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Team No. 11 2013 Canadian Corporate/Securities Law Moot Court Competition





(i) Pandemonium’s Poor Performance

(ii) Charon’s Announcement

(iii) The Rights Plan

(iv) The Convertible Notes

(v) The Surrender of the Convertible Notes

(vi) The Shareholders’ Meeting

(vii) The Judgments Below




(i) The Business Judgment Rule and NP 62-202

(ii) The Directors’ Breach

(iii) Shifting Burden of Proof

(iv) No “Just Say No” Defence


(i) Breach of CBCA

(ii) Invalid Shares


(i) The Failure to Consider the Canon of “Implied Exclusion”

(ii) Bijural Legislation Was Not Contemplated

(iii) Same Class Shares are to be Fungible

(iv) Pandemonium’s Failure to Follow its Constating Documents as Drafted.................28 D. BELIAL DID NOT ACT “JOINTLY OR IN CONCERT”

(i) There is No “Agreement, Commitment, or Understanding”

(ii) Belial Does Not Meet The Criteria Of An “Affiliate”

(iii) The Rights Plan Fails to Capture Belial as an “Associate”



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1. This appeal goes to the heart of the issues relating to hostile take-over bids. The locus of debate concerns the level of deference that courts should give to corporate directors’ business judgment when taking defensive tactics.

2. There exists significant uncertainty throughout the country regarding the relationship between corporate law and securities law. Conflicts ensue between the obligations arising from the fiduciary duties of the board on the one hand, and between the protection of investors and the efficiency of the capital markets on the other. The Appellant submits that this uncertainty must be resolved with an eye to ensuring corporate director accountability.

3. In BCE Inc v 1976 Debentureholders, this Honourable Court confirmed that directors owe their fiduciary duties to the corporation. Following BCE, despite various competing interests and temptations in the context of rapid changes, once a corporation has been put “in play”, directors are required to pursue the best interests of the corporation. On April 18, 2012, this Honourable Court dismissed the application for leave to appeal from a decision that favoured the stability of a public bidding process unfettered by defensive tactics (SCC Fibrek).

–  –  –

Fibrek Inc v AbitibiBowater inc, [2012] SCCA No 131 (SCC) (QL) [SCC Fibrek].

4. The Appellant submits that this Honourable Court ought to modify the business judgment rule in the context of take-over bids in a way that reconciles the approaches of corporate law and securities law. Furthermore, the Appellant submits that significant safeguards must be kept in place to ensure that directors cannot engage in self-serving

–  –  –

5. In the case at bar, the directors of Pandemonium Production Corp. (“Pandemonium”) (the “Directors”) lost sight of the corporation’s best interests, and pursued defensive tactics with the sole intention to defeat the proposed bid of Charon Entertainment Inc. (“Charon”).

6. It is crucial that this Honourable Court overturn the decision of the Ontario Court of Appeal (the “OCA”) (the “OCA Decision”), which, if left to stand, opens the door to four detrimental consequences.

7. First, it encourages paying deference to the business judgment of directors in the context of hostile take-over bids, even when their actions show disregard for the best interests of the corporation. Where directors have hostility toward a bidder, it allows them to “just say no” to putting the corporation in play.

8. Second, in the event of a breach, it deems directors to have complied with the provisions of the Canada Business Corporations Act if they breach the provisions at first but find ways to eventually comply.

–  –  –

9. Third, it allows directors to discriminate between same-class shareholders to arrive at desired results, and thus override fundamental principles of equality in corporate law.

10. Last, it prevents hostile bidders from acquiring a Canadian public company even with the support of the majority of shareholders. In this way, the OCA Decision closes the door to possible courses of action or measures that protect the best interests of the corporation and its shareholders.

11. Overall, the principles arising from the OCA Decision will, if left to stand, have significant repercussions on corporate governance. At a time when directors of a target

–  –  –

to curtail the requisite analysis of the best interests of the corporation and instead advance their own interests.

12. Furthermore, the OCA Decision will perpetuate the high degree of uncertainty in the capital markets by making the success of future hostile take-over bids contingent on the interests of individual directors. These interests will not necessarily align with the best interests of the corporation, which will therefore make them impossible to predict.


13. The Appellant brought proceedings against the Directors as a derivative action. The Appellant seeks declaratory relief that, if granted, would clear the way for its bid to proceed free of obstacles created by the Respondents.

(i) Pandemonium’s Poor Performance

14. Pandemonium is incorporated under the CBCA and is listed on the Toronto Stock Exchange (the “TSX”). It is in the business of producing and distributing video games, movies and related forms of entertainment.

15. Pandemonium’s two largest shareholders are Tartarus Partners LLC (“Tartarus”), and Belial Screen Idols Ltd. (“Belial”), who hold 26.3% and 17.2% of Pandemonium’s issued and outstanding common shares, respectively. Belial is also a major shareholder of Charon, holding approximately 12.5% of its issued and outstanding shares.

16. Months before the announcement of Charon’s proposed bid, Belial increased its share ownership in Pandemonium. Charon also purchased shares of Pandemonium, and held 9.8%

–  –  –

17. Although Charon and Belial used the same broker, Prosperine Securities Limited, evidence establishes that different representatives handled their accounts, took instructions only from their respective clients and did not communicate with each other.

–  –  –

18. Before trial, things were looking dim for Pandemonium. Its earnings and cash flow had deteriorated to the extent that the company had to lay off staff and delay development of new projects to ensure it could continue as a going concern. Tartarus repeatedly expressed dissatisfaction with the Directors’ ability to enhance shareholder value and with Pandemonium’s share liquidity. Furthermore, Tartarus advised the Directors that it wished to sell or at least reduce its interest in Pandemonium.

