Regulators asked to scrutinize voting for Tembec takeover

Share

A U.S. investment management firm is turning to securities regulators in Ontario and Quebec to address some of its concerns about Rayonier Advanced Materials' proposed takeover of Tembec Inc., saying there are disturbing questions about the role of Fairfax Financial Holdings Ltd. in the deal.

Oaktree Capital Management has filed complaints with both the Ontario Securities Commission and Quebec's Autorité des marchés financiers, said Ian Robertson of Kingsdale Advisors, which is acting on behalf of Oaktree. Fairfax is based in Toronto while Tembec's headquarters are in Montreal. Los Angeles-based Oaktree is Tembec's biggest shareholder with a nearly 20-per-cent stake.

The complaints come amid souring prospects for the $807-million (U.S.) transaction. Oaktree and Restructuring Capital Associates, another Tembec shareholder, have both confirmed they oppose the friendly agreement. They say the offer is too low, a view supported by proxy advisory firm Glass Lewis & Co., which is recommending Tembec investors vote against the deal.

Oaktree's appeal to regulators centres on the declaration, made by Tembec and Rayonier when they announced their friendly merger May 25, that Fairfax, a major Tembec shareholder, "is supportive of the transaction." Fairfax subsequently sold its position in Tembec in the days that followed. But because it was an investor as of the so-called record date – the cutoff used by companies to establish who their shareholders are – it might be entitled to vote the stake it held at that time despite the fact it has since cashed out.

Such a situation, known as empty voting, remains relatively rare in Canada but a few cases have come up that were contested in court. Oaktree says Tembec and Rayonier potentially misled investors into thinking Fairfax backed the merger for its long-term value. And it says Fairfax should not be allowed to vote on the proposal because it no longer has an economic interest in Tembec.

"[Fairfax] has voted with their feet" already, said a person familiar with the complaint who asked not to be named because he wasn't authorized to speak to the media. "If they really thought this was a blockbuster deal and it was going to be hugely valuable in the long term, they wouldn't have exited their position."

Fairfax did not respond to requests for comment Wednesday. The company confirmed in a news release on June 19 that it sold the last of its Tembec shares – representing a 14.2-per-cent stake in the forestry company – that day for an average price of about $4.30 (Canadian) a share. June 19 is the record date for Tembec's special shareholders meeting to vote on Rayonier's offer.

A Tembec spokesperson declined to comment on Fairfax's role. A spokesperson for Rayonier did not respond to questions by publication time.

Oaktree is also questioning the extent to which Fairfax was provided with advanced disclosure about the proposed takeover. It says the price Fairfax obtained for its shares, as much as $4.41, exceeds what Tembec's shareholders are receiving.

Jacksonville, Fla.-based Rayonier is offering $4.07 a share or the equivalent in Rayonier stock for total consideration of $320-million (U.S.). The deal also includes the assumption of $487-million in debt. The price represents a 37-per-cent premium to Tembec's closing price on May 24, the day before the deal was announced.

Oaktree and Restructuring together hold about 37 per cent of Tembec's shares. That's enough to scuttle the deal, which requires the support of two-thirds of shares to pass.

Rayonier has so far declined to raise its offer. The company says its bid represents a significant premium to Tembec's historical share price. It argues that Tembec shareholders will benefit from the fact Rayonier shares are far more liquid than Tembec stock. It says Tembec had the ability to launch talks with other potential suitors but none have materialized since the deal was unveiled.

In a statement Wednesday, Tembec again urged its shareholders to vote in favour of the agreement. The company said there were no other offers on the table and warned its stock price could fall if the deal fails.