Where are minority shareholders’ rights in this deal?

Did you ever hear of a company consolidating its shares by five million to one? Even Nortel did only a 10-to-one consolidation.

Ian Wollach bought 8,000 shares of Polyair Inter Pack Inc., a Toronto packaging firm, at $2 a share last year. Today, they’re worth 5 cents a share. His $16,000 investment has shrunk to $400.

Polyair consolidated its shares in order to to go private. Wollach thought the Ontario Securities Commission might protect minority shareholders in such a deal, which he considers a sham engineered to bypass requirements for a share valuation.

Annoyingly, Wollach didn’t get a response from the OSC until this week (the deal closed in mid-July). And he found the response next to useless.

I’m posting the letters below. Now I want to hear what you think.

Author: Ellen Roseman

Consumer advocate and personal finance author and instructor.

5 thoughts on “Where are minority shareholders’ rights in this deal?”

  1. I am a regular reader of your Toronto Star articles and for this reason am sending you my tale of woe.

    I purchased 8,000 shares of Polyair Inter Pack Inc. in 2008 at a cost of $2 per share. The shares were subsequently diluted and thereafter have traded infrequently.

    The company is being taken private by the majority shareholder by way of a share consolidation. Not by way of a purchase, but by way of a sham share consolidation of 5 million to 1, with no fractional interests.

    Share consolidations are typically 5 to 1 or 10 to 1. I’ve never heard of a share consolidation of 5 million to one.

    Typically, share consolidations are used in situations where all shareholders get treated equally. It’s not the case in this instance, where an Ontario corporation is being taken private by a US based controlling shareholder.

    In substance, this is not a share consolidation but a forced sale situation. By calling it a share consolidation, small shareholders such as myself lose the benefit of a formal share valuation.

    Objecting to the transaction has been made difficult by the fact that my shares are held in street form by TD Waterhouse. Only registered owners of shares had the right to object, and as a discount broker, TD declined to act on my behalf.

    The share consolidation of 5 million to 1 is simply a sham to avoid OSC regulatory requirements and exercise a bargain purchase option.

    Pursuant to the “share consolidation”, I will be forced to sell my shares at the bargain price of 5c per share (yes, my $16,000 will be worth $400).

    So on July 14, I wrote to David Wilson, the OSC Chair asking what, if anything, would the OSC do to protect smaller shareholders such as myself, and why should I not be entitled to a fair price for my shares?

    I received an acknowledgement on July 20th from the OSC, telling me that the matter has been referred to a “senior” complaints officer. Thereafter I have heard nothing, notwithstanding the fact that the transaction is scheduled to close this week.

    Polyair and its professional advisors are likely not losing any sleep, knowing that a senior OSC complaints officer is on the case.

    In principle, I am not opposed to the transaction. I am opposed to shareholder opression. All that I want is the right to know is that I am being paid a fair price for my shares.

  2. Dear Mr. Wollach:

    Thank you for your complaint sent to staff of the Ontario Securities Commission (OSC) concerning the Polyair Inter Pack Inc. (Polyair) consolidation of shares. I have been asked to review your concerns and to co-ordinate a response on behalf of the OSC.

    It appears from my review of your correspondence that you have three concerns regarding the consolidation. I have provided some background information for you regarding the consolidation and have also explained the regulatory role in each of your concerns.

    The OSC is responsible for administering and enforcing Ontario securities law. Our reviews of complaints are undertaken from a regulatory perspective, to consider whether the issuer may have failed to comply with securities regulations that apply to it.

    We have reviewed your complaint to determine whether Polyair has complied with securities regulatory requirements that we administer.

    Background Information

    On June 12, 2009, notice that an annual and special meeting of common shareholders was to be held on July 13, 2009, was given to shareholders, along with a Management Proxy Circular (MPC).

    Among other items, shareholders were asked to approve a resolution for a 1 for 5,000,000 share consolidation. If approved, the shareholders would receive $0.05 per share (pre-consolidation), and an application would be submitted to securities regulators to cease being a reporting issuer.

    The disclosure also indicated that Glencoe Skydome Holdings (GSH) owned 98.02% of the common shares, that it intended to vote for the consolidation, and as a result of the consolidation, GSH would be the only remaining shareholder.

    1. Share Consolidation

    You have expressed your concern that the company was taken private by a sham share consolidation rather than a purchase.

    Polyair was incorporated under the laws of the Province of Ontario and is therefore subject to the provisions of the Business Corporations Act (Ontario) (OBCA). The transaction was carried out pursuant to s. 168 of the OBCA, which permits the company to change the shares into a different number of shares of the same class.

    The consolidation, which was approved by a majority of shareholders, was therefore permitted under the applicable corporate law.

    I appreciate that the vote was a foregone conclusion since the majority shareholder, which owned in excess of 98% of the outstanding shares, confirmed its intent to support the resolution. Minority shareholders are subject to the risk that the interests of controlling shareholders may outweigh those of the minority in a vote.

    Both corporate law, such as the OBCA, and Ontario securities law contain provisions for protecting the interests of minority shareholders in specific circumstances, when warranted, to ensure fairness is maintained and the interests of the minority are not unduly oppressed.

