Quebec v. Committee for the Equal Treatment of Asbestos Minority Shareholders

Quebec v. Committee for the Equal Treatment of Asbestos Minority Shareholders Collection Decisions of the Court of Appeal Date 1999-02-18 Docket numbers C28164, C28173, C28178 Judges Doherty, David H.; Laskin, John Ivan; Rosenberg, Marc Subject Civil Decision Content DATE: 19990218 DOCKET:C28164 C28173 C28178 COURT OF APPEAL FOR ONTARIO DOHERTY, LASKIN AND ROSENBERG JJ.A. BETWEEN: ) ) SA MAJESTÉ DU CHEF DU QUÉBEC, ) Sheila R. Block and ONTARIO SECURITIES COMMISSION, ) James C. Tory AND SOCIÉTÉ NATIONALE ) for the appellant DE L’AMIANTE ) Sa Majesté du ) Chef du Québec Appellants ) ) Glenn F. Leslie and and ) Matthew J. Halpin ) for the appellant COMMITTEE FOR THE EQUAL ) Société Nationale TREATMENT OF ASBESTOS ) de l’Amiante MINORITY SHAREHOLDERS ) ) Joseph Groia and Respondent ) Janice Wright ) for the appellant Ontario ) Securities Commission ) ) James D.G. Douglas ) and Freya Kristjanson ) for the respondent CETAMS ) ) Heard: March 30 and 31, 1998 LASKIN J.A.: [1] The focus of this appeal is s. 127(1)3 of the Securities Act,1 which gives the Ontario Securities Commission (“OSC” or “Commission”) discretion to make an order in the public interest removing the exemptions that enable a person to participate in the Ontario capital markets. [2] In the 1980s the Québec Government acquired control of Asbestos Corporation Ltd. (“ACL”), a leading asbestos producer in the province, by purchasing the interest of its majority shareholder, a Canadian company, from its American parent. After acquiring control, Québec refused to make an offer to purchase the shares of the minority shareholders in ACL, many of whom were resident in Ontario. In 1988, a group of minority shareholders, represented by the Committee for the Equal Treatment of Asbestos Minority Shareholders (“CETAMS”), applied to the OSC for a determination whether Québec’s acquisition of control of ACL amounted to a take-over bid requiring a follow-up offer to the minority shareholders or whether the OSC should make an order under s. 127(1)3 removing Québec’s exemptions. [3] Québec’s challenge to the jurisdiction of the OSC to hold a hearing was dismissed by this court in 1992. The hearing resumed in 1994 and on July 19, 1994, a three-member panel of the Commission (Geller, Kitts and Carscallen) dismissed CETAMS’ application. The panel held that Québec’s acquisition of control of ACL did not amount to a take-over bid, and that although Québec had treated the minority shareholders unfairly, an order removing Québec’s exemptions under s. 127(1)3 of the Act was not warranted. [4] On an appeal by CETAMS, the Divisional Court, by an order dated May 2, 1997, overturned the decision of the Commission. The Divisional Court held that the Commission erred by failing to exercise its public interest jurisdiction. It directed the Commission to order Québec to make a follow-up offer to the minority shareholders of ACL, failing which Québec’s exemptions were to be withdrawn. [5] Sa Majesté du Chef du Québec (“Québec” or the “Québec Government”), Société Nationale de l’Amiante (“SNA”), the Crown corporation used to acquire control of ACL, and the OSC all appeal to this court. They submit that the Divisional Court applied the wrong standard of review, mischaracterized the panel’s reasons and made an order that misconceived the purpose of s. 127(1)3. The gist of their appeal turns on whether the OSC erred in refusing to make an order under s. 127(1)3, because Québec’s acquisition of control of ACL did not have a “transactional connection” with Ontario and because Québec did not intend to avoid Ontario law. For the reasons that follow, I would set aside the decision of the Divisional Court and restore the decision of the OSC. A. Background 1. The Facts [6] In the fall of 1977, the newly elected Parti Québecois Government in the Province of Québec decided to nationalize the Québec asbestos industry. At the time, Québec was the world’s largest asbestos producer, accounting for about 29% of the world’s asbestos production. Québec, however, had virtually no secondary asbestos industry. Ninety-five percent of the raw asbestos produced in the province was shipped elsewhere for manufacture. The Québec Government wanted to create an asbestos manufacturing industry to complement the province’s asbestos mining industry, in the words of Premier Levesque: “to give back a certain control over this natural resource, which is at the same time so much and so little our own.” [7] To accomplish its objective, the Government decided to take control of ACL, which at the time was the province’s second largest asbestos producer. ACL was a federally incorporated company whose shares traded on the Toronto and Montreal stock exchanges. ACL was controlled by General Dynamics Corporation (“GD US”), a Delaware Corporation with its head office in St. Louis, Missouri. GD US owned all the shares of General Dynamics Corporation (Canada) Limited (“GD Canada”), which in turn owned 54.6% of the common shares of ACL. Approximately 30% of the common shares of ACL were held by minority shareholders resident in Ontario. [8] On October 30, 1977, Premier Levesque announced his Government’s intention to take control of ACL. He was quoted in the press as saying “… other shareholders would be uncomfortable if they were minority shareholders while the Government held control. The Government must take positions and achieve objectives that are not always those of ordinary shareholders.” At the same time, Québec’s Finance Minister, Jacques Parizeau, undertook on behalf of the Government to offer to purchase the shares of ACL held by the public. Mr. Parizeau was quoted as saying: “we will in any case make a bid for all public shares;” and “a public offer for Asbestos Corp. shares would be at an equivalent price to that paid for the General Dynamics block.” [9] The Québec Government decided to use a Crown corporation to take control of ACL. In May 1978, SNA was incorporated by an act of the National Assembly. All of SNA’s shares were allotted to Québec’s Minister of Finance, and SNA was given the power to acquire any company in the business of extracting or manufacturing asbestos. In June 1979, SNA’s incorporating statute was amended to permit the Québec Government to expropriate the assets of ACL. However, Québec indicated its preference to acquire control of ACL by agreement with GD US. It would expropriate only if negotiations failed. [10] Québec then began to negotiate with GD US. On September 21, 1979, SNA offered to purchase all of GD Canada’s shares in ACL at a price of $42 per share. In its offer SNA stated that once it acquired the shares of ACL held by GD Canada it would offer to purchase the remaining shares of ACL at the same price. GD US, however, rejected SNA’s offer, claiming that ACL shares were worth $99 per share. [11] Negotiations then stopped because ACL challenged the constitutionality of the legislation permitting its assets to be expropriated by SNA. In the spring of 1981, the Québec Court of Appeal rejected the constitutional challenge and the Supreme Court of Canada denied leave to appeal. Québec then imposed a November 30, 1981 deadline for a negotiated agreement with GD US, failing which it would expropriate. Negotiations resumed. [12] On November 9, 1981, the Québec Government and GD US reached an agreement under which SNA would acquire voting control of GD Canada and, therefore, indirect control of ACL. The 1981 agreement provided that GD Canada would be recaptialized to convert its equity into two classes of shares, one voting and one