Canada: Kingsway Decision: Speculation Or Inference Does Not Lead To Joint Actor Status + A Warning Regarding Purchasing From Offshore Sellers Through Canadian Brokers

Last Updated: June 2 2016
Article by Gregory Hogan and Adria Leung Lim

Key Take-Aways

Kingsway Financial Services Inc. v. Kobex Capital Corp., 2016 BCSC 460, is noteworthy in emphasizing that, when determining whether a take-over bid has occurred, joint actor status is fact dependent and must relate to the take-over bid. A party seeking a declaration of non-compliance must present clear, cogent evidence - mere speculation is insufficient, and inferences cannot be drawn. Acting jointly in respect of corporate affairs, does not demonstrate acting jointly for the specific purpose of a take-over bid.

The case is also a reminder that the definition of "person" includes "legal representative", which should not be forgotten when considering whether a particular purchase is subject to Canadian take-over bid rules. Offers to, and purchases from, foreign shareholders can fall within the formal take-over bid rules if the foreign vendor transacts through a broker or similar agent resident in Canada, i.e., the purchases are made through a legal representative in Canada.


On March 3, 2016, the Supreme Court of British Columbia dismissed applications brought by Kingsway Financial Services Inc. (Kingsway), against Kobex Capital Corp. (Kobex) and Sprott Inc. (Sprott). Kingsway, as a dissident shareholder of Kobex that failed to convince Kobex's shareholders to appoint its slate of directors during a proxy fight, alleged that Sprott, an indirect shareholder of Kobex, failed to comply with its reporting obligations under British Columbia's securities laws after having made a "take-over bid" for the shares of Kobex.

Since March 2011, investment funds controlled by Sprott's subsidiary, Sprott US Holdings Inc. (Sprott US), have held Kobex common shares on behalf of its clients. As at October 2015, the investment accounts of Sprott US held approximately 18.5% of Kobex's shares, making it the largest shareholder of Kobex.  Kingsway, an Ontario company that functioned like a merchant bank, owned approximately 13% of the issued and outstanding shares of Kobex at that time.

On September 17, 2015, Kingsway initiated a proxy contest to replace the board of directors of Kobex, and requisitioned a special meeting of Kobex in order to reconstitute Kobex's board. On October 8, 2015, Kobex's board adopted a shareholder rights plan, which prevented Kingsway from acquiring more than 15% of Kobex's share. Because Sprott already held 18.5% of Kobex's shares, Sprott was exempted from automatically triggering the shareholder rights plan. However, Sprott would lose that exemption if it acquired 0.1% or more additional Kobex shares.

On October 27, 2015, the president of Sprott US, and the person responsible for Sprott's interest in Kobex, Richard Rule, purchased 2.4% of Kobex's outstanding shares (the October 27 Transaction). This resulted in Sprott and Rule together holding over 20% of Kobex. Despite issuing a press release on October, 28, 2015, stating that Sprott US rejected the changes to the board of directors proposed by Kingsway, Sprott made no public disclosure about the October 27 Transaction. Rule in fact had subsequently cancelled the October 27 Transaction to avoid the controversy arising during the proxy fight.

Acting Jointly or In Concert

Kingsway alleged that, despite its subsequent cancellation, the October 27 Transaction constituted a take-over bid under British Columbia securities laws, and that Sprott's failure to publicly disclose the transaction was a breach of British Columbia securities laws with respect to the early warning reporting obligations. Specifically, Kingsway submitted that the requirement under Commission rule National Instrument 62-103 to file a report within 2 business days from the date of the acquisition of 10% or more of an issuer's shares (the Early Warning Reporting Requirement), was not met by Sprott. Kingsway argued that the Early Warning Reporting Requirement was triggered immediately upon an offer to acquire having been made, despite the subsequent cancellation of the October 27 Transaction.

Take-over bid: an offer to acquire outstanding voting securities or equity securities of a class made to one or more persons, any of whom is in the local jurisdiction or whose last address as shown on the books of the offeree issuer is in the local jurisdiction, where the securities subject to the offer to acquire, together with the offeror's securities, constitute in the aggregate 20% or more of the outstanding securities of that class of securities at the date of the offer to acquire but does not include an offer to acquire if the offer to acquire is a step in an amalgamation, merger, reorganization or arrangement that requires approval in a vote of security holders.

Offeror's securities: securities of an offeree issuer beneficially owned, or over which control or direction is exercised, on the date of an offer to acquire, by an offeror or any person acting jointly or in concert with the offeror

Rule stated that the October 27 Transaction was for his personal account, was not motivated in any way by Kingsway's proxy battle with Kobex, was not intended to result in an acquisition of control of Kobex, and was cancelled to avoid the unanticipated and unintended controversy.

Section 98 of the British Columbia, Securities Act, R.S.B.C. 1996, c. 418 requires that a person not make a take-over bid, whether alone or acting jointly or in concert with one or more persons, except in accordance with specific rules, which are generally found in Multilateral Instrument 62-104 (MI-62-104). The Court examined the issues of whether the October 27 Transaction constituted a take-over bid under section 98 of the Securities Act and if so, whether Sprott failed to comply with the regulatory requirements for take-over bids in MI 62-104. 

The Court stated that whether Sprott and Rule were acting jointly or in concert with each other was a question of fact.  Although it was a reasonable inference that Rule was acting jointly or in concert with Sprott given his position as a director and chief executive officer of Sprott US, the evidence failed to establish that Rule and Sprott actually acted jointly or in concert for the specific purpose of a take-over bid. The Court rejected the argument from Kingsway that the phrase "acting jointly or in concert with one or more persons" does not require that the "acting" be for a specific purpose and that it is sufficient if there is a common alignment of general interests. It instead found that Section 98 of the Securities Act plainly requires that the "acting jointly or in concert" be for the specific purpose of a take-over bid. The mere fact that Rule and Sprott were acting jointly or in concert in 2011, for example, does not, without more, demonstrate that they were acting jointly or in concert with respect to an unforeseen, unanticipated transaction over four and a half years later. As such, the Court concluded that the October 27 Transaction did not constitute a take-over bid under the Securities Act.

Requirement for Offers to be Made in the Local Jurisdiction

Although irrelevant given the finding that the October 27 Transaction was not a take-over bid as Sprott and Rule were not acting jointly, the Court addressed the argument made by Sprott that the October 27 Transaction would not have been a take-over bid for another reason, being that the "offer to acquire" made by Rule was not established by Kingsway to have been made in British Columbia or any other Canadian jurisdiction.   Despite Sprott arguing there was no evidence presented as to who was the vendor of the shares that were the subject of the October 27 Transaction, and whether the vendor was in British Columbia, there was evidence that the broker acting for the vendor was located in British Columbia.

person: an individual or other person in that person's capacity as a trustee, executor, administrator or personal or other legal representative.

The Court noted that "person" was defined in MI 62-104 to include "an individual or other person in that person's capacity as a trustee, executor, administrator or personal or other legal representative". Even if the beneficial shareholder was located offshore, the fact that the vendor had a broker in British Columbia was sufficient for the offer from Sprott/Rule  to have been made to a person in British Columbia and this meant that the British Columbia take-over bid regime would have been applicable.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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