2012 QCCA 569, 2012 QCCA 569

Unofficial English Translation AbitibiBowater inc. (Produits forestiers Résolu) c. Fibrek inc. 2012 QCCA 569 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL No.: 500-09-022484-125 (500-80-021531-125) DATE: MARCH 27, 2012 CORAM: THE HONOURABLE PIERRE J. DALPHOND, J.A JACQUES DUFRESNE, J.A. RICHARD WAGNER, J.A. ABITIBIBOWATER INC., doing business under the name Resolute Forest Products and RFP ACQUISITION INC. APPELLANTS – Respondents – petitioners v. FIBREK INC. RESPONDENT – Appellant – respondent And MERCER INTERNATIONAL INC.

RESPONDENT – Appellant – impleaded party and AUTORITÉ DES MARCHÉS FINANCIERS and TORONTO STOCK EXCHANGE IMPLEADED PARTIES – Impleaded parties JUDGMENT [ 1 ] The appellants appeal from a judgment rendered on March 9, 2012, by the Court of Quebec, District of Montreal (the Honourable Judge Diane Quenneville), which overturned a prohibition order made on February 23, 2012, by the securities Bureau de décision et de révision. [ 2 ] For the reasons of Dalphond J.A., with which Dufresne and Wagner JJ.A. agree; THE COURT : [ 3 ] ALLOWS the appeal with costs (excluding additional fees, if any) [ 4 ] SETS ASIDE the judgment of the Court of Quebec; [ 5 ] Rendering the judgment that should have been rendered, DISMISSES the appeals of Fibrek and Mercer, with costs (excluding additional fees, if any).

PIERRE J. DALPHOND, J.A JACQUES DUFRESNE, J.A. RICHARD WAGNER, J.A.

Mtre Sophie Melchers Mtre Julie Himo Mtre Caroline Larouche Norton Rose Canada For the appellants Mtre Alain Riendeau Mtre Stéphanie Lapierre Mtre Vincent Cérat Lagana Fasken, Martineau, DuMoulin For the respondent (Fibrek inc.) Mtre Peter Kalichman Mtre Sophie Perron Irving Mitchell Kalichman For the respondent (Mercer International inc.) Mtre Jean Nicolas Boutin Wilkins Mtre Brigitte Gobeil Autorité des Marchés Financiers For the impleaded party (Autorité des marchés financiers) Mtre Fabrice Benoît Osler, Hoskin & Harcourt For the impleaded party (Toronto Stock Exchange) Date of hearing: March 22, 2012 REASONS OF DALPHOND, J.A. [ 6 ] This is an appeal from a judgment of the Court of Quebec rendered on Friday, March 9, 2012, [1] which overturned a decision of the Bureau de décision et de révision (the Bureau) rendered on February 23, 2012, [2] prohibiting Fibrek from issuing 32,320,000 subscription warrants to Mercer, for the price of $32,320,000, convertible to as many shares (the warrants). [ 7 ] This case raises public interest issues with respect to the Court of Quebec’s standard of review for this type of decision by the Bureau and the regulatory principles for takeovers.

CONTEXT [ 8 ] Fibrek, whose head office is in Quebec, is a business incorporated under the

Canada Business Corporations Act , R.S.C. (1985), c. C-44. Its shares are listed on the Toronto Stock Exchange (TSX). [ 9 ] AbitibiBowater (Abitibi) is a company listed on both the New York Stock Exchange (NYSE) and the Toronto Stock Exchange, and has been doing business under the name Resolute Forest Products since its reorganization. On November 28, 2011, it announced its intention to launch a takeover bid to purchase all of Fibrek's issued and outstanding shares.

Before officially launching its takeover bid on December 15, 2011, Abitibi made sure that it had the support of Fibrek’s three most important shareholders: Fairfax, [3] Pabrai, and Oakmont. Until April 13, 2012, it could count on the steadfast support of 59,502,822 shares, i.e., 46.5% of Fibrek's 130,075,556 outstanding shares. [ 10 ] Initially, its offer was conditional to the tender of at least two-thirds of Fibrek's shares, a percentage that was later reduced to 50.01% on March 20, 2012.

A portion of the consideration was payable in money and another in Abitibi shares, [4] representing a value of approximately $1 per share, based on Abitibi's share price in December of 2011. [ 11 ] Being of the view that this bid was low considering the potential or actual value of Fibrek, its board of directors decided to adopt various tactics to discourage this takeover bid, which it deemed hostile, and to gain more time to elicit one or several higher bids.

It therefore amended the contracts of its executives, [5] hired consultants to establish the value of the business and its shares, set up an independent committee, and hired lawyers and other advisors. [ 12 ] On December 19, 2011, the board adopted a shareholders' rights scheme that would come into play in the event Abitibi purchased a single share and would neutralize Abitibi's offer (a defensive tactic commonly referred to by those in the as a poison pill). Following an application by Abitibi, this rights scheme was subjected to a prohibition order issued by the Bureau on February 9, 2012,

effective February 13, 2012: [ translation ] "WHEREAS it is now time, in the public interest, to allow the shareholders of Fibrek to decide of their own free will whether or not to tender their shares in answer to Resolute's bid ( AbitibiBowater inc. (Resolute Forest Products) v. Fibrek inc. , 2012 QCBDR 8 ).