non-voting; SNA would acquire 51% of the voting shares, but only 17.5% of the equity; GD US would retain 49% of the voting shares and 82%.5 of the equity; SNA and GD US would enter into a shareholders’ agreement providing that for the next five years SNA could acquire the remaining shares of GD Canada held by GD US by means of “put” and “call” options; GD US’s put option gave it the right to require SNA to purchase and SNA’s call option gave it the right to require GD US to sell the remaining shares of GD Canada held by GD US at a price of $42 per ACL share, the price that the Québec Government had insisted on all along. This 1981 transaction was mainly driven by tax considerations. The put and call arrangements were intended to permit GD US to accumulate tax credits, which it would then offset against the capital gains on the sale of its shares, thus minimizing the taxes it paid. [13] This 1981 transaction materially differed from the offer made by SNA in 1979 and rejected by GD US. Under the transaction contemplated in 1979, SNA would have acquired ACL shares from GD Canada. SNA would then have made a follow-up offer to the minority shareholders of ACL to purchase their shares at the same price. [14] In the 1981 transaction, SNA did not purchase ACL shares. Instead it purchased GD Canada shares from GD US. In other words, the 1981 transaction was an agreement between SNA, a Québec Crown corporation, and GD US, a Missouri-based Delaware corporation, for the acquisition of the shares of GD Canada, a private Canadian company that was not a reporting issuer in Ontario or anywhere else. Importantly, the 1981 transaction was not accompanied by an undertaking to the minority shareholders of ACL to purchase their shares. [15] Indeed, on November 11, 1981, two days after the agreement was reached, Québec announced that it did not intend to make an offer to the minority shareholders of ACL. On November 13, 1981, the shares of ACL fell to a four-year low in response to a statement by Mr. Parizeau that the province had no intention of buying any ACL shares other than those controlled by GD US. He said, instead, “it is up to GD Canada to evaluate over the years the advantage of eventually increasing its share in Asbestos Corp.” Six days later on November 19, 1981, Mr. Parizeau was again quoted as saying: “but at the present time, I am not buying the shares of General Dynamics … but if I force them out … then obviously I should do something with the minority shareholders.” The OSC described these statements as “to say the least, disingenuous.” Nonetheless, the market did not interpret Mr. Parizeau’s statements as a promise by the Québec Government to make a follow-up offer to the minority shareholders. The evidence shows that the price of ACL shares did not increase to levels consistent with such a promise. [16] On February 12, 1982, the agreement between Québec, SNA and GD US was formalized. GD Canada’s name was changed to Mines SNA Inc. and its registered office was moved from Ottawa to the Province of Québec. In November 1986, GD US exercised its put option; and on December 9, 1986, SNA purchased the remaining common shares of GD Canada held by GD US. The total cost to the Québec Government of acquiring control of ACL was approximately $171,000,000. 2. The 1988 Proceedings [17] In April 1988, the OSC issued a notice of hearing to determine two questions: first, whether the transaction by which SNA acquired GD US’s shares in GD Canada amounted to a take-over bid in Ontario, requiring SNA to make a follow-up offer to the minority shareholders of ACL; and second, whether the OSC should exercise its public interest jurisdiction under s. 124(1)[now s. 127(1)3] of the Securities Act and take away Québec’s trading exemptions in the Ontario capital markets. [18] Québec immediately challenged the jurisdiction of the OSC to inquire into the transaction. In a decision dated August 15, 1988, the OSC held that it had jurisdiction to decide the issues raised in the notice of hearing. A combined appeal and judicial review application brought by Québec was dismissed by the Divisional Court. A further appeal was dismissed by this court on October 26, 1992.2 In this court, Québec argued two main points: first, the principle of provincial extra-territorial incompetence precluded the application of Ontario law to this transaction; and second, and of significance to the present appeal, the OSC could only exercise its public interest jurisdiction if the transaction had a sufficient Ontario connection. [19] McKinlay J.A., writing for the court, rejected both arguments. On the first point, she held that the provisions of the Securities Act raised in the notice of hearing were within the province’s legislative competence and that it was neither fair nor reasonable to suggest only Ontario residents are subject to Ontario regulatory rules when operating in Ontario capital markets. She wrote at p. 595: … I am of the view that territorial jurisdiction of the OSC under s. 124 does not depend solely upon the province or country in which relevant transactions may have taken place, but rather upon whether or not persons availing themselves of the benefits of trading in the Ontario capital markets act in a manner consistent with the provisions of the Act. [20] On the second point, McKinlay J.A. held the Commission’s public interest jurisdiction was not “subject to an implicit precondition” that the conduct in question “must have a sufficient Ontario connection.”3 She wrote at pp. 592-93: I have difficulty understanding the argument of the appellant that s. 124(1) must be interpreted as being subject to an implicit precondition that the conduct relied upon by the OSC as the basis for the exercise of its discretion must have a “sufficient Ontario connection”. The Ontario connection required by the section is “the public interest”. I construe “the public interest” in that provision as being not only the interest of residents of Ontario, but the interest of all persons making use of Ontario capital markets. The discretion being contemplated by the OSC is a discretion to withdraw special privileges given, in this case, to the government of another province. I see nothing in the Act, nor do I see any constitutional or policy reason why any limited interpretation should be placed on the clear wording of the section. [21] Following this court’s decision, the OSC resumed its hearing into whether the transaction amounted to a take-over bid or whether it should exercise its public interest jurisdiction and remove Québec’s trading exemptions. 