(ii) Charon’s Announcement

19. On August 17, 2012, an opportunity for Tartarus to sell its shareholdings emerged.

Charon, another TSX-listed company operating within the same industry, announced its intention to make an unsolicited take-over bid to acquire all of the issued and outstanding common shares of Pandemonium at a premium.

20. Tartarus communicated privately to the Directors that it welcomed Charon’s

–  –  –

could “finally get a chance to bail out” (Trial Decision). Tartarus also advised the Directors of its intention to tender the bid if there were no better bids on the table. However, the Directors had other plans in mind.

Charon Entertainment Inc v Pandemonium Productions Corp et al (2012), at para 9, (Ont Ct J) Pluto J [Trial Decision].

(iii) The Rights Plan

21. On August 20, 2012, the Directors authorized the adoption of a shareholder rights plan (the “Rights Plan”) and formed a special committee of independent directors (the “Special Committee”). The Special Committee in turn retained counsel, and a financial advisor, Astoreth Capital Markets Inc. (“Astoreth”). On August 30, 2012, Astoreth provided the Special Committee a valuation of Pandemonium’s shares.

22. The Special Committee, in consultation with Astoreth, reviewed the possibility of alternative bidders and entered into discussions with them. It concluded that Pandemonium was unlikely to have any alternatives available.

23. Astoreth notified Pandemonium that it would not be productive to initiate an auction process, as there was likely no acceptable alternative bid forthcoming. On this basis, the Directors determined that Pandemonium could not leverage its offer and the proposed bid was guaranteed to be successful.

24. Despite the wishes of the majority of the shareholders and the lack of prospects of realizing greater shareholder value, the Directors concluded that it was best to block Charon’s bid. Referring to Charon’s Chair, Pandemonium’s Chief Executive Officer, Mr. Nick Devore, expressed this one-track vision as the goal of stopping “that she-devil at all costs!” (Trial Decision).

–  –  –

25. Pandemonium’s legal counsel advised the Directors that Charon would likely succeed in having the Rights Plan cease-traded by the Ontario Securities Commission (the “OSC”), as there was no reasonable prospect of an alternative offer.

(iv) The Convertible Notes

26. Astoreth advised the Special Committee that there was a way for them to significantly dilute the majority’s holdings. However, they also had to get creative to make it happen in time for it to have any effect on Charon’s bid.

27. In 2008, Pandemonium had issued, by private placement, convertible unsecured notes (“Convertible Notes”) amounting to $28 million and maturing on December 31, 2012.

Conveniently, many of these noteholders (the “Noteholders”) were already parties friendly to Pandemonium. These parties included relatives of Mr. Devore, existing shareholders, Pandemonium’s legal counsel, suppliers and customers and others with business relationships with Pandemonium.

28. Astoreth advised the Special Committee that the conversion of the Convertible Notes into common shares would be financially advantageous, as it could increase the total number of outstanding common shares by almost 30 million. Unfortunately, this option was not available until December 31, 2012.

29. Nevertheless, Astoreth and the Special Committee were relentless. Instead, the Special Committee approached the Noteholders with a proposal. Following discussions, the Noteholders agreed to convert their Convertible Notes into common shares.

30. Pandemonium agreed to add a “sweetener” to this agreement by providing one special

–  –  –

Warrants were exercisable immediately and entitled the holders to buy one common share of Pandemonium for $1.20 if exercised on or before December 31, 2012.

31. Pandemonium could not easily obtain the consent of the Noteholders to amend the indenture governing the Convertible Notes. Instead, it adopted a resolution to try to alter the fact that the Convertible Notes would remain outstanding and continue to accrue interest until December 31, 2012.

(v) The Surrender of the Convertible Notes

32. On September 6, 2012, the Noteholders surrendered 87% of the principal amount of the Convertible Notes and endorsed them for transfer with signed notices irrevocably electing to convert them into common shares. Unlike regular conversions, the Noteholders reserved the right to receive the final interest payment on December 31, 2012.

33. On the same day, the Directors passed a resolution purporting to issue, effective immediately, 25,882,500 common shares (the “Conversion Shares”) to the Noteholders who had surrendered their Convertible Notes. The Directors also purported to issue the Special Warrants to which they were entitled, and conditionally issue the common shares issuable on the exercise of the Special Warrants (the “Warrant Shares”).

34. The Directors’ resolution included a provision for later adjustment to the number of Conversion Shares issued, by either issuing additional Conversion Shares or cancelling some of those already issued. However, the adjustment could only occur after December 31, 2012, when Pandemonium cancelled the surrendered Convertible Notes.

35. With encouragement from Pandemonium, 92% of the Special Warrants were exercised by the Noteholders that agreed to do so with payment of the exercise price. Their Warrant

–  –  –

shareholdings of Charon, Tartarus and Belial to approximately 7.2%, 19.2% and 12.6%, respectively, of the outstanding common shares of Pandemonium.

(vi) The Shareholders’ Meeting

36. On September 28, 2012, Pandemonium held a special meeting of shareholders to approve the Rights Plan. Tartarus was not allowed to vote on the resolution as a “Grandfathered Person” owning more than 20% of Pandemonium’s shares, rendering it not an “Independent Shareholder” under the Rights Plan.

37. After announcing its intention to make a bid for Pandemonium, Charon also could not vote as an “Offeror”. At the meeting, Charon successfully challenged a significant number of the proxies solicited by Pandemonium.

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