In other words, this delaying tactic to give Fibrek time to find a white knight had been going on long enough and the time had come to let the shareholders respond to Abitibi's bid. [ 13 ] Meanwhile, Mercer International inc., a British Columbia corporation operating in the same industry as Fibrek and whose shares are registered on the TSX and NASDAQ, had shown interest. In early February, after having been given access to Fibrek's books, Mercer agreed to act as their white knight.

After various dealings, which included a support agreement in which Fibrek's upper management undertook to support Mercer’s bid and an $8.5M break fee if they chose to support a better offer, it launched a takeover bid for Fibrek. Its bid, in cash and shares, [6] represented a value of approximately $1.30 per share, according to the share price at the time. It was conditional to the tender of 50.1% of the shares and to various approvals, including that of its shareholders regarding the issuance of the shares required to complete the takeover bid.

These agreements were negotiated on February 9, the day on which the Bureau rendered its first ruling, and were made public the very next day. [ 14 ] In the course of negotiations with Fibrek, Mercer demanded the option of buying 32,320,000 warrants for the price of $1 each, convertible to as many shares of Fibrek. In the event of a conversion, Mercer would hold 32,320,000 common shares of Fibrek, representing 19.9% of Fibrek’s issued capital, [7] for the price of $1 per share – the price offered by Abitibi.

Moreover, from the moment a single share is purchased, Mercer is entitled to require the nomination of two directors to Fibrek's board. [ 15 ] Mercer's takeover bid is not conditional upon the issuance of the warrants or their conversion, as was confirmed in clarifications sent to Fibrek's shareholders on March 19, 2012, following a request from the United States Securities and Exchange Commission (SEC): “The Offer is not conditional upon the issuance or conversion of the Special Warrants”. [ 16 ] On February 13, 2012, being of the view that Mercer's takeover bid and ancillary agreements (break fee and warrants) were abusive toward the shareholders and financial markets, Abitibi applied to the Bureau for a prohibition order respecting Mercer's takeover bid and warrants pursuant to

section 93 of the Act respecting the Autorité des marchés financiers , R.S.Q. c. A-33.2 ( AAMF ) and

section 265 of the Securities Act , R.S.Q. c. V-1.1 ( SA ). [ 17 ] On February 16, 2012, Steelhead Partners LLC (Steelhead), a Fibrek shareholder with 6,479,000 issued and outstanding Fibrek shares at the time, [8] after reviewing Mercer's takeover bid, confirmed that it would tender its shares in favour of Abitibi.

Steelhead is also a shareholder of Abitibi (13.3%). [ 18 ] As at February 16, 2012, Abitibi's bid appeared to have the support of 50.7% of Fibrek shareholders, thereby condemning Mercer's rival bid to failure if it had not had the warrants, its weapon to dilute the shareholders. [ 19 ] In its February 23, 2012 ruling, the Bureau found that the break fee, which was included in the Mercer takeover bid, was outside the norm and that the issuance of warrants constituted an unconscionable transaction on the markets.

It prohibited the issuance of warrants and their conversion into shares, but it did not prohibit Mercer's takeover bid, even if it was tied to an overly generous break fee. [ 20 ] Being of the view that the Bureau's ruling was contrary to Notice 62-202 relating to take-over bids - Defensive tactics (NP 62- 202) adopted by the Canadian securities administrators (CSA), which includes the AMF, Mercer and Fibrek resorted to the appeal under

section 115.16 AAMF to the Court of Quebec, civil division, which does not suspend the Bureau's decision (

section 115.21 AAMF ). The case was heard on an urgent basis before the administrative and appellate division on March 5, 6, and 7, 2012. In a judgment rendered on March 9, 2012, completed on March 16 and corrected on March 19, the appeal was allowed and the Bureau's decision was set aside. [ 21 ] Unhappy with this outcome, Abitibi turned to this Court to seek leave to appeal pursuant to

section 115.22 AAMF , which it was granted on March 16. The appeal was heard on an expedited basis on March 22, 2012. THE BUREAU’S DECISION [ 22 ] The complete version of the decision is 66 pages long ( 2012 QCBDR 17 ). In the first part of the judgment, the Bureau paints a picture of the protagonists, and summarizes the sequence of events and the positions of the parties. Subsequently, the Bureau analyzed the extent of its jurisdiction in matters involving takeovers.

It relied on the case law of the Supreme Court, amongst other things, and on decisions from the securities commissions of other provinces, including those that considered NP 62-202, about which it described the guiding principles before adding: [translation] [105] It is important to recall that takeover bids play a significant role in the governance of today's companies; they are a disciplinary vehicle for directors and executives. This disciplinary vehicle promotes a better allocation of resources, even going so far as to replace an inefficient management team.

Non-intervention in the face of abusive defensive tactics will be detrimental to this disciplinary tool and will have a negative impact on the distribution of resources. [106] There is no doubt that an investor with a diversified portfolio will necessarily prefer the existence of rules encouraging the launch of a greater number of bids even if that entails giving up some premium in a specific case. A lower price obtained in a particular file is largely compensated by established and fair rules encouraging a bidding process. [107] The CSA acknowledges the important role that takeover bids play in the economy.