    The right to dissent that is granted to shareholders in corporate law is one of these provisions. This, and the additional requirements of Ontario securities law that protect shareholders, are discussed separately below.

    2. Right to Dissent

    You have also expressed concern about forfeiture of your right to dissent. It appears from our review of the disclosure in the MPC, shareholders had a right to dissent as provided under s. 185 of the OBCA, and were informed of it. On page three of the MPC, there is disclosure, in bold typeface, that shareholders must comply with the requirements set out in s. 185, to exercise the right of dissent.

    A similar warning in bold typeface is also provided on page 12. On page 26, there is also the following disclosure in bold typeface:

    “It is recommended that a Shareholder wishing to exercise a right of dissent seek legal advice, as failure to comply strictly with the requirements set forth in Section 185 of the OBCA may result in the loss or unavailability of any right to dissent.”

    Attached to the MPC is “Appendix B – Summary of Procedure to Exercise Dissent Right”. The Appendix provides a summary of the dissenting shareholder provisions and again suggests that shareholders wishing to exercise a right to dissent seek legal advice.

    3. Protection of Minority Security Holders – Formal Share Valuation Requirement

    Securities regulation in Ontario requires additional disclosure by shareholders owning more than 10% of voting shares about their ownership and trades in securities. By reviewing this, and other publicly available disclosure, shareholders have a way to inform themselves about majority shareholders and insiders, and the business of a company.

    Securities regulation also has additional safeguards for minority shareholders in circumstances where (1) a significant transaction is proposed with related parties, (2) the transaction involves an offer to acquire securities of the issuer by insiders or the issuer itself, or (3) the transaction may result in the interest of a security holder being terminated without the security holder’s consent.

    These additional safeguards take the form of specific requirements for a formal valuation and minority shareholder voting. These provisions are contained in Multilateral Instrument 61-101 – Protection of Minority Security Shareholders in Special Transactions (MI 61-101).

    Although a formal share evaluation is required by MI 61-101 for certain business transactions, exemptions from the requirement also apply.

    There is an exemption available for reporting issuers whose shares are not listed on specified markets. Since the shares of Polyair are not listed on any of these specified markets, it relied on that exemption for the valuation requirement.

    We also note that the board of directors formed an Independent Committee to consider and make a recommendation on the consolidation.

    Both committee members were independent from the “interested parties” as defined under MI 61-101. The Independent Committee retained legal counsel and other professional advisors at the expense of the corporation.

    After considering the alternatives available to the corporation, it voted unanimously to recommend to the Board that it put the consolidation resolution to a vote of shareholders at a meeting.


    From our review of the information that you have provided and disclosure of the company, we did not identify any failure of Polyair to comply with securities regulatory requirements that would apply to the consolidation and going private transaction.

    The share consolidation transaction and granting of dissent rights are requirements of corporate law.

    While we are pleased to be able to provide the information above for you, securities regulators such as the OSC are not responsible for enforcing compliance with corporate law. Specific remedies may be available to shareholders for breaches of corporate law, and these are generally enforced by the affected parties.

    Please also note that OSC staff may not provide legal opinions or advice, and if you wish to pursue your concerns, we suggest you consult with your own legal counsel with corporate and Ontario securities law expertise, for advice about options that may be available in legal proceedings.


  3. To David S. Wilson, Chair, OSC:

    Dear Mr Wilson,

    This is an extremely poor response, which is best described as pathetic.

    The Commission never responded to the main issue. How can the purchase of a minority interest be a share consolidation?

    Additionally, there is no precedent for a share consolidation of 5 million to 1.

    You must be joking when you write “securities regulators such as the OSC are not responsible for enforcing compliance with corporate law”.

    What then exactly do you do?

    Remember that I am a small shareholder with shares worth $400. The suggestion that I consult with my “own legal counsel with corporate and Ontario securities law expertise, for advice about options that may be available in legal proceedings”, indicates a complete lack of understanding as to the cost hereof.

    Yours truly,

    Ian Wollach

  4. The ability of the OSC to find excuses so that they do not actually do anything to protect minority shareholders never ceases to amaze me.

    Their ability to ignore obvious evasion of minority protection requirements is stunning.

    They say that there is an exemption from valuation and minority approval requirements because the company is not listed. But it was listed until they decided to oppress the minority shareholders. They then delisted the company and — voila — no protection.

    They also say that they have no role in enforcing corporate law and that is generally true, except for Ontario companies and this is an Ontario company.

    The Commission can bring an oppression action on behalf of minority shareholders. Chances of them doing that, of course, are zero.

    This is a good road map for unethical controlling shareholders.

  5. OSC is indeed a joke. One only has to look at their track record for going after companies for acting contrary to ‘less than honest and accurate’ responsibilities.

    Bre-X is the best example of OSC’s ineptitude and incompetence, with the government’s 10 year fight with Garth Drabinsky the most recent example. In the US, they’d be fined millions, and have their asses hauled to the joint.

    Ellen, one of your colleagues wrote an article on the very subject:


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