Decisions
FENWAY RESOURCES LTD., et.al. [Decision]
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BCSECCOM #:
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Document Type:
Decision
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Published Date:
1998-03-27
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Effective Date:
1998-03-19
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Details:
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COR#98/058
IN THE MATTER OF THE SECURITIES ACT
R.S.B.C. 1996, c. 418
AND
IN THE MATTER OF FENWAY RESOURCES LTD.
AND
IN THE MATTER OF TRUMP OIL CORPORATION
HEARING
| PANEL: | JOYCE C. MAYKUT, Q.C. | VICE CHAIR |
 | ADRIENNE R. WANSTALL | MEMBER |
| DATES: | FEBRUARY 24 TO 27, 1998 |
| APPEARING: | JAMES A. ANGUS | FOR COMMISSION STAFF |
| PATRICK ROBITAILLE | |
| JOHN H. FRANK | FOR FENWAY RESOURCES LTD. |
| RONALD N. PELLETIER | FOR TRUMP OIL CORPORATION |
| THOMAS MANSON | FOR TRANSPAC SERVICES |
| | CORPORATION |
DECISION OF THE COMMISSION
1. INTRODUCTION
On February 12, 1998, the Executive Director issued temporary orders under section 161(2) of the Securities Act, R.S.B.C. 1996, c. 418 against Trump Oil Corporation and Fenway Resources Ltd. The temporary orders arose from a take over bid made on January 14, 1998, by Trump for all of the shares of Fenway and provided that:
- 1. Trump is prohibited from proceeding with the bid; and
2. all persons cease trading in the shares of Trump and Fenway.
The temporary orders were subsequently extended until this decision is rendered.
The temporary orders were accompanied by notice of a hearing to be held before the British Columbia Securities Commission on February 24, 1998, in which Commission staff would be applying for orders under section 161(1)(a) and (e) of the Act with respect to the bid, an adjournment of the hearing and extension of the temporary orders.
Also on February 12, 1998, Transpac Services Corp., a shareholder of Fenway, applied to the Commission for various orders under sections 114(1) and 161(1) of the Act respecting the bid.
At the beginning of the hearing, the Commission determined that it would hear together the applications by Commission staff and by Transpac, and that Transpac would have standing to make submissions respecting Commission staff’s application as well as its own.
At the end of the hearing, Commission staff submitted that they are not seeking an extension of the cease trade order against Fenway, but are seeking a permanent order prohibiting Trump from proceeding with the bid and an adjournment and extension of the cease trade order against Trump until Commission staff can complete their investigation into an alleged manipulation of Trump shares. Transpac is seeking the same orders against Trump as Commission staff.
2. BACKGROUND
Fenway was incorporated in British Columbia in 1980, has its head office in British Columbia and is a reporting issuer under the Act. A majority of its directors live in British Columbia. Its principal asset is the right to participate in a joint venture to quarry and mine materials for the production of cement on the island of Palawan in the Philippines. Fenway’s shares were listed on the Vancouver Stock Exchange and, at some point, were quoted on the National Association of Securities Dealers, Inc. over-the-counter bulletin board. However, the Exchange delisted Fenway’s shares on May 21, 1997, and, since that time, Fenway’s shares have not been listed or quoted on any stock exchange or quotation system in Canada or the United States.
Trump was incorporated in Nevada on August 31, 1995. It has its head office, and all of its directors live, in British Columbia. In early 1997, Trump’s shares were consolidated on a basis of one Trump share for every 250 Trump shares, which resulted in there being 28,866 Trump shares outstanding. On May 16, 1997, Trump issued an additional 10,000,000 shares valued at US$0.0345 per share to unknown persons in satisfaction of debt, the nature of which is also unknown. No Form 20, Report of Exempt Distribution, was filed under the Act in respect of that share issuance. In June 1997, it appears that Trump shares were first quoted on the NASD over-the-counter bulletin board. By the end of that month, 184,400 shares had traded and the shares were quoted at a price of US$3.015.
Between July 1, 1997, and January 9, 1998, 1,344,300 Trump shares were traded, at prices ranging from US$1.00 to US$5.28125. There was no evidence as to trading volume or share price between January 10 and January 13, except that the closing quotation on January 13, 1998, was US$3.25. As Trump had 10,028,866 shares outstanding at that time, its market capitalization on January 13, 1998, was US$32,593,814.
On January 14, 1998, Trump made an offer to purchase all of the issued and outstanding shares of Fenway on the basis of one share of Trump for one share of Fenway.