The rules must not favour the initiator or the company's management, and both must leave the decision up to the shareholders of the target company and allow them to make an informed choice. The CSA points out that they are worried by the fact that defensive tactics might prevent the shareholders from making an informed decision and could interfere with the openness of takeover bids . [Emphasis added]

[ 23 ] It then considered the specific facts of the case. After analyzing the facts and the testimony of the main parties from Fibrek and Mercer and some experts, it found that the break fee was extremely generous and that the only real purpose of the warrants was to dilute the block of shares committed to Abitibi; in its view, it was a defensive tactic and not actual financing, which had not been proved to be necessary according to the Bureau’s assessment of the evidence.

Thus, if the warrants were issued and were then converted to common shares of Fibrek, Mercer would hold approximately 24.85% of all shares based on the number of shares issued and outstanding prior to the conversion and 19.9% of all shares based on the number of shares issued and outstanding after the conversion .

As for the commitment of Fairfax, Oakmont and Pabrai, which represents 46% of Fibrek's shares prior to the conversion, it would represent only 36.7% of outstanding shares after dilution. [ 24 ] Fibrek submitted only one precedent, a decision by the Alberta Commission, to justify a private placement despite Abitibi's takeover bid: ARC Equity Management (Fund 4) Ltd. (Re) , 2009 LNABASC 315. The Bureau pointed out that the context was very different in that case and that, contrary to Fibrek’s view, it militated in favour of a prohibition order.

It wrote: [translation] [156] It is interesting to note that when Paramount approached Profound with the idea of a takeover, Profound "faced a challenging business environment and the expectation that its primary lender would soon reduce Profound's line of credit limit to an amount potentially below what had already been borrowed . Profound was going to need some new funding, at an unpropitious time". Profound thus found itself in financial dire straits.

Profound was going to need new financing in very short order to avoid eventually being placed in a precarious situation. [157] On March 27, 2009, Profound's special committee determined that the bid and the private placement were in the best interests of Profound and recommended to its board that it approve Paramount's bid.

According to the minutes of that meeting, to come to this conclusion, the special committee considered “that Profound's net debt was $61.5 million, its credit facility of $70 million was under review and its bank line could be reduced to between $56 and $62 million (possibly less, we were told, than had already been borrowed under the facility); considered alternatives that might provide Profound with additional funds to continue its operations in the normal course; and considered the interests of Profound shareholders and other stakeholders”. [158] Therefore, for the CSA, the financial terms of the private bid, in addition to Profound's financial circumstances, were relevant circumstances in its analysis .

The stock issued in the context of the private placement was issued at a 15% premium with respect to the share price at the time . Profound's board of directors therefore saw this new source of financing at a premium in a positive light as it was offered at a time when the company needed a cash influx . [159] It is in this overall context that the CSA found that the private placement was not a mere tactical tool but rather a so-called hybrid measure : 100 However, we do not view the Private Placement as solely a tactical acquisition tool .

We think that Staff were correct in characterizing the Private Placement as something of a hybrid. Paramount made a financial commitment and Profound obtained a high degree of financing certainty (specifically, that Profound would receive the subscription money were Paramount not to obtain 50.1% of the Profound Shares under the Bid). The money was indeed paid to Profound, and used.

This was a real financing, not a sham . 101 Moreover, it was a financing of some apparent benefit not only to Profound and, by extension, its shareholders (ARC among them) - as a new source of funding, well-timed and seemingly attractively-priced in the circumstances - but also to Paramount itself, to the extent that it offered a lifeline to its intended target while the overall acquisition plan progressed . Although not put to a shareholder vote (none being required), the financing was approved by the Profound Board, which under corporate law bore responsibility to Profound and all its shareholders.

In our view, based on the information provided to us, it appears that the directors on the Profound Board fulfilled that responsibility; we are inclined to wonder where Profound would be today without the financial injection delivered by the Private Placement . (Emphasis added by the Bureau.) [160] Furthermore, it also considered that when the idea of the private placement occurred to Paramount, it is likely that this company had already thought about the utility of owning a significant interest in Profound in order to favour the planned transaction.

The CSA, however, found that the measure could in part be considered a tactical tool, if Paramount needed it: 98 We do not doubt that, when the idea of the Private Placement was first broached, Paramount already had in mind the potential ultimate utility of a block of Profound Shares (and their votes) should events reach the stage at which a Merger became a tangible prospect. We believe that Paramount even anticipated that, were that prospect to arise, success would require support from 66.6% of those voting.

These considerations were, in our view, factors in Paramount's determination to agree to the Private Placement, as large a transaction as could be effected without triggering (under take-over bid rules) the obligation to offer the same deal to existing Profound shareholders, and on terms seemingly favourable to Profound (the price and the commitment to complete it even were the Bid to fail ).

We therefore conclude that the Private Placement was, at least in part , a tactical tool designed to assist Paramount (if needed or desired) in acquiring all of Profound. [161] The CSA determined that its jurisdiction in matters of public interest could be exercised when the conduct or planned transaction was deemed abusive with respect to shareholders specifically and the integrity of capital markets in general. [162] ARC suggested that the following comments made by the Ontario Securities Commission (OSC) in HudBay Minerals inc. (Re) should be considered: ... an acquirer should not generally be entitled, through a subscription for shares carried out in anticipation of a merger transaction, to significantly influence or affect the outcome of the vote on that transaction.