3. The 1994 Proceedings Before the OSC4 [22] The panel first considered whether the transaction amounted to a take-over bid under the Ontario statute. If it did, SNA would be required to make a follow-up offer to the minority shareholders of ACL. The panel looked at the issue from two perspectives: was it a take-over bid as defined in the Act, or was it a deemed take-over bid under the Act’s anti-avoidance provisions because it was artificially structured to avoid the take-over bid rules. The panel held that it was neither. Because it found that SNA’s acquisition of control of ACL did not amount to a take-over bid triggering the requirement of a follow-up offer to the minority shareholders, the panel concluded that the OSC did not have to seek a compliance order from the court. The panel’s finding that the transaction did not amount to a take- over bid was not appealed and, therefore, is not before this court. [23] The panel then considered whether it should exercise its public interest jurisdiction. The respondent CETAMS argued that Québec and SNA had committed two abuses warranting the Commission’s intervention: they had failed to provide equal treatment to the minority shareholders of ACL contrary to the spirit of the take-over bid rules; and, their public statements misled the minority shareholders of ACL into believing that a follow-up offer would be made. [24] On the first argument, the panel was of the view that “both the Québec Government and GD US had a moral obligation to concern themselves with the interests of the minority shareholders of Asbestos, and about the propriety of GD US walking away with a sizeable payment while the minority shareholders were left behind.”5 The panel, nonetheless, concluded that although the transaction failed to comply with the spirit of the take-over bid rules and was unfair to the minority shareholders, it would not intervene because the transaction did not have a sufficient Ontario connection or nexus. In the panel’s words at p.281: In our view, the actions of the Québec Government and SNA failed to comply with the spirit underlying the take-over bid rules of the Act, were abusive of the minority shareholders of Asbestos and were manifestly unfair to them. However, in order for us to find that such actions were also abusive of the integrity of the Ontario capital markets and warranted a clause 127(1)3 response on our part, a sufficient Ontario connection or “nexus” must be present. [25] The panel then discussed why SNA’s acquisition of control of ACL did not have a sufficient Ontario nexus and why it was not an Ontario transaction structured to appear to be a non-Ontario transaction. There was not, in our view, a transactional connection of the transaction with Ontario. Asbestos was not an Ontario corporation and its registered office was in Quebec. Its Canadian operations were in Quebec, not in Ontario. The transactions resulting in a change in its control took place outside Ontario between non-Ontario parties. In the circumstances of this case, the facts that Asbestos was a reporting issuer in Ontario, with its common shares listed on the Toronto Stock Exchange, that a substantial number of its common shares were held by Ontario residents, and that that exchange was the principal exchange on which those shares traded, are not, in our view, sufficient to establish the transactional connection required. We were not presented with any evidence that the transaction which finally occurred was structured so as to make an Ontario transaction appear to be a non- Ontario one. This is not the case, like Canadian Tire, of “transactions that are clearly designed to avoid the animating principles behind” Ontario’s take-over bid legislation and rules. The evidence was clear that the principal (and so far as the evidence went, the sole) purpose for structuring the transaction in its final form was the minimisation of taxes on the profit received by GD Canada and GD U.S. In our view, the structuring of the transaction was not abusive of the integrity of the capital markets of this province, and cannot be relied on to provide the required nexus. Accordingly, we find that a sufficient Ontario nexus for the exercise of our clause 127(1)3 jurisdiction in connection with the acquisition by SNA of control of Asbestos has not been established. [26] On the respondent’s second argument, the panel viewed the statements made by Québec cabinet ministers about Québec’s intention to make a follow-up offer once GD US had turned down $42 per share in 1979 to be “equivocal”. Although in the panel’s view the Québec Government should have been more forthright, its failure to be so was not abusive enough for the Commission to invoke its public interest jurisdiction. Moreover, on the evidence before it, the panel concluded it was not reasonable for investors to rely on these statements as representations that a follow-up offer would be made. [27] The panel members therefore concluded that although they had “every sympathy for the unfortunate minority shareholders of Asbestos who … we find to have been unfairly and badly dealt with by the Québec Government”, these shareholders were “dealt with in circumstances in which we find that they are unable to look to the Act for a remedy.”6 4. The Appeal to the Divisional Court [28] On appeal, the Divisional Court (O’Driscoll, Steele and Crane JJ.) reversed the decision of the Commission. Crane J., who wrote for the court, concluded that the OSC had made two jurisdictional errors: first, the “OSC erred in erecting a jurisdictional barrier in the form of a transactional nexus pre- condition”; and second, “the OSC has erred by holding that a finding of fact of a conscious attempt to avoid what would otherwise be a take-over bid in Ontario with that as the motivating and underlying reason for such avoidance manoeuvre is a necessary prerequisite to the exercise of its s. 127(1)3 jurisdiction.” Moreover, on what he found to be the first jurisdictional error, Crane J. held that the OSC had also erred in concluding a sufficient Ontario nexus had not been established. On what he found to be the second jurisdictional error, Crane held that Québec’s motive was irrelevant: “the task of the OSC is to consider the effects of a transaction and regulate conduct; it is not the task of the OSC to evaluate proper or improper motives of the participants.” [29] Having made these findings, the Divisional Court directed the OSC to order the Québec Government to make a follow-up offer to the minority shareholders of ACL within 90 days. If it failed to do so, the OSC was directed to deny the Québec Government all of the exemptions that allowed it to participate in Ontario’s capital markets. The Divisional Court also directed the OSC to order the Québec Government to pay the respondent CETAMS’ costs of the 1994 proceedings before the OSC. It is from the Divisional Court’s order that Québec, SNA and the OSC appeal. B. Did the OSC Commit a Reviewable Error in Refusing to Exercise its Public Interest Jurisdiction Under s. 127(1)3 of the Securities Act ? 1. The Standard of Review [30] The applicable standard of review of the decision of an administrative tribunal – whether the decision is entitled to deference from a reviewing court and if so, the extent of that deference – mainly depends on determining the legislature’s intent in conferring jurisdiction on the tribunal. To make this determination, the courts have looked at a broad range of considerations: for example, whether the tribunal is protected by a privative clause, whether a right of appeal lies from the tribunal’s decision, the nature of the tribunal’s role and functions, whether the question goes to the tribunal’s jurisdiction, or whether the question in issue falls within the tribunal’s expertise. [31] Where an administrative tribunal is not protected by a privative clause and its home statute gives the parties a broad right of appeal, at first blush one might expect the tribunal’s decisions to receive little or no deference from the courts. But recent decisions of the Supreme Court of Canada have emphasized that deference is still called for if the question in issue comes within the tribunal’s expertise. In both Pezim v. British Columbia (Superintendent of Brokers)7 and Re Southam8, Iacobucci J. elaborated on the extent of the deference owed to decisions of specialized tribunals on issues falling within their expertise even if the decisions are not protected by a privative clause and are subject to a broad statutory right of appeal. For these tribunals deciding these kinds of issues, the standard of review is reasonableness. Unless the decision under review is unreasonable, the