The take over bid circular contains Trump’s audited financial statements for the eight months ending August 31, 1997. These financial statements describe Trump as “a holding company for future subsidiary acquisitions” and show that Trump has total assets of US$4,526 (comprised solely of organization costs), current liabilities of US$8,900, and no income.
The take over bid circular contains Fenway’s audited financial statements for the year ended August 31, 1997. These financial statements show that Fenway has total assets of CDN$5,286,998 (including CDN$3,871,939 in the Palawan project and CDN$317,425 in cash), current liabilities of CDN$13,075, and income of CDN$66,200 (derived solely from interest). The circular also includes an excerpt from a valuation of Fenway done on August 31, 1997, by MCSI Consulting Services Inc., which determined that Fenway’s “En bloc fair market value” was between US$1.6 and 2.3 million, or between US$.19 and .28 per share.
The take over bid circular contains pro forma financial statements for Trump and Fenway as of August 31, 1997. The notes to the pro formas disclose that Trump anticipates recording the acquisition of Fenway by use of the purchase method of accounting, whereby the net book value of the newly acquired company will be adjusted to “acquisition date fair values”. The pro formas show, for Fenway, an investment of US$2,788,577 in its Palawan project and, for Trump, an investment in subsidiary (i.e. Fenway) of US$14,423,790. The latter figure appears to have been derived from the 8,242,166 Trump shares to be issued in exchange for the Fenway shares, multiplied by US$1.75. The notes to the pro formas state that Trump’s management estimated the current market value of Trump shares to be US$1.75 based upon a sale of 20,000 Trump shares at US$1.75 on August 27, 1997, and a sale of 31,400 Trump shares at US$1.75 on September 2, 1997. No further particulars are provided as to the reasons why Trump’s management valued its investment in Fenway in this manner.
The offer to purchase and take over bid circular contain the following paragraphs:
- The Management of Trump has determined not to accept the surrender of Fenway shares from any shareholder unless the management of Trump has reasonable grounds to believe, and does believe, immediately prior to accepting such surrender, that such shareholder, either alone or together with any representative, has such knowledge and experience in financial and business matters that such shareholder is capable of evaluating the merits and risks of this offer as described in this offering document and that such shareholder is able to bear the economic risks of such an exchange. [Offer, page III]
- Management of Trump believes that a strategic merger with Fenway will result in a financially strong and growing company with exposure to a diversified range of opportunities. The following are benefits to Shareholders [of Fenway] expected as a result of a combination of Trump and Fenway:
(a) the opportunity to participate in a well managed, financially strong company; and
(b) improved market liquidity resulting from the increased capitalization and larger public float. [Circular, page 16]
- Although there are significant risks associated with participating in the Offer, non-tendering Shareholders also face significant risks. Upon consummation of the Offer, any Shareholder who does not elect to surrender his or her Fenway Shares for Trump Shares will continue to hold securities which are currently delisted by the Vancouver Stock Exchange. Holders of Fenway Shares who elect to surrender such shares for Trump Shares may hold a more liquid investment than Shareholders who do not participate in the Offer. [Circular, page 23]
- All of the Trump Shares offered by this Offering Document will be issued in reliance on the exemption specified by the provisions of Rule 506 of Regulation D, promulgated pursuant to the provisions of Section 4(2) of the U.S. Securities Act. As a result, the Trump Shares offered by this Offering Document, when issued, shall be “restricted” securities, as that term is defined by the provisions of Rule 144 promulgated pursuant to the provisions of the U.S. Securities Act. As those Trump Shares will be “restricted” securities, those Trump Shares will not be available for resale until (i) the expiration of the applicable holding period (one (1) year for non affiliates and two (2) years for Affiliates of Trump) or (ii) registration of those Trump Shares for resale; provided, however, those Trump Shares may be sold in transactions which are exempt from the registration requirements of the U.S. Securities Act. Each person acquiring Trump Shares offered by this Offering Document should contact his or her legal counsel or other securities advisor to determine the applicable holding period of those Trump Shares and request advice so that such person may understand completely the resale restrictions of that Rule 144. [Circular, page 39]
If for any reason it is determined that the Offer does not qualify for the exemption specified by the provisions of that Rule 506 (and if no other exemption from registration is available) and the Offer is not registered with the applicable federal or state authorities, the offer or issuance of the Trump Shares offered by this Offering Document would be deemed to have been made in violation of the applicable laws requiring registration. As a remedy in the event of such violation, each person acquiring Trump Shares offered by this Offering Document would have the right to rescind his or her acquisition of Trump Shares and to have his or her Fenway Shares returned. [Circular, page 38]
The take over bid circular discloses that, if the bid is successful, all of the current directors of Trump will resign and the current directors of Fenway will become directors and officers of Trump. The take over bid circular does not contain a valuation of Trump or a fairness opinion respecting the exchange of Fenway for Trump shares on a one for one basis.