" [163] The CSA pointed out that while this was an obiter , it was nonetheless worth a closer look. [164] The CSA found that in order to determine if a private placement was used merely as a tactical tool in the context of a transaction

and should therefore prompt the commission to intervene in light of the abuse of the target business , an investigation into the parties' intent, the facts, and the sequence of events would allow for reasonable inferences to be drawn respecting the purpose of the said private placement: 96 ARC would have us view the Private Placement as merely a tactical tool. Paramount and Profound would prefer that we view the Private Placement as merely a financing, wholly legitimate and not now to be revisited. Staff contended that it was a hybrid or combination of the two.

The undisputed fact that, given the outcome of the Bid, Paramount would not be able to ensure the required 66.6% approval of the Merger at the Special Meeting without voting its Private Placement Shares does not determine this question. The appropriate characterization - and, with it, possibly the determination of whether there is an abuse warranting intervention - in our view requires us also to inquire into the thinking of the parties (Paramount in particular ). Although we do not have direct evidence on such thinking, reasonable inferences can be drawn from the facts, the timing and the sequence of events.

" [165] The CSA observed that the fact Profound and Paramount used the private placement in a tactical approach to offer greater certainty with respect to the transaction was far from ideal and might have appeared unfair to ARC.

It did find, however, that it was not abusive conduct prompting it to intervene to exercise jurisdiction in matters involving the public interest. [166] The CSA ended its judgment by pointing out that in light of the issues raised in the Profound transaction, this type of private placement was worth a closer look and, depending on the circumstances, could yield a different outcome: 116 Having concluded that this is not a clear case of an abuse warranting the exercise of our public interest jurisdiction, we consider that ARC has raised issues worthy of analysis and debate.

Private placements of voting securities negotiated in such circumstances may come under deserved scrutiny. Depending on all the circumstances, a future effort to follow Paramount's approach might encounter not just serious challenge, but possibly also a different outcome.

" ... [168] There are therefore several elements in the ARC case that differ from this one and that lead us to a different outcome: • The private placement was not granted in the context of an unsolicited bid to dilute the shareholders who have granted lock-up agreements in favour of the first bidder; • A first bidder was not challenging a defensive tactic resulting in dilution; rather, a shareholder was challenging the right to vote following the conversion of warrants into shares in connection with the planned merger; • The takeover bid had been launched in a context where the company was clearly in financial dire straits; • Profound was in serious need of financing because of its financial difficulties, and the amounts received through the private placement were used to reimburse the largest secured creditor who was threatening to place Profound in a precarious situation pursuant to its banking agreements; • The TSX had conditionally approved the private placement in special subscription warrants and ARC had not appealed that decision ; • The price of the subscription warrants was issued at a 15% premium over the market share price at the time; • According to the terms of the subscription warrants agreement, Paramount did not have the right to name representatives to Profound's board of directors. [169] We are therefore of the opinion that, in the context of a takeover bid, the issuance of subscription warrants resulting in dilution should only be allowed if it is shown that the target company has a real and pressing need for capital and is not using it only (1) to counter lock-up agreements that were validly entered into in the context of a takeover bid or (2) as a defensive tactic. [Emphasis added.] [ 25 ] The Bureau added the following comments to better explain its regulatory policy decision: [translation] Lawfulness and legitimacy of lock-up agreements [170] As mentioned earlier, the facts clearly show that the issuance of subscription warrants directly affects the lock-up agreements entered into by majority shareholders.

Lock-up agreements serve a useful purpose by providing an element of trust to someone intending to launch a takeover bid by giving them assurances that they will meet with some measure of success: 104 In fact, lock-up or support agreements are common arrangements used to ensure that holders of significant blocks of shares will vote their shares in support of a plan of arrangement (or tender them to a bid, as the case may be), thus helping to ensure the success of the transaction.

This is not illegitimate or improper, but rather this is the result of a carefully formulated policy that has now been in practice for several years. [171] In the absence of this element of trust and certainty, bidders would be less inclined to launch a takeover bid, and that would be detrimental to the proper functioning and performance of the markets. [172] It is important to note that lock-up agreements were entered into by three Fibrek majority shareholders who undoubtedly possessed all the information required to make an informed decision.

Even if allusions were made to this effect, no evidence of bad faith or that they may have been acting with Resolute was adduced before the tribunal. It seems disingenuous to claim after the fact that the

price accepted at the time was too low, while in actual fact when the lock-up agreements were entered into the price represented a premium of approximately 31% with respect to market value.

These institutional bearers thus enabled a takeover bid to be launched to all the shareholders at a substantial premium. [173] It is not for us to question the reasons why Fibrek's majority shareholders freely chose, on November 28, 2011, to enter into irrevocable lock-up agreements with Resolute at a price of $1 per Fibrek share. [174] It is noteworthy that among the three shareholders who signed the lock-up agreements, only Fairfax was also a shareholder of Resolute, whereas Pabrai and Oakmont, who hold approximately 20% of Fibrek's stock, were not. [175] It would appear that the shareholders subject to such agreements negotiated with the bidder and decided that the price was acceptable. ... [ 26 ] In other words, the Bureau refused to dilute the block committed to a bidder by substituting the committed shareholders' assessment with an obligation to reconsider their position, or, at the very least, to sacrifice the value of the lawful undertaking because it could be beneficial to the other shareholders.