reviewing court should not interfere with it. [32] Pezim and Southam apply directly to this case. The decisions of the OSC are not protected by a privative clause and instead, under s.9(5) of the Act, are subject to a broad right of appeal. But the OSC is a specialized body with broad expertise in regulating the capital markets and in protecting the investing public from abuse. This expertise is reflect in two ways: first in the wide powers given to the OSC under the Act; and second in the OSC’s own well-developed, carefully crafted body of jurisprudence, which is readily accessible to those who must conform to the regulatory regime that the OSC supervises. Moreover, the issue before the OSC in this case, whether it should exercise its public interest jurisdiction under s. 127(1)3 of the Act to withdraw Québec’s trading exemptions, and if so, on what terms, is an issue that falls squarely within the Commission’s specialized expertise, and indeed is a core part of its statutory mandate. The OSC’s decision on this issue is therefore entitled to deference on appeal. [33] Also, in deciding whether to exercise its public interest jurisdiction, the OSC is required to exercise a broad discretion: the Commission may make an order if, in its opinion, it is in the public interest to do so. Discretion implies the power to choose between alternative courses of action. Where a tribunal’s decision requires the exercise of discretion, courts have typically used other terms to signal deference: the reviewing court should only interfere if the tribunal in exercising its discretion has “erred in principle”, acted capriciously or made a decision that amounts to a miscarriage of justice. In Pezim, Iacobucci J. used these terms in discussing when the court could review a decision made by the British Columbia Securities Commission under s. 144 of its Act, a provision comparable to s. 127 of the Ontario Act. In doing so, he relied on an earlier decision of this court in Re the Securities Commission and Mitchell9. Iacobucci J. wrote at pp. 607-8: As we have seen, s. 144 of the Act gives the Commission a broad discretion to make orders that it considers to be in the public interest. Thus, a reviewing court should not disturb a Commission’s order unless the Commission has made some error in principle in exercising its discretion or has exercised its discretion in a capricious or vexatious manner. The discretion given to Securities Commissions to determine what is in the public interest was discussed by the Ontario Court of Appeal in Re the Securities Commission and Mitchell, [1957] O.W.N. 595, at p. 599: The Chairman and other members of the Commission are selected and appointed by the Lieutenant-Governor in Council for their high qualifications, ability and experience. It is the function and duty of the Commission under s. 8 of The Securities Act to form an opinion whether or not it is in the public interest to suspend or cancel the registration of any person. It is intended by the legislation that the Commission shall have extremely wide powers of discretion in forming its opinion. The opinion of the Commission should not be set aside or altered upon an appeal unless the Commission has erred in some principle of law or unless it appears clearly that the Commission has not proceeded to form its opinion in a judicial manner or unless it appears that the opinion of the Commission is so clearly wrong as to amount to an injustice requiring a remedy on appeal. [34] Error in principle is a broad term that embraces many different grounds of review. It has been held to include not only error of law or applying a wrong legal principle, but as well, failing to take into account a relevant factor, taking into account an irrelevant factor, failing to give sufficient weight to a relevant factor, over-emphasizing a relevant factor and misapprehending the evidence.10 [35] Although the term error in principle embraces different grounds for review, it does not state a standard of review. Indeed, errors in principle may range across the spectrum from the correctness standard at one end to the reasonableness standard at the other end. The degree of deference to be given to the tribunal’s exercise of discretion will vary depending on the nature of the alleged error in principle. [36] An alleged error in law (for example, the application of a wrong legal principle), at least on a question outside the tribunal’s expertise, will invite review on a correctness standard. No deference need be shown to the tribunal’s determination. Most alleged errors in principle, however, should be reviewed against the reasonableness standard. Therefore, when the tribunal is alleged to have erred in the weight it gave to various factors bearing on the exercise of its discretion, the reviewing court should show deference to the tribunal’s determination. Only if the tribunal has exercised its discretion unreasonably, should the reviewing court interfere. [37] To suggest that a reviewing court can interfere with a tribunal’s decision because in the court’s opinion the tribunal gave too much weight to one factor or not enough weight to another factor is to abandon deference altogether. This kind of interference would deny the very rationale for judicial deference to the decisions of specialized tribunals. The weighing of relevant factors, the balancing process, is what the exercise of discretion is all about. Iacobucci J. made this point in Re Southam at p. 770: The suggestion remains, however, that the Tribunal might have erred in law by failing to accord adequate weight to certain factors. The problem with this suggestion is that it is inimical to the very notion of a balancing test. A balancing test is a legal rule whose application should be subtle and flexible, not mechanical. … These sorts of things are not readily quantifiable. They should not be considered as matters of law but should be left initially at least to determination by the Tribunal. The most that can be said, as a matter of law, is that the Tribunal should consider each factor; but the according of weight to the factors should be left to the Tribunal. In other words, only if by emphasizing some factors and not emphasizing others, the tribunal exercised its discretion unreasonably should the court intervene. [38] Applying the reasonableness standard to the OSC’s public interest discretion becomes important when considering whether the court should intervene because the panel emphasized the absence of a sufficient Ontario connection and the lack of an improper motive on the part of Québec as factors warranting its refusal to make an order under s. 127(1)3 of the Act. To put this question in context, I will briefly discuss the nature of the Commission’s public interest jurisdiction under s. 127(1)3. 