On the same day Trump made the bid, the directors of Fenway issued a directors’ circular recommending acceptance of Trump’s offer. The recommendation reads as follows:
- Management of Fenway believes that a strategic merger with Trump will result in a financially strong and growing company. The following are potential benefits to Fenway shareholders expected as a result of a combination of Trump and Fenway:
(a) the opportunity to participate in a well managed, financially strong company;
(b) improved market liquidity resulting from the increased capitalization and larger public float.
The Board of Directors of Fenway have reviewed and considered all facts respecting the foregoing matters which they have considered to be relevant. It is the unanimous recommendation of Fenway’s Board of Directors that Fenway shareholders accept the Offer made by Trump.
In a notice to the depository for the bid that appears to have been sent on February 12, 1998, Trump advised the depository that, notwithstanding the provisions of the offer to purchase and take over bid circular, the management of Trump will accept the surrender of Fenway shares “from each and every Fenway shareholder”. However, Trump did not file under the Act or deliver to the Fenway shareholders a notice of variation with respect to this variation in the terms of the bid.
The bid expired on February 16, 1998. Approximately 94% of Fenway shares were tendered to the bid, but the temporary orders have prevented Trump from taking up the shares.
3. FINDINGS
The take over bid by Trump for the shares of Fenway raises concerns respecting inadequate disclosure and unequal treatment of Fenway shareholders.
Inadequate Disclosure
The required form for a take over bid circular, Form 32, provides in Item 15 that when the consideration offered includes shares of the offeror, the take over bid circular must include the information prescribed by the form of prospectus appropriate for the offeror. We are of the view that, in the case of Trump, the appropriate prospectus form would be that for a junior industrial issuer, Form 12A. We have identified several instances where the Trump take over bid circular fails to disclose the information prescribed by Form 12A or is otherwise inadequate.
- Section 112 of the Securities Rules, B.C. Reg. 194/97, requires that a prospectus of an issuer other than a mutual fund must contain the issuer’s balance sheet for the past two years and its income statement, statement of retained earnings and statement of changes in financial position for the past five years. The financial statements of Trump contained in the take over bid circular cover only the period from January 1, 1997, to August 31, 1997, though Trump was incorporated on August 31, 1995.
- Section 114 of the Rules requires that if the proceeds of the prospectus offering will be used to finance the acquisition of a business, and the acquisition is material to the issuer, the prospectus must contain the balance sheet of the acquired business for the past two years and its income statement, statement of retained earnings and statement of changes in financial position for the past five years. The financial statements of Fenway contained in the take over bid circular cover only the year ended August 31, 1997, though Fenway was incorporated in 1980.
- Section 114 of the Rules requires that if the proceeds of the prospectus offering will be used to finance the acquisition of a business, and the acquisition is material to the issuer, the prospectus must contain pro forma financial statements of the issuer and the acquired business with a note of the underlying assumptions and the events on which the pro formas are based. The pro formas in the take over bid circular disclose that the acquisition of Fenway will be recorded using the purchase method of accounting and that the value of Fenway will be adjusted to “acquisition date fair values”. The pro formas in the take over bid circular show, for Fenway, an investment in the Palawan project (its only major asset) of US$2,788,577; the valuation report referred to in the take over bid circular sets Fenway’s fair market value as at August 31, 1997, at US$1,600,000 to US$2,300,000. Yet, the pro formas show, for Trump, an investment in subsidiary (i.e. Fenway) of US$14,423,790. The latter figure appears to have been derived by multiplying the 8,242,166 Trump shares to be issued under the bid by a share price of US$1.75. The notes to the pro formas simply state that management of Trump estimated the market value of Trump shares to be US$1.75 based on two sales of shares that took place in August and September 1997. There is no explanation as to why Trump’s management considered the price of these two sales, which took place several months before the bid was made, rather than the share price of US$3.25 quoted on January 13, 1998, to represent the current market value of Trump’s shares at the time the bid was made. Nor is there an explanation of why Trump’s management concluded that the US$14,423,790 figure (which is more than six times the figure in the Fenway valuation report) represents the acquisition date fair value of Fenway.