For the Bureau, this represented the best way of respecting the fundamental right of shareholders to decide for themselves whether or not to accept a takeover bid. COURT OF QUEBEC JUDGMENT [ 27 ] From her analysis of NP 62-202, the judge accepted that the Bureau's first duty was to maximize the value for shareholders while ensuring that there would be bidding, not to ensure the best performance of the markets, an objective that it qualified as secondary.

It follows, in her opinion, that the Bureau's decision was unreasonable, a position she summarized in these words: [translation] [155] In closing, the Bureau's approach enables Abitibi to acquire control of Fibrek at a discount.

It is clear that if an order prohibiting the private placement were made, Mercer would withdraw its bid. [9] In fact, Mercer would then have little chance of succeeding since Abitibi has assurances that it will receive the vote of over 50% of Fibrek's stock. [156] In paragraphs 193 and 194 of its detailed reasons, the Bureau wrote: [translation] [193] Contrary to the objectives of the regulations respecting takeover bids, granting such broad discretion to the board of directors would limit, and maybe even eliminate, any competitive bids and put an end to the bidding process. [194] Interrupting the bidding process is diametrically opposed to the shareholders' right to decide for themselves. [157] For the reasons stated herein, the Court is unable to reconcile paragraphs 193 and 194 of the detailed reasons given on March 6, 2012, with the objectives determined in the guiding principles of NP 62-202 and the long line of decisions rendered on the subject.

This makes the Bureau's decision unreasonable within the meaning of Dunsmuir . [158] Indeed, the Bureau ran directly counter to the objectives stated in NP 62-202 since it successfully limited the bidding process, maybe even putting a complete end to it, [10] thereby penalizing the shareholders. With its order, the Bureau did the exact opposite of what it should have done: maintain competition and bidding in the interest of the shareholders. [159] It is also important to understand that the Bureau did not penalize only those Fibrek shareholders who did not sign lock-up agreements.

By its decision, the Bureau also penalized shareholders such as OakMont and Pabrai since, had the counter-offer process continued, Abitibi would have made a bid superior to Mercer's, which would have benefitted these shareholders and all the other shareholders of Fibrek. [160] At paragraphs 195 and following of its detailed reasons, the Bureau recognized the right of shareholders to decide for themselves.

Yet, by putting an end to the private placement, the shareholders were left with only one bid, Abitibi's. [11] The Court does not see how the Bureau's order benefits the shareholders. [161] The Bureau made a fundamental error when it undermined the basic principle of NP 62-202, that is, it prevented the bidding, or the counter-offer, from coming to fruition and thus prevented shareholders from exercising their choice. [162] The Bureau committed an unreasonable error by considering only the interests of the majority shareholders, that is, those who had signed the lock-up agreements. [163] The Bureau committed an unreasonable error by finding that the private placement, a tactic to dilute the majority shareholders, went against public interest, and more specifically, that it went against the interests of the financial markets. [12] [164] Finally, the Bureau did not pay the necessary attention to the observations made by the AMF, whose mission and role are crucial to assessing the notion of public interest within the meaning of the Act . [13] [ 28 ] Overall, it appears that the Bureau's decision was unreasonable because it did not espouse the AMF's position as to the

interpretation that should be given to NP 62-202 and because diluting the majority shareholders is in the public interest when it paves the way for bidding. Maximizing the value for shareholders, including those who agreed to sell at a lower price, as a principle, must prevail over that of preserving the effects of the lawfully agreed-upon lock-up agreements. ANALYSIS

[29] This appeal raises the following issues: What is the level of curial deference that that is owed by the Court of Quebec to adecision by the Bureau? In the present case, was the requisite deference shown? [30] The Bureau heard an application to prohibit a transaction in securities in respect of Mercer's takeover bid and the issuance ofwarrants to Mercer, pursuant to

section 265 SA: 265. The Bureau de décision et de révision may order a person to cease any activity in respect of a transaction in securities. The Bureau de décision et de révision may, furthermore, order any person or category of persons to cease any activity in respect of atransaction in a particular security.

In the case of failure by a reporting issuer to provide periodic disclosure about its business and internal affairs in accordance with theconditions determined by regulation or failure by an issuer or another person to provide any other disclosure prescribed by regulation inaccordance with the conditions determined by regulation, the power to order a person to cease any activity in respect of a transaction insecurities shall be exercised by the Authority. [31] This is not a case intended in subsection 3 of

section 265 SA, where the power to intervene is the AMF's and where the Bureausits only in review. The two first paragraphs, according to which only the Bureau has jurisdiction, do apply. The legislature assigned theirapplication exclusively to the Bureau. It has the expertise in these matters and may act upon the initiative of a party of the AMF. [32] Moreover, subsection 93(2) AAMF states that the Bureau exercises its discretion under subsections 265(1) and (2) SA in thepublic interest: 93.

