C87 billion Ontario Teachers Pension Plan (OTPP) is arguing for the protection of investor voting rights in corporate transactions, as one of its private equity funds is fighting the effects a private placement by an investee company may have on the voting results in a second stage amalgamation transaction.

OTPP is urging Canadian securities regulators – the Ontario Securities Commission and the Alberta Securities Commission – to disallow companies from voting newly issued shares acquired in private placements with the apparent purpose of swaying the outcome of takeover bids.

OTPP is an investor in the ARC Energy Funds which are seeking an order to address the “improper” effects that a private placement by Profound Energy Inc. to Paramount Energy Trust, issued in connection with Paramount’s take-over bid for Profound, will have on the voting results in a second stage amalgamation transaction.

The funds are seeking orders from the regulators to restrict Paramount’s ability to vote the shares it acquired in the private placement, which Paramount has indicated it will vote in order to reach the threshold to approve the amalgamation.

The funds contend that the rights of shareholders in Profound have been thwarted by the inappropriate structure and tactics used in this transaction and could set a harmful precedent.

Senior vice-president of public equities at OTPP, Wayne Kozun, said the plan was concerned about the issuance of shares on a private placement basis in anticipation of a merger or acquisition, particularly when the votes attached to the shares may alter the balance of voting on a corporate transaction.

“Permitting the use of structures by bidders to circumvent normal voting thresholds would be at odds with the reasonable expectations of shareholders, and would seriously undermine investor confidence in, and the integrity of, the Canadian capital markets,” Kozun said in a letter to the regulators.

He said the pension plan supports a petition to regulators from ARC Funds to prevent Paramount from using shares gained in a recent private placement to vote in favour of its proposed takeover of the company.

The Calgary-based ARC energy funds together hold more than 11.5 million Profound shares, which constituted approximately 31 per cent of the outstanding shares of Profound prior to the private placement to Paramount.

On March 31, 2009, Paramount and Profound jointly announced the signing of a support agreement, pursuant to which Paramount made a take-over bid for all of the outstanding shares of Profound, for a combination of cash and Paramount trust units, valued at that time at C$1.34 per Profound share.

In connection with the bid, Profound issued a private placement provided exclusively to Paramount, through the issuance of special warrants priced at $0.75 and convertible one-for-one into Profound common shares, which, upon conversion represented a pro forma 19.9 per cent ownership interest in Profound.

Concurrently, Profound adopted a shareholder rights plan, which restricted the acquisition of 20 per cent or more of the shares of Profound, and severely limited purchases by existing shareholders with an interest already above 20 per cent.

The ARC funds believe that Paramount should not be permitted to vote the newly issued private placement shares in favour of the amalgamation.