2. The Public Interest Jurisdiction of the OSC Under s. 127(1)3 of the Securities Act [39] Québec’s and SNA’s acquisition of control of ACL did not breach the take-over bid provisions of the Securities Act. Yet, the Divisional Court directed the OSC to exercise its public interest jurisdiction and to do so in a way that provided the remedy of a follow-up offer to the minority shareholders. Therefore, both the scope and purpose of the Commission’s public interest jurisdiction are significant on this appeal. And both were discussed at some length by the panel in its reasons. [40] The scope of the Commission’s discretion to act in the public interest under s. 127(1)3 is very wide. The section provides: 127. (1) Orders in the public interest. – The Commission may make one or more of the following orders if in its opinion it is in the public interest to make the order or orders: … 3. An order that any exemptions contained in Ontario securities law do not apply to a person or company permanently or for such period as is specified in the order. [41] The exercise of the Commission’s discretion under this provision is guided by the two broad purposes of the Act set out in s. 1.1 – to provide protection to investors from unfair, improper or fraudulent practices; and to foster fair and efficient capital markets and confidence in capital markets – and by the six “fundamental principles” set out in s. 2.1. [42] As the panel noted, the Commission’s own jurisprudence states that the OSC may exercise is public interest jurisdiction even absent a breach of the Act or of the regulations. The leading case is Canadian Tire Corporation v. C.T.C. Dealer Holdings Ltd.11 where the Commission, relying on its earlier decision in Re Cablecasting Ltd., said: “the Commission should act to restrain a transaction that is clearly abusive of investors and of the capital markets, whether or not that transaction constitutes a breach of the Act, the regulations or a policy statement … transactions that are clearly designed to avoid the animating principles behind such legislation and rules will be scrutinized closely by the Commission and intervention will be ordered in appropriate cases.” The Commission’s decision in Canadian Tire was upheld on appeal by the Divisional Court12, where Reid J. reiterated at p. 138 that “s. 123[now s.127(1)2] on its face makes no reference to any breach of the Act, regulations or policy statement being required. The discretion granted to the Commission is not, by anything found in s. 123, confined to circumstances in which a breach occurs.”13 [43] In its later decision in Re H.E.R.O. Industries Ltd.14 the Commission affirmed that it will exercise its public interest jurisdiction in connection with transactions violating the spirit of the take-over bid rules though not violating the rules themselves. By this stage, there should be no doubt in anyone’s mind that the Commission will intervene to protect the public interest in cases in which the rules in Part XIX are complied with, but the spirit underlying those rules is not. … In determining whether or not to so intervene, the Commission must have regard to whether its intervention will enhance the pursuit of the policy objectives it has identified. For one thing, it must determine that the transaction in question has a sufficient Ontario connection or “nexus” to warrant intervention to protect the integrity of the capital markets in the province (see Re Asbestos Corp. Ltd. (1988), 11 O.S.C.B. 3419). It would be futile (and probably wrong) for the Commission to purport to intervene in a transaction whose connections with Ontario were so slight as to render such intervention meaningless.15 [44] However, though the Commission’s public interest jurisdiction is broad, sensibly, the Commission has exercised this jurisdiction cautiously, absent a breach of the Act. Thus, in Canadian Tire the Commission commented that it is “well aware of the necessity to proceed with caution where a breach of the Act or policy statement has not been shown.”16 [45] The purpose of the Commission’s public interest jurisdiction is neither remedial nor punitive; it is protective and preventive, intended to be exercised to prevent likely future harm to Ontario’s capital markets. The past conduct of offending market participants is relevant but only to assessing whether their future conduct is likely to harm the integrity of the capital markets. The Commission discussed the purpose of its public interest jurisdiction in Re Mithras Management Ltd.17 Under sections 26, 123 and 124 of the Act, the role of this Commission is to protect the public interest by removing from the capital markets – wholly or partially, permanently or temporarily, as the circumstances may warrant – those whose conduct in the past leads us to conclude that their conduct in the future may well be detrimental to the integrity of those capital markets. We are not here to punish past conduct; that is the role of the courts, particularly under section 118 of the Act. We are here to restrain, as best we can, future conduct that is likely to be prejudicial to the public interest in having capital markets that are both fair and efficient. In so doing we must, of necessity, look to past conduct as a guide to what we believe a person’s future conduct might reasonably be expected to be; we are not prescient, after all. And in so doing, we may well conclude that a person’s past conduct has been so abusive of the capital markets as to warrant our apprehension and intervention, even if no particular breach of the Act has been made out. And in Re American Diversified Realty Fund Limited Partnership18: “(Such) orders are not punitive. They are made to protect the public from the harms that might reasonably be anticipated if the respondent continued to enjoy those exemptions from compliance with the several sets of rules, provided to protect the public, in respect of trading, distribution of securities and take-over bids. [46] In the light of these principles, I turn to consider the Divisional Court’s decision and whether that court properly concluded that the OSC committed a reviewable error in failing to exercise its public interest jurisdiction under s. 127(1)3 of the Act. 3. Was the Divisional Court Wrong to Conclude that the OSC Erred in Failing to Exercise its Public Interest Jurisdiction? [47] In my opinion, the Divisional Court was wrong to conclude that OSC erred in failing to make an order under s. 127(1)3 of the Act. I think that the Divisional Court made four main errors in its analysis of the OSC’s decision. First, it applied the wrong standard of review; second, it mischaracterized what the Commission did; third, it erred by failing to appreciate that whether the acquisition of control of ACL had a “sufficient Ontario connection” or a “transactional connection” with Ontario, whether Québec intended to avoid Ontario law and whether Québec’s public statements misled investors into believing a follow-up offer would be made, were relevant factors for the Commission to consider in exercising its discretion under s. 127(1)3; and fourth, it misconceived the purpose of the OSC’s public interest jurisdiction by looking at it as a means of providing a remedy for the individual shareholders of ACL. [48] In my opinion, the Commission did not set up any jurisdictional preconditions to the exercise of its discretion. Instead, it took into account and indeed gave prominence to factors that were relevant to the exercise of its discretion. It weighed those factors and made findings of fact on them that were reasonably supported by the evidence. Finally, it properly considered whether the abusive and unfair conduct that it found to have been established warranted an order under s. 127(1)3 of the Act, removing Québec’s trading exemptions. In refusing to make such an order, I am not persuaded that the Commission exercised its discretion unreasonably or, to use the familiar language of review of discretionary orders, committed an error in principle, or acted capriciously, arbitrarily or unjustly. Therefore, I would set aside the order of the Divisional and restore the order of the OSC. I will elaborate on my conclusions. (i) The Divisional Court Applied the Wrong Standard of Review [49] In its reasons the Divisional Court made no mention of the applicable standard of review. However, I think it is apparent from the court’s reasons that it applied a standard of correctness, instead