On the request of the Authority or of any interested person, the board shall exercise the functions and powers assigned to it under thisAct, the Act respecting the distribution of financial products and services (chapter D-9.2), the Money-Services Businesses Act (chapterE-12.000001), the Derivatives Act (chapter I-14.01) and the Securities Act (chapter V-1.1). The board shall exercise its discretion in the public interest.

The board may not, when assessing the facts or the law for the purposes of those Acts, substitute its assessment of the public interest forthat made by the Authority in making a decision. [Emphasis added] (The third subsection does not apply in this case since the Bureau was not sitting in review of an AMF decision.) [33] It is well established that the power of the Canadian securities authority, the Bureau in this case, exists whether or not there hasbeen a breach of the securities legislation, since it permits intervention when justified by the public interest, as pointed out by theSupreme Court of Canada in Committee for the Equal Treatment of Asbestos Minority Shareholders v.

Ontario (Securities Commission),[2001] 2 S.C.R. 132, 2001 SCC 37: 39 Section 127(1) of the Act provides the OSC with the jurisdiction to intervene in activities related to the Ontario capitalmarkets when it is in the public interest to do so. The legislature clearly intended that the OSC have a very wide discretion in suchmatters. The permissive language of s. 127(1) expresses an intent to leave it for the OSC to determine whether and how to intervene in aparticular case: 127.

(1) The Commission may make one or more of the following orders if in its opinion it is in the public interest to make the order ororders . . . 40 The breadth of the OSC’s discretion to act in the public interest is also evident in the range and potential seriousness of thesanctions it can impose under s. 127(1). Furthermore, pursuant to s. 127(2), the OSC has an unrestricted discretion to attach terms andconditions to any order made under s. 127(1):

(2) An order under this

section may be subject to such terms and conditions as the Commission may impose. 41 However, the public interest jurisdiction of the OSC is not unlimited. Its precise nature and scope should be assessed byconsidering s. 127 in context. Two aspects of the public interest jurisdiction are of particular importance in this regard.

First, it isimportant to keep in mind that the OSC’s public interest jurisdiction is animated in part by both of the purposes of the Act described in s.1.1, namely “to provide protection to investors from unfair, improper or fraudulent practices” and “to foster fair and efficient capitalmarkets and confidence in capital markets”. Therefore, in considering an order in the public interest, it is an error to focus only on thefair treatment of investors.

The effect of an intervention in the public interest on capital market efficiencies and public confidence in thecapital markets should also be considered. 42 Second, it is important to recognize that s. 127 is a regulatory provision. In this regard, I agree with Laskin J.A. that “[t]hepurpose of the Commission’s public interest jurisdiction is neither remedial nor punitive; it is protective and preventive, intended to beexercised to prevent likely future harm to Ontario’s capital markets” (p. 272). This

interpretation of s. 127 powers is consistent with theprevious jurisprudence of the OSC in cases such as Canadian Tire, supra, aff’d reflex, (1987), (ON SC), 59 O.R. (2d)79 (Div. Ct.); leave to appeal to C.A. denied (1987), 35 B.L.R. xx, in which it was held that no breach of the Act is required to trigger s.127. It is also consistent with the objective of regulatory legislation in general. The focus of regulatory law is on the protection ofsocietal interests, not punishment of an individual’s moral faults: see R. v. Wholesale Travel Group Inc., (SCC), [1991]3 S.C.R. 154, at p. 219. [Emphasis added.]

[34] Canadian Tire Corp. (Re) (1987), (ON SC), 10 OSCB 857, judicial review dismissed (1987), 37 D.L.R.(4th) 94 (Div. Ct.), a joint decision of the Ontario and Quebec Commissions, cited with approval by the Supreme Court in Committee forthe Equal Treatment of Asbestos Minority Shareholders v. Ontario (Securities Commission), supra, stated on page 948: … The Legislature deliberately has given the Commission a broad and unfettered power to move quickly to intervene in the capitalmarkets to stop a trade or a transaction which it deems to be contrary to the public interest.

The ambit of the Commission's power undersection 123 is not hedged or confined by particular examples or by particular criteria, as is true elsewhere in the Act. Rather, theLegislature has vested in the Commission the power to intervene where it has been demonstrated that such intervention is necessary tofulfil the Commission's mandate to regulate the capital markets in the public interest. ...

Equally clearly in our view, the Commission should act to restrain a transaction that is clearly abusive of investors and of the capitalmarkets, whether or not that transaction constitutes a breach of the Act, the regulations or a policy statement. Such occasions may berare, but the power is there in

section 123 and it ought to be used in appropriate circumstances. ... To invoke the public interest test of

section 123, particularly in the absence of a demonstrated breach of the Act, the regulations or apolicy statement, the conduct or transaction must clearly be demonstrated to be abusive of shareholders in particular, and of the capitalmarkets in general. A showing of abuse is something different from, and goes beyond, a complaint of unfairness. A complaint ofunfairness may well be involved in a transaction that is said to be abusive, but they are different tests. Moreover, the abuse must be suchthat it can be shown to the Commission's satisfaction that a question of the public interest is involved.

