Debentureholder Challenge to Share Payment Rejected

On September 9, 2003, Counsel Corp. (Counsel) gave notice to its debentureholders of its intention to exercise the share payment option provided for in the trust indenture that governed its US$50 million outstanding debenture issue. Rather than repaying its debentures in cash on maturity at October 31, 2003, Counsel announced that it would issue and deliver to the holders of debentures 690 common shares of Counsel for each US$1,000 principal amount of debentures. This equated to a market price of approximately US$1.45 for each common share. By Notice of Application dated September 29, 2003, Amaranth LLC, an institutional investor holding, together with related funds, approximately 30 per cent of the outstanding debentures, commenced proceedings seeking to declare invalid, inoperative and of no force and effect the notice issued by Counsel of its election to exercise its share payment option.

In its application, Amaranth claimed that Counsel ought to be prevented from utilizing its right to repay its debentures in shares because Counsel had allegedly engaged in oppressive conduct by trading in its shares improperly during the period of time preceding its notice to exercise its share payment option, both by trading on inside information and by representing the significant majority of trading in Counsel shares during the period, and thereby artificially supported the price of its shares and decreasing the number of shares that it would have to issue in satisfaction of its debenture obligations. Counsel denied the allegations.

At the hearing of the application on October 28, 2003, Justice John Ground of the Ontario Superior Court of Justice determined, as a preliminary matter of law, that under the terms of the governing trust indenture, individual debentureholders, including Amaranth, had no standing to seek an oppression remedy concerning the manner in which Counsel fulfilled its obligations to debentureholders. Amaranth appealed. In the interim, Counsel proceeded to issue shares in exchange for debentures, and Amaranth delivered up its debentures in exchange for shares.

By Order dated May 20, 2004, (reported as 71 O.R. (3rd) 258 (C.A.)), the Court of Appeal for Ontario quashed Amaranth’s appeal on the basis that an appeal from the dismissal of an oppression remedy lies to the Divisional Court of the Superior Court of Justice. Amaranth’s argument that an appeal on a preliminary procedural issue of standing ought to go to the Court of Appeal was rejected.

Counsel moved before the Divisional Court to dismiss Amaranth’s appeal as moot or for estoppel. The motion and appeal were heard together on November 23, 2004. The unanimous Divisional Court (Matlow, Pitt and Aston JJ) dismissed the appeal on the basis that Justice Ground had correctly determined that Amaranth lacked standing to sue. Amaranth elected not to seek leave to appeal further to the Court of Appeal for Ontario thus ending the attack on Counsel’s exercise of its share payment option. No findings were made by any court regarding the allegations raised by Amaranth.

Counsel was represented by Benjamin Zarnett, Fred Myers and Suzy Kauffman, with the assistance of corporate counsel Stephen Halperin, Tim Heeney and Matt Angus, of Goodmans LLP. Amaranth was represented by Patricia Jackson, Linda Plumpton, and Arlen Sternberg, with the assistance of corporate counsel James Turner, of Torys LLP.