of the proper standard of unreasonableness. The Divisional Court’s reasons show no deference to the Commission’s findings, even to its finding of fact that a transactional connection with Ontario had not been made out on the evidence, no appreciation that the Commission’s public interest jurisdiction is at the heart of the tribunal’s expertise and no recognition that this jurisdiction should be exercised cautiously when no breach of the Act occurs. The Divisional Court simply substituted its judgment for that of the OSC on what is in the best interests of the Ontario capital markets. (ii) The Divisional Court Mischaracterized the Commission’s Reasons [50] The Divisional Court also appears to have mischaracterized what the Commission did. The Divisional Court considered that the Commission erected two barriers to the exercise of its public interest jurisdiction: the requirement of a transactional connection with Ontario and the requirement of an intention to avoid Ontario law. In the Divisional Court’s view, the Commission decided that unless both requirements were met it could not legally make an order under s. 127(1)3 of the Act. In this court the respondent supported the Divisional Court’s characterization of the Commission’s reasons. [51] But the Commission did not decide that it could not make an order under s. 127. It decided that it would not do so. It did not treat a transactional connection to Ontario or an intention to avoid Ontario law as conditions precedent to the exercise of its public interest jurisdiction. Consistent with its established jurisprudence, it treated them as factors relevant to the exercise of its discretion under s. 127 in a case where no breach of the Act occurred and the acquisition of control of ACL took place outside Ontario. Thus, drawing on its decision in Re H.E.R.O., the Commission said: H.E.R.O. teaches that the Commission can and should intervene to protect the public interest in cases in which the take-over bid rules of the Act are complied with, but the spirit underlying these rules is not. It, however, also teaches that, in determining whether the Commission’s intervention will enhance the pursuit of the policy objectives it has identified, it must determine that the transaction in question has a sufficient Ontario connection or “nexus” to warrant intervention to protect the integrity of the capital markets in the province. The latter determination must, of course, depend on the facts of the particular case, and what might constitute a sufficient nexus in the circumstances of one case might not satisfy the test in the circumstances of another case.19 [52] The Commission expanded on this point by affirming that “in take-over cases of the type before us”, that is where a change of control transaction takes place outside Ontario: We should not, in our view, attempt to impose Ontario’s requirement of equal treatment of minority shareholders, no matter how sensible and appropriate we may consider this requirement to be, on transactions which don’t have a transactional connection with Ontario and which have not been deliberately structured to attempt to turn what is clearly a transaction with an Ontario transactional connection into one purporting to have no such connection. In our view, the protection of those who use the Ontario capital markets and of the public interest do no require us to do so, tempting though it may be in some cases. 20 This is not the language of jurisdictional pre-conditions, but of factors relevant to the exercise of the Commission’s discretion in the kind of case that was before it. [53] The panel was not declining jurisdiction or even deciding whether it had jurisdiction to make an order in the public interest. Indeed, the OSC had fought for this jurisdiction for six years and this court had already decided in 1992 that it did have the jurisdiction to make a s. 127 order. The panel was well aware of the previous decision of this court and referred expressly to McKinlay J.A.’s reasons (which I quoted earlier) rejecting a sufficient Ontario connection as an “implicit jurisdictional precondition.” In an important passage not referred to by the Divisional Court, the panel plainly acknowledged that a sufficient Ontario connection was not a jurisdictional requirement, but a factor that was relevant to the exercise of its discretion under s. 127(1)3 in a take-over bid case such as the present one, and yet a factor that may not be relevant in other cases under this subsection. The Commission wrote: Our clause 127(1)3 jurisdiction is, after all, a discretionary one, requiring a determination by us of what the public interest requires in each case. Rather, we regard this statement as a refusal to impose a “sufficient Ontario connection” as a jurisdictional requirement which must be satisfied in any clause 127(1)(3) proceedings before the Commission’s discretion arises, thus leaving it to the Commission to make the necessary discretionary determination unencumbered by any a priori requirement imposed by the court as a matter of interpretation of the statutory provision. We have no doubt that in clause 127(1)3 proceedings not relating to take-overs there will be situations in which a “sufficient Ontario connection” would not be considered by the Commission as relevant to its determination to exercise its clause 127(1)3 jurisdiction.21 In other words, the Commission was making a discretionary decision that it recognized it had the jurisdiction to make, and the Divisional Court erred in holding otherwise. (iii) The Divisional Court Failed to Consider all the Relevant Factors [54] The Divisional Court also erred by failing to appreciate that though investor abuse was relevant to the exercise of the Commission’s discretion under s. 127(1)3 of the Act, so too were whether the transaction had an Ontario nexus, whether Québec intended to avoid Ontario law and whether the public was misled. The Divisional Court focussed only on the effect of the transaction, the abusive and unfair treatment of the minority shareholders, and ignored the other factors relied on by the panel. The effect of a transaction, in this case the unfair treatment of the minority shareholders, was relevant and was considered by the panel, but in my view the panel acted reasonably in considering these other factors as well. [55] These other factors were relevant in this case because, in exercising its discretion under s. 127(1)3 of the Act, the Commission had to consider the likely future harm to the integrity of Ontario’s capital markets, and the likelihood Québec’s unfair treatment of the minority shareholders would be repeated. As the Commission itself said in Canadian Tire22: Moreover, the abuse must be such that it can be shown to the Commission’s satisfaction that a question of the public interest is involved. That almost invariably will mean some showing of a broader impact on the capital markets and their operation … For the Commission to act, there must be a clear showing that the interests of the public marketplace are involved. And in Re Trend Capital Services Inc.23: In our opinion there are two issues which require consideration. The first, already mentioned, is whether or not, assuming the conduct is objectionable, there is a reasonable likelihood it will be repeated. The second is whether or not the conduct of the respondents, if objectionable, is such as to bring into question the integrity and reputation of the capital markets in general. There were the tests which we followed in reaching our conclusions.24 [56] The panel reasonably considered that a transactional connection to Ontario was