That almost invariably will meansome showing of a broader impact on the capital markets and their operation. [Emphasis added] [35] In the present case, the Bureau's decision is essentially regulatory in nature. It does not settle a dispute between the AMF and anintermediary or issuer. It is the result of an application made by Abitibi to decide whether the means chosen by Fibrek are abusive withrespect to Abitibi, to the shareholders who entered into lock-up agreements, and to the markets. [36] This type of decision, made by an independent and specialized organization, warrants the greatest deference.

The Court ofQuebec was therefore obligated to show the highest degree of deference to the Bureau's decision. This principle has been well-established since Pezim v. Colombie-Britannique (Superintendent of Brokers), (SCC), [1994] 2 S.C.R. 557, whichrecent case law follows closely (Cartaway Resources Corp. (Re), [2004] 1 S.C.R. 672, 2004 SCC 26; Nechi Investments Inc. v. Autoritédes marchés financiers, J.E. 2011-370, 2011 QCCA 214; Gagné v. Autorité des marchés financiers, J.E. 2008-1708, 2008 QCCA 1566;Lions Gate Entertainment Corp. v.

Icahn Partners LP, 75 B.L.R. (4th) 71, 2010 BCCA 231). [37] This means that the Court of Quebec could intervene only if the Bureau's decision was not justified, intelligible and transparentor did not fall within a range of possible, acceptable outcomes that are defensible in respect of the facts and the law (Dunsmuir v. NewBrunswick, [2008] 1 S.C.R. 190, 2008 SCC 9, Canada (Citizenship and Immigration) v.

Khosa, [2009] 1 S.C.R. 339, 2009 SCC 12). [38] In this case, there is no doubt that the Bureau's decision is intelligible, transparent and sufficiently reasoned within the meaningascribed to this notion by case law (Newfoundland and Labrador Nurses' Union v. Newfoundland and Labrador (Treasury Board), 2001SCC 62; Syndicat national de l'automobile, de l'aérospatiale, du transport et des autres travailleuses et travailleurs du Canada (TCA-Canada), sections locales 187, 728, 1163 v.

Brideau, J.E. 2007-1265, 2007 QCCA 805). [39] For the Court of Quebec to intervene, it would have been necessary to show that the Bureau's decision was not one of thepossible, acceptable outcomes that are defensible in respect of the facts and the law. [40] Let us consider whether or not it is. [41] The Bureau's decision was made after all the relevant facts were analyzed, including the severability of the warrants fromMercer's takeover bid, the dilution effect that their conversion into shares would have, the price paid by Mercer for the warrants[14] andthe context of their issuance. [42] The Bureau's finding that the warrants were only a defensive tactic to dilute, if necessary, the shareholders who favouredAbitibi's takeover bid and to promote Mercer's takeover bid is supported by the evidence and cannot be characterized as unreasonable. [43] According to the Bureau, interfering with the lock-up agreements, which were lawfully entered into by shareholders whoperformed their own analyses and made their own decisions, was unacceptable and likely to discourage takeovers.

This is a conclusionthat only the Bureau, with its expertise, could reach and it seems to find support in case law rendered elsewhere in Canada. [44] It should be said that this dilution would make it so that a majority of present Fibrek shareholders, if Steelhead is included (asFibrek and Mercer argue that it should), will see their decision to accept Abitibi's takeover bid deprived of any effect.

Presentshareholders would no longer be in control of their destiny since Mercer could interfere and neutralize their choice, the warrantsbecoming an obstruction to the open process and preventing the majority shareholders from deciding Fibrek's fate. It is established inCanadian corporate law that shareholders may act as they see fit, insofar as the majority does not oppress the minority; should thathappen, the minority may avail themselves of the relevant remedies.

This is the principle governing the Bureau's decision, in the mannerof the other Canadian commissions. [45] This choice stems from the power to assess and decide conferred exclusively on the Bureau, which is to be exercised in theinterest of shareholders and the markets. While one may disagree with the approach taken by the specialized decision-maker, it cannotbe said that its decision is not one of the possible and acceptable outcomes that is defensible in respect to the facts and the law.

[ 46 ] The specialized decision-maker chose the security of the lock-up agreements over the right of the majority to decide Fibrek's fate and, consequently, it refused to allow the dilution, though it allowed Mercer, with the support of Fibrek's upper management, to try to convince those shareholders who have yet to commit to choose Mercer's bid, which, if it is be perceived to be truly superior by these shareholders should be their logical choice. I reiterate that both offers are comparable from a cash standpoint.

It remains for the shareholders to decide if they prefer Mercer or Abitibi stock in their portfolios. [ 47 ] Neither the SA nor the rules enacted under the applicable statutes impose an outcome different from the one chosen by the Bureau.

As for the national policy stated in NP 62-202, excepting that it has no normative value, [15] a reading of the Bureau's decision indicates that it and the decisions of the securities commissions of the other provinces were taken into account in the analysis, even though these decisions had no binding authority on the Bureau (any more than its own previous decisions). [16] As for ARC , the only decision submitted by Fibrek's board of directors to justify its position, the Bureau analyzed it at length and explained in an intelligible and reasonable manner why the context of this file justified a different outcome. [ 48 ] As indicated by its name – Notice 62-202 relating to take-over bids - Defensive tactics – this policy targets the defensive responses and strategies (poison pills) of the target company's upper management.

