HudBay must hold vote on Lundin takeover: OSC

HudBay Minerals Inc. must get shareholder approval in order to complete a controversial $814-million merger with Lundin Mining Corp., the Ontario Securities Commission said on Friday.

The OSC, which regulates the Toronto Stock Exchange, said the stock-based agreement between the two miners would add 157 million HudBay shares to its existing equity base, a move that would severely diminish the value of the holdings of existing investors.

"That level of dilution is extreme. It is at the very outer end of the range of dilutions in prior transactions before the TSX," the commission said in rendering its decision on the merger after two days of hearings in Toronto.

"We have concluded … that the quality of the marketplace… would be significantly undermined by permitting the transaction to proceed without the approval of the shareholders of HudBay," the three-person board said.

The OSC order sets aside a Toronto Stock Exchange provision that let companies skip a shareholder vote in certain circumstances, and will likely force HudBay to call such a meeting in the near future.

Three month stock chart of HudBay Minerals Inc.

For its part, the company is not saying much.

"HudBay is reviewing the OSC decision with its legal advisers," HudBay said in a statement.

Short, controversial history

The HudBay-Lundin saga began in November when HudBay, a zinc and copper mining company, agreed to trade 0.3919 of its shares for each Lundin share to acquire the struggling Toronto-based miner.

In its fiscal third quarter, Lundin took a $200-million after-tax financial writedown on the value of its mine holdings because of the faltering economy.

HudBay's bid — which would have the $1.9-billion firm taking over the $4.3 billion Lundin — would boost HudBay's existing base of 153 million outstanding shares by 50 per cent.

In addition, HudBay refused to put the arrangement to its existing shareholders, citing the TSX provision.

Three month stock chart for Lundin Mining Corp.

Some existing shareholders for both companies, including Lundin's biggest equity owner SRM Global Master Fund Ltd. Partnership, disliked the deal.

The powerful Ontario Teachers' Pension Fund went so far as to write the OSC in January challenging the TSX loophole.

Formal application

Jaguar Financial Corp., which owned five per cent of HudBay, finally made a formal application to Ontario's securities regulator to examine the transaction.

As an additional twist, Jaguar, an activist investment company that buys positions in firms and then tries to force out existing management, tried to force out HudBay's directors in November.

Experts noted that HudBay's dilutive strategy could act as a takeover defence because, in this case, the transaction would dilute Jaguar's holdings and lessen the investment company's appeal to other shareholders to change management.

Shares in the two companies went in different directions after Friday's ruling was announced.

HudBay's stock rose 24 per cent in the morning session, up 85 cents, to $4.37.

Shares in Lundin were off about 20 per cent, or 24 cents, to 95 cents in early trading.