relevant to the exercise of its public interest jurisdiction in this case because it was concerned about “long-arm regulation”. It was concerned about the Commission’s regulatory reach over a change of control transaction that took place outside Ontario and did not breach Ontario law; and it was concerned about adversely affecting Québec’s continuing participation in the Ontario capital markets unless the transaction had a sufficient connection to this province. [57] The panel considered whether the evidence supported a finding of a sufficient Ontario connection and concluded that it did not. The Divisional Court disagreed with the panel’s finding, but in my view that finding was reasonably supported by the evidence and therefore is not reviewable on appeal. The panel held (in a passage I repeat for convenience): There was not, in our view, a transactional connection of the transaction with Ontario. Asbestos was not an Ontario corporation and its registered office was in Quebec. Its Canadian operations were in Quebec, not in Ontario. The transactions resulting in a change in its control took place outside Ontario between non-Ontario parties. In the circumstances of this case, the facts that Asbestos was a reporting issuer in Ontario, with its common shares listed on the Toronto Stock Exchange, that a substantial number of its common shares were held by Ontario residents, and that that exchange was the principal exchange on which those shares traded, are not, in our view, sufficient to establish the transactional connection required. [58] This case is close on the facts to Re H.E.R.O., a case dealing with a take-over bid for a British Columbia company that was listed on the Toronto Stock Exchange and that had a number of minority shareholders resident in Ontario. In Re H.E.R.O. the Commission did find a transactional connection with Ontario but in that case, the connection to Ontario was stronger than here because the two competing bidders were both based in Ontario. I find no ground to interfere with the panel’s finding here that SNA’s acquisition of control of ACL did not have a sufficient transactional connection to Ontario to invoke s. 127(1)3 of the Act. [59] The Commission also reasonably considered whether Québec and SNA intended to avoid Ontario law as relevant to the exercise of its discretion under s. 127(1)3. As I have already said, the purpose of an order under that section is to protect the Ontario capital markets by removing a participant who, based on past misconduct, represents a continuing or future threat to the integrity of these markets. Therefore, the Commission could not focus only on the effect of the transaction. This transaction was lawful. The Commission had to consider whether the Québec Government deliberately attempted to avoid the requirements of the Act. Indeed, the former Act,25 which applied to this transaction, recognized the relevance of intention or knowledge. In s. 91(2), of that Act, the anti-avoidance provisions of the take-over bid rules, intention to avoid the law was the criterion that distinguished deemed take-over bids to which the rules applied from those bids to which the rules did not apply. [60] Therefore, Québec’s intention was relevant. The Commission found no intent “to avoid the animating principles behind Ontario’s take-over bid legislation and rules” and therefore concluded that “the structuring of the transaction was not abusive of the integrity of capital markets of this province.” In my view, the Commission’s finding and its conclusion are reasonable and, therefore, are not reviewable on appeal. [61] The respondent alternatively submitted that even if transactional connection to Ontario and intention to avoid Ontario law were relevant to the exercise of the Commission’s discretion under s. 127(1)3 of the Act, the panel erred by giving these factors too much weight. The panel certainly emphasized these factors but in doing so I am not persuaded that it exercised its discretion unreasonably. Therefore, I would not give effect to the respondent’s alternative position. [62] Finally, the Commission considered that it could make an order under s. 127(1)3 if, after SNA’s offer was rejected in 1979, the public was misled by statements from Québec Cabinet Ministers into believing that a follow-up offer would be made. That the Commission would consider exercising its public interest jurisdiction on this basis shows that it did not consider a transactional connection and an intention to avoid Ontario law to be, as the Divisional Court contended, jurisdictional barriers or pre-conditions to an order under s. 127(1)3 of the Act. Although the Commission viewed the statements of the Québec Ministers as equivocal, it found that the public was not misled and could not reasonably rely on the statements. It also found that the market did not interpret the statements as a promise of a follow-up offer. These findings, too, were reasonably supported by the record before the OSC and therefore are not reviewable. (iv) The Divisional Court Misconceived the Purpose of a s. 127(1)3 Order [63] The Divisional Court’s fourth error is closely related to its third error. The Divisional Court misconceived the purpose of an order under s. 127(1)3 of the Act removing a market participant’s trading exemptions. In focussing only on investor abuse, the unfair treatment of the minority shareholders, the Divisional Court viewed the section as remedial, as a means to give the shareholders what amounts to an oppression remedy although they have never sued for oppression. As I have already stated, the OSC’s public interest jurisdiction is not remedial, but preventive. It is to be exercised to prevent future harm to Ontario’s capital markets not to remedy past misconduct. [64] I therefore conclude that the Commission took into account relevant factors in the exercise of its discretion not to make an order under s. 127(1)3. Although it gave great weight to the absence of a transactional connection and a lack of an intention to avoid Ontario law, I am not persuaded that in doing so it exercised its discretion unreasonably. In other words, the respondent has not persuaded me that the OSC erred in principle, acted arbitrarily or capriciously or reached an unjust result. I would therefore set aside the order of the Divisional Court and restore the order of the OSC. C. The Order of the Divisional Court [65] Because I would restore the ruling of the Commission denying the respondent relief, it is unnecessary to consider the order made by the Divisional Court. The appropriateness of that order, and even the court’s jurisdiction to make it, however, were thoroughly canvassed by all counsel and I will therefore briefly state my views on it. [66] The Divisional Court actually made three orders. First, it directed the OSC to order the Québec Government to make a follow- up offer to the minority shareholders of ACL at a price per share not less than the price it paid to GD US for voting control of GD Canada, plus interest at the average prime rate since February 12, 1982. Second, if the Québec Government failed to make a follow-up offer within 90 days of the Divisional Court’s decision, it directed the OSC to withdraw all of the exemptions that allow the Québec Government to participate in the Ontario capital markets. Third, the Divisional Court directed the OSC to order the Québec Government to pay all of the respondent’s costs of the 1994 proceedings before the OSC. [67] The court’s jurisdiction to make the orders it did must be found in s. 9(5) of the Securities Act, which provides that on an appeal the Divisional Court: … may by its order direct the Commission to make such decision or to do such other act as the Commission is authorized and empowered to do under this Act or the regulations and as the court considers proper, having regard to the material and submissions before it and to this Act and the regulations, and the Commission shall make such decision or do such act accordingly. [68] In other words, under s. 9(5) the Divisional Court cannot require the OSC to do anything that the OSC itself could not do directly. The OSC’s public interest discretion to withdraw exemptions is prescribed by s.127(1)3 and s. 127(2) of the Act which state: 127. (1) Orders in the public interest. – The Commission may make one or more of the following orders if in its opinion it is in the public interest to make the order or orders: … 3. An order that any exemptions contained in Ontario securities law do not apply to a person or company permanently or for such period as is specified in the order. (2) Terms and conditions. – An order under this section may be subject to such terms and conditions as the Commission may impose. [69] One view of the Divisional Court’s first order is that it directed the OSC to order the Québec Government to make a follow- up offer to the minority shareholders of ACL. On that view, the Divisional Court had no jurisdiction to make this order because the OSC itself could not make such an order under s. 127 of the Act. An alternative and more favourable view of the Divisional Court’s first order, taken together with its second order, is that the Québec Government will lose its trading exemptions until it makes a follow-up offer. On this view the making of a follow- up offer is a term or condition of the s. 127(1)3 order. Once the condition is satisfied the exemptions will be restored. On this view, which I accept, the Divisional Court had the jurisdiction to make its first and second orders. The question is whether it ought to have made them. [70] In my view, the Divisional Court should not have made these orders. Instead it should have remitted the matter to the OSC, requiring the Commission to exercise its public interest jurisdiction under s. 127(1)(3) of the Act, but permitting the Commission to determine which trading exemptions should be withdrawn, for how long and on what terms. I hold this opinion for three reasons. [71] First, these orders went beyond what Commission counsel asked for before the OSC and beyond what the respondent asked for in the Divisional Court. Moreover, they were made without giving any of the parties an opportunity to make submissions on their appropriateness. Before the OSC, Commission counsel asked only for an order prohibiting the Québec Government from using the trading exemptions to make a take-over bid. The Divisional Court’s order would have the effect of completely expelling the Québec Government from Ontario’s capital markets unless it made a follow-up offer. In its factum in the Divisional Court, the respondent asked either that the Québec Government’s trading exemptions be withdrawn “for such period and upon such terms as the Commission may order” or that the Commission reconsider its decision not to exercise its public interest jurisdiction. Fairness concerns suggest that the Divisional Court should have given Québec and SNA an opportunity to argue whether a broader order than requested was appropriate. [72] Second, although the Divisional Court may have had the power to direct the OSC to order the removal of all trading exemptions until the Québec Government made a follow-up offer, the court should have remitted the matter to the OSC to decide whether such an order was appropriate. Whether and on what terms to withdraw exemptions in the public interest requires specialized expertise. Indeed, the Commission’s jurisdiction to regulate the capital markets in the public interest is an important part of its statutory mandate. Neither the Divisional Court, nor this court, has the securities or the regulatory expertise to make an appropriate order under s. 127(1)3 of the Act. [73] Third, having decided to direct the OSC how to exercise its public interest jurisdiction, the Divisional Court then failed to consider factors that the OSC would have considered had it been given the opportunity to do so. The Divisional Court failed to consider the effect of its orders on the reputation and integrity of Ontario’s capital markets; it failed to consider the business and regulatory costs of denying Québec’s participation in this province’s capital markets, a participation that raises billions of dollars per year; and it failed to consider whether these costs of removing Québec’s exemptions would be proportional to the regulatory objectives sought to be realized by a s. 127(1)3 order. All of these factors were arguably relevant to the exercise of the Commission’s discretion. Yet, the Divisional Court took into account only the unfair treatment of the minority shareholders. It undoubtedly did so because, as I have already indicated, it viewed a s. 127(1)3 order as remedial instead of as a regulatory tool. It used the OSC’s public interest jurisdiction not as a means of protecting Ontario’s capital markets against harmful future conduct, but as a means of providing a remedy for what it perceived to be past misconduct and as a means of giving the minority shareholders what they wanted but never sued for, a follow-up offer. [74] For these reasons, in my view, the Divisional Court’s first two orders were inappropriate. Having concluded that the OSC erred by failing to exercise its public interest jurisdiction, the Divisional Court should have referred the matter back to the OSC and left it to the Commission to determine what trading exemptions of the Québec Government were to be withdrawn and for how long and on what terms. [75] Finally, as the respondent acknowledged, the Divisional Court had no jurisdiction to direct the OSC to order the Québec Government to pay the respondent’s costs of the proceedings before the Commission. The OSC itself does not have the power to award these costs and therefore under s. 9(5) of the Act, the Divisional Court does not have the power to direct the Commission to do so. D. Conclusion [76] I would allow the appeals, set aside the order of the Divisional Court and in its place order that CETAMS’ appeal be dismissed. In the light of the history of these proceedings and the Commission’s finding that the actions of Québec and SNA were abusive of and unfair to the minority shareholders, I would make no order for costs, either in this court or in the Divisional Court. Released: February 18, 1999 _______________________________ 1 R.S.O. 1990, c. s.5. 2 (1992), 10 O.R. (3d) 577. 3 At p. 592. 4 (1994), 4 C.C.L.S. 233 (O.S.C.). 5 At p. 281. 6 At pp.286-87. 7 [1994] 2 S.C.R. 557. 8 Canada (Director of Investigation and Research) v. Southam Inc.,[1997] 1 S.C.R. 748. 9 [1957] O.W.N. 595. 10 R.. v. Rezaie (1997), 31 O.R. (3d) 713 at 719 (C.A.); Re Fox and Ontario Legal Aid Plan (1977), 14 O.R. (2d) 668 (H.C.J.); Friends of the Oldman River Society v. Canada (Minister of Transport), [1992] 1 S.C.R. 3; Reza v. Canada, [1994] 2 S.C.R. 394. 11 (1987), 35 B.L.R. 56 at 99-100. 12 (1987), 35 B.L.R. 117, (Div. Ct.); leave to appeal to the Court of Appeal for Ontario denied. 13 At p. 138. 14 (1990), 49 B.L.R. 182. 15 At p. 191. 16 At p. 99. 17 (1990), 13 O.S.C.B. 1600 at 1610-11. 18 (1991), 14 O.S.C.B. 551 at 595. 19 At p. 278. 20 At pp. 280-81. 21 At p. 279. 22 At pp. 107-8. 23 (1992), 15 O.S.C.B. 1711, aff’d (1993) 16 O.S.C.B. 1539 (Div. Ct.). 24 At p. 1750. 25 Securities Act, R.S.O. 1980, c. 466.