It’s happening…maybe. November 3, 2022
VIA EMAIL
Ontario Securities Commission
20 Queen Street West, 20th Floor
Toronto ON, M5H 3S8
Attn: Jeff Kehoe, Director of Enforcement
Jason Koskela, Director, Office of Mergers and Acquisitions
Autorit des Marchs Financiers
800 Rue du Square-Victoria, 22e tage
Montral, QC H4Z 1A1
Attn: Jean-Franois Fortin, Executive Director, Enforcement
Dear Mr. Kehoe, Mr. Koskela and Mr. Fortin,
Re: Rio Tinto PLC and Turquoise Hill Resources Ltd.
We are litigation counsel for Caravel Capital Investments Inc (“Caravel”). We write to advise the Ontario Securities Commission (the “Commission”) of recent events concerning Rio Tinto PLC’s (“Rio Tinto”) attempt to acquire all of the shares of Turquoise Hill Resources Ltd. (“Turquoise Hill”) that is abusive and contrary to the public interest and in breach of sections 2.24 and 4.2(1) of NI 62- 104.
On September 1, 2022, Rio Tinto and Turquoise Hill announced that they had entered into an agreement for Rio Tinto to acquire the approximately 49% of Turquoise Hill it did not already own for a price of $43/share. The transaction has to be approved by 50.1% of the votes cast by the minority shareholders.
Caravel is the holder of 275,000 common shares of Turquoise Hill as of the record date, being September 19, 2022. Caravel determined that the price per share being offered by Rio Tinto significantly undervalued Turquoise Hill. On that basis, Caravel decided to vote against the proposed transaction.
Groia & Company Professional Corporation Lawyers Wildeboer Dellelce Place
365 Bay Street, 11th Floor Toronto, Ontario M5H 2V1
Tel: 416-203-2115 Fax: 416-203-9231 www.groiaco.com
Joseph Groia Direct Line: 416-203-4472 Email: jgroia@groiaco.com
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Rio Tinto announced on November 1, 2022 that it had reached an agreement with certain Turquoise Hill shareholders, Pentwater Capital Management LP and SailingStone Capital Partners LLC (the “Favoured Shareholders”) (the “Favoured Shareholders Agreement”). In exchange for the Favoured Shareholders agreeing to abstain from voting on the transaction, Rio Tinto agreed to pay the Favoured Shareholders 80% of the purchase price ($34.40) within two business days of the transaction closing plus a minimum of 20% of the purchase price ($8.60) plus interest upon the final determination of dissent procedures. The Favoured Shareholders are being awarded a call option on their Turquoise Hill shares with the upside potential being an award from an arbitrator in the millions of dollars. The Favoured Shareholders Agreement also allows the Favoured Shareholders to preserve their rights to pursue their claims of oppression and settle those claims confidentially. None of the other shareholders will retain that right once the proposed transaction is approved, allowing the Favoured Shareholders to benefit from further consideration related to the proposed transaction. A copy of the Favoured Shareholders Agreement is attached to this letter as Appendix “A”. Copies of the Favoured Shareholders’ opposition documents detailing their oppression claims are attached to this letter as Appendix “B”.
Caravel has requested that it and all other dissenting shareholders be offered the same arrangement. Rio Tinto has denied its request.
It is clear that the Favoured Shareholders, like Caravel and other dissenting shareholders, believe the price being offered by Rio Tinto does not capture the value of Turquoise Hill. The proxy advisory firm Institutional Shareholder Services also recommended Turquoise Hill shareholders vote against the deal, as Turquoise Hill is poised to trade dramatically higher in the long term due to its Oyu Tolgoi mine. A copy of Institutional Shareholder Services’ recommendation is attached to this letter as Appendix “C”. In the absence of any special arrangements, the transaction would not be approved. As a result, Rio Tinto is in a position to effect its transaction of Turquoise Hill by paying off the Favoured Shareholders to the detriment of the remaining Turquoise Hill shareholders.
The proposed transaction is not in the public interest. The Commission has the jurisdiction pursuant to section 127 of the Securities Act, R.S.O. 1990, c. S.5 to issue a cease trade order of Turquoise Hill’s shares. The AMF has the same jurisdiction pursuant to section 265 of the Securities Act, R.S.Q. c V- 1.1 and section 93 of the Act respecting the Autorit des marchs financiers, R.S.Q. c. A-33.2. As it did in Canadian Tire Corp, Re, 10 O.S.C.B. 857, aff’d 10 O.S.C.B. 1771, this situation calls for regulatory intervention to prevent an abusive transaction that will have a deleterious effect on a class of investors in particular, and on the capital markets in general. At minimum, the proposed transaction is “manifestly unfair”, “clearly prejudicial” and “clearly unfair” to every shareholder except the Favoured Shareholders, which is sufficient to ground the Commission’s public interest jurisdiction (see Selkirk Communications Ltd. (1988), 11 O.S.C.B. 285 and H.E.R.O. Industries Ltd. (1990), 13 O.S.C.B. 3775).
The agreement with the Favoured Shareholders is a collateral benefit and a breach of section 2.24 of NI 62-104, which prohibits an agreement, commitment or understanding with any holder or beneficial owner of securities that has the effect of providing to such person a consideration of greater value than that offered to the other holders of target securities. An exemption from this prohibition is only available where it would not be prejudicial to the public interest and the agreement, commitment or understanding with a selling securityholder is made for reasons other than to increase the value of
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consideration paid in a take-over bid. Like in CDC Life Sciences Inc. (1988), 11 O.S.C.B. 2541, a cease trade order of the take-over bid should be granted on the basis that the Favoured Shareholders will receive a consideration different from that offered by the offeror generally.
The agreement with the Favoured Shareholders also violates the private agreement exemption under section 4.2(1) of NI 62-104, which is restricted to circumstances where the value of the consideration paid for any securities, including brokerage fees or commissions, does not exceed 115% of the market price of the securities at the date of the bid as determined in accordance with the regulations. The deal between Rio Tinto and the Favoured Shareholders is structured to give the latter upside potential that is only limited by the finding of an arbitrator. It is possible, if not likely, that the arbitrator will award the Favoured Shareholders a premium of greater than 15%.
Given the serious concerns identified above, our client requests the Commission act swiftly to prohibit Rio Tinto from continuing with this transaction, and intervening, if necessary, in the arrangement proceeding in Court in the Yukon. We have been contacted by several other minority shareholders, including individual shareholders Lee Crocket, Michael Leavitt and Sheryl Louise Watson who are supportive of our client’s request to have the Commission and AMF act on this issue.
We are available at your convenience to discuss this matter further. Yours faithfully,
Joseph Groia
cc: Money Khoromi money@founders.law Founders Law LLP
545 King Street West Toronto, Ontario M5V 1M1
Lee Crocket lpc100000@gmail.com