These tactics are prima facie considered suspicious if they include the issuance of a significant percentage of shares or of options to this end once a bid has been launched or when one is imminent, as they could be game-changers. This is why NP 62-202 warns target companies that such tactics may be subject to review. [ 49 ] NP 62-202 basically purposes to prevent any interference with shareholder rights such as choosing for themselves as soon as possible, tendering their shares if they deem that to be the right decision, and benefiting from the promised consideration.

In other words, participating in a bidding process without interference from management. [ 50 ] In CW Shareholdings inc. and Shaw Communications (1998), 21 OSCB 2910 , the Ontario Commission wrote, on page 2920: What constitutes the primary concern of the Commission in contested take-over bids was expressed by the Commission in In the Matter of Canadian Jorex Limited and Manville Oil & Gas Ltd. (1992), 15 OSCB 257 at page 266 as follows: "Underlying our conclusion was our view of the public interest in matters such as this.

As is amply reflected in National Policy 38 [the predecessor to NP 62-202], the primary concern of the Commission in contested take-over bids is not whether it is appropriate for a target board to adopt defensive tactics, but whether those tactics "are likely to deny or severely limit the ability of the shareholders to respond to a take-over bid or a competing bid" (paragraph 6) or "may have the effect of denying to shareholders the ability to make a [fully informed] decision and of frustrating an open takeover bid process" (paragraph 2) .

If so, then as National Policy 38 clearly indicates, the Commission will be quite prepared to intervene to protect the public interest as we see it.

For us, the public interest lies in allowing shareholders of a target company to exercise one of the fundamental rights of share ownership — the ability to dispose of shares as one wishes — without undue hindrance from, among other things, defensive tactics that may have been adopted by the target board with the best of intentions, but that are either misguided from the outset or, as here, have outlived their usefulness." In our view, the rationale underlying Jorex, as well as that underlying NP 62-202, is that the Commission's primary concern in the take- over bid context is the protection of the interests of the shareholders of the target company.

NP 62-202 does express a secondary objective, to provide a regulatory framework within which take-over bids may proceed in an open and even-handed environment (often expressed as the requirement for a "level playing field"), but this is clearly a subsidiary consideration. [ 51 ] Neither NP 62-202 nor any other policy adopted by the CSA addresses lock-up agreements. The power of intervention in their regard stems solely from the power to prohibit in the public interest provided for under

section 265 SA and 93 AAMF . [ 52 ] In this case, the Bureau took into consideration the fact that the lock-up agreements were not subject to specific rules and that they were considered lawful and beneficial to market performance.

Armed with this conclusion, which had been stated in other decisions by Canadian commissions and which thus seemed entirely reasonable (there was no evidence to the contrary), the Bureau assessed the impact of the defensive tactic adopted by Fibrek's board of directors with respect to these agreements, Abitibi's bid, and the interests of shareholders who had agreed to tender their shares in favour of Abitibi, or who wanted to do so. [ 53 ] It found that the result of the defensive tactic was certainly to the benefit of Mercer, as the other bidder, but that it was not to the benefit of the shareholders as a whole.

Thus, according to the factual conclusion drawn by the Bureau (which was not shown to be unreasonable), committed shareholders and those wanting to sell to Abitibi, who now appeared to represent a majority of Fibrek shareholders, ran the risk of being deprived of the possibility of following through with their choice, not because of the more attractive nature of Mercer's bid, which would be the normal consequence of free competition and bidding, but because of the dilution effect brought on by the conversion of the warrants issued at a time when Fibrek did not have a real financial need. [ 54 ] In short, the Bureau found that this fettered the bidding process, while lock-up agreements, to date, had not been considered to do so.

The Bureau wrote: [translation] [203] We are therefore of the opinion that to allow the defensive tactic in this case, which circumvents the validly negotiated lock-up agreements, would harm the bidding process and interfere with the right of shareholders to decide for themselves to tender their shares in response to a bid. ... [227] We are of the view that the subscription warrants and the break fee are defensive tactics adopted by Fibrek in the context of Resolute's bid and are abusive toward the shareholders specifically and the financial markets in general.

These findings are supported by the evidence and cannot be characterized as unreasonable.

[ 55 ] Armed with this analysis, which certainly is one of the possible outcomes in this case, the Bureau decided to prohibit any transactions on the warrants, but it did not prohibit Mercer's takeover bid notwithstanding the too-high break fee.

Its decision cannot be characterized as unreasonable in the circumstances. [ 56 ] The judge of the Court of Quebec was wrong to substitute herself for the Bureau in the exercise of its authority to make regulatory decisions in the public interest, by choosing the minority shareholders' interests over the majority shareholders' choices, which are not oppressive or abusive, instead of favouring the stability of a public bidding process unfettered by defensive tactics, a principle recognized by all the Canadian authorities in NP 62-202.

CONCLUSION [ 57 ] For these reasons, I would allow the appeal with costs (excluding additional fees, if any), set aside the judgment of the Court of Quebec, rendering the judgment that should have been rendered, and dismiss the appeals of Fibrek and Mercer, with costs (excluding additional fees, if any). PIERRE J. DALPHOND, J.A