- Form 12A, section 11.1 requires that the prospectus contain a table disclosing particulars of the issuer’s share capital. The notes to the section provide that where shares have been issued for non-cash consideration, the prospectus must disclose, in notes to the table, “the method of determining the value of the consideration (e.g. out of pocket costs, valuation opinion, Arm’s Length negotiations or, in the case of services, determination by directors based on estimated fair market value).” A table in the take over bid circular discloses that, on May 16, 1997, Trump issued 10,000,000 shares valued at US$0.0345 for proceeds to Trump of US$345,000. The reason given for that share issuance is “Satisfaction of indebtedness”. There is no description of what these debts were, to whom they were owed, to whom the shares were issued or how either the US$0.0345 share price or the debts were valued.
- The take over bid circular discloses: that Trump issued shares for US$0.0345 per share eight months prior to the bid; that there was no activity in the company during that eight months and that it continues to have substantially no assets and no income; that, on the day before Trump made the bid, its shares were quoted at US$3.25, resulting in a market capitalization for Trump of US$32,593,814; and that Fenway’s current fair market value is between US$1,600,000 and US$2,300,000, or US$0.19 to US$0.28 per share. Yet the take over bid circular does not provide a current valuation of Trump, a fairness opinion or any other explanation of why Trump’s share price is so high, given its lack of assets and income, or why an exchange of Fenway for Trump shares on a one for one basis represents a fair transaction.
- The take-over-bid circular describes two expected benefits to Fenway shareholders of a combination of the two companies. The first is “the opportunity to participate in a well-managed, financially strong company.” As the management of the combined company will be Fenway’s current management, and the only assets of the combined company will be Fenway’s current assets, there appears to be no such “opportunity” presented to Fenway’s shareholders by the bid. In fact, if all of them tender to the bid, they will end up holding a 46%, rather than their current 100%, interest in the Palawan project.
- The second expected benefit is “improved market liquidity resulting from the increased capitalization and larger public float”. This representation is simply not supported by the facts. By tendering to the bid, Fenway shareholders will be exchanging their unrestricted Fenway shares for Trump shares that cannot be traded for at least one year in the United States, where the only market for Trump shares is located.
- In order to meet the requirements of Rule 506, the Trump offer provides that Trump’s management will not accept the surrender of Fenway shares from a shareholder unless they believe that the shareholder is capable of evaluating the merits and risks of the offer and is able to bear the economic risks of the exchange. Four days before the bid expired, Trump sent a notice to the depository ostensibly waiving this provision and advising that they would accept Fenway shares from any Fenway shareholder. Not only did Trump fail to file or deliver to the Fenway shareholders a notice of variation in respect of this, Trump failed to disclose whether this would make the exemption in Rule 506 unavailable to them and, if so, what steps, if any, Trump intended to take to ensure compliance with the securities laws of the United States and what the consequences would be if Trump failed to so comply.
We observed above that an offeror making a share exchange take over bid must include in its take over bid circular the same information it would have been required to include in a prospectus. This is intended to provide the shareholders of the offeree issuer with full, true and plain disclosure of all material facts relating to the securities of the offeror proposed to be issued pursuant to the bid: see In the Matter of Beringer Properties Inc., Beringer Acquisitions Ltd., Parallel Research Inc., Sean Francis Kehoe and James Morris Durward and in the Matter of Trian Equities Ltd. [1993] 18 B.C.S.C Weekly Summary 18.
The test to be applied in assessing disclosure deficiencies in a take over bid circular is that the deficiency is material if there is “a substantial likelihood that a reasonable shareholder would consider an omitted fact, or the impugned description of an included fact, important in reaching a decision.”: Re CDC Life Sciences Inc. (1988), 11 O.S.C.B. 2541 (Ontario Securities Commission) at 2555. See also Trian Equities v. Beringer Acquisition Ltd. et al. (December 29, 1992) Vancouver Registry, A910605 (B.C.S.C.).
We have identified several disclosure deficiencies in Trump’s take over bid circular. These include: missing financial statements of Trump and Fenway; pro forma financial statements containing values for Trump and Fenway that are not adequately explained; inadequate disclosure respecting the 10,000,000 shares issued by Trump in May 1997; no valuation of Trump, fairness opinion or any other explanation of why Trump’s current share price is so high or why an exchange of Fenway for Trump shares on a one for one basis would be a fair transaction; lack of factual support for Trump’s recommendations to Fenway shareholders; and confusion respecting the availability of the Rule 506 exemption in the United States (including the lack of a description of the ramifications for Trump and the Fenway shareholders if the exemption is not available). We find that there is a substantial likelihood that a reasonable shareholder would consider these deficiencies important in reaching a decision and, therefore, that these deficiencies are material. We therefore find that Trump has contravened section 108(7) of the Act by not delivering a share exchange take over bid circular in the required form.
Unequal Treatment of Shareholders
Section 105(a) of the Act requires that a bid must be made to all holders of shares of the offeree issuer who are in British Columbia. Trump’s offer to purchase and take over bid circular provide that shares will not be accepted from any shareholder unless Trump’s management “has reasonable grounds to believe, and does believe, immediately prior to accepting such surrender, that such shareholder, either alone or together with any representative, has such knowledge and experience in financial and business matters that such shareholder is capable of evaluating the merits and risks of this offer as described in this offering document and that such shareholder is able to bear the economic risks of such an exchange.” We find that, by including this provision in the offer to purchase and take over bid circular, Trump, in effect, did not make the bid to all holders of Fenway shares in British Columbia and therefore contravened section 105(a) of the Act.
Fenway argued that Trump subsequently waived compliance with this provision by directing the depository to accept shares tendered by all Fenway shareholders. However, section 108(4) of the Act requires that, if there is a variation in the terms of a take over bid, whether or not the variation results from the exercise of any right contained in the bid, a notice of variation must be delivered to every person to whom the take over bid circular was required to be delivered and whose securities have not been taken up. Section 110(1) of the Act requires that a notice of variation must be delivered to the offeree issuer and filed. We find Trump did not file under the Act, or deliver to either Fenway or the Fenway shareholders, a notice of variation respecting the waiving of this provision and, therefore, that Trump contravened sections 108(4) and 110(1) of the Act.
4. DECISION
We have found that Trump did not deliver a take over bid circular in the required form and therefore contravened section 108(7) of the Act. We are of the view that the disclosure deficiencies in the take over bid circular go to the heart of the bid and raise serious concerns as to the fairness of the one for one share exchange proposed by Trump. These are not deficiencies that can be adequately addressed through amendments to the take over bid circular. As well, we have found that Trump did not make the bid to all holders of Fenway shares in British Columbia, in contravention of section 105(a) of the Act. Finally, when Trump subsequently took steps to vary the bid by opening it up to all Fenway shareholders, it did not file under the Act or deliver to Fenway or the Fenway shareholders a notice of the variation, in contravention of sections 108(4) and 110(1) of the Act. In view of the above, we have concluded that it is in the public interest that Trump’s bid should not proceed.
Commission staff have asked the Commission to adjourn the hearing and extend the temporary cease trade order against Trump until a hearing is held and a decision rendered with respect to an alleged manipulation of Trump shares. Commission staff raised the issue of a manipulation of Trump shares in their submission to us, arguing that the evidence presented at the hearing supports their position. However, there is nothing in the notice of hearing that specifies such an allegation. In the absence of a specific allegation of manipulation, or of a contravention of section 57 of the Act, in the notice of hearing, we are not prepared to extend the temporary cease trade order against Trump on this basis.
However, that does not end the matter. Pursuant to the definition of reporting issuer in section 1(1) of the Act, Trump became a reporting issuer upon the filing under the Act of its securities exchange take over bid circular. However, we have found that Trump’s take over bid for Fenway should not proceed, primarily because of material disclosure deficiencies in Trump’s take over bid circular.
Considering the circumstances in which this take over bid was made and the deficiencies we have identified with the take over bid circular, it would not be in the public interest to permit Trump to continue as a reporting issuer where the base disclosure document it used to obtain reporting issuer status is so seriously flawed.
Accordingly, we order:
- 1. under section 161(1)(c) of the Act that the exemptions described in sections 44 to 47, 74, 75, 98 and 99 of the Act do not apply to Trump in respect of Trump’s take over bid for the shares of Fenway; and
2. under section 161(1)(b) of the Act that all persons cease trading in Trump shares until Trump files a prospectus with, and receives a receipt for it from, the Executive Director.
We are not extending the temporary cease trade order against Fenway.
DATED at Vancouver, British Columbia, on March 19, 1998.
FOR THE COMMISSION
| Joyce C. Maykut, Q.C. | Adrienne R. Wanstall |
| Vice Chair | Member |