1654776 Ontario Limited v. Stewart, 2013 ONCA 184: You’ve Been Warned

Mr or Ms Executive, in the ONCA’s reasons for judgment released today, to keep your mouth shut about the state of confidential negotiations.

Here’s a link to the reasons on the ONCA  and some excerpts.

[1] This appeal is from the judgment of Justice Edward P. Belobaba dismissing the appellant’s application for an order that the respondents disclose the identities of confidential sources for a story written by the respondent Sinclair Stewart and published by the respondent the Globe and Mail Inc. The appellant, whose sole officer, director and shareholder is Jeffrey G. MacIntosh, holder of the Toronto Stock Exchange Chair in Capital Markets Law at the University of Toronto Law School, seeks their identities to proceed with a proposed class action relying on the provisions of the Securities Act, R.S.O. 1990, c. S.5, that create private rights of action.

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[5] I would dismiss the appeal. The appellant has put forward a claim that, except for the respondents’ claim of privilege, would entitle it to disclosure. The apparent strength of the case, however, is weak. The public interest in free expression must always be weighed heavily in the balance. Upholding the privilege would not leave the appellant without a remedy. It can proceed against the companies involved. The public interest in promoting compliance with the disclosure regime regulated by the Securities Act can be adequately served without granting disclosure.

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[7] In the action, the appellant seeks $30 million in general damages and $5 million in punitive damages arising from fluctuations in the price of BCE shares over a four-day period during the attempted leveraged buy-out of BCE in 2007-2008. BCE announced the leveraged buyout in a press release dated June 30, 2007. The press release stated that BCE had entered into an agreement with Canada Inc. for the acquisition of all of BCE’s common shares by means of an all-cash bid of $42.75 per share.

[8] In compliance with the requirements of the Ontario Securities Act BCE filed a material change report dated July 5, 2007 concerning the transaction and describing the future events that could affect its completion, including financing covenants, regulatory approvals, and conditions precedent.

[9] Ultimately on June 20, 2008, after proceedings that reached the Supreme Court of Canada, the courts approved the transaction. BCE and Canada Inc. issued a joint public statement confirming their continued commitment to the transaction.

[10] On June 30, 2008 the Globe and Mail published a story in its business section that the buyout would likely be delayed, if it proceeded at all. The Globe and Mail’s story reported information supplied by the confidential sources. In the lead paragraph, Stewart wrote:

 [The] problem-plagued $35 billion takeover of BCE Inc. will likely be delayed until the end of the year owing to the increasingly fractious negotiations between the company’s private equity buyers and a syndicate of lenders who are pushing to lower the value of the buyout, according to people involved in the negotiations.

[11] Stewart then went on to provide a more detailed discussion, which included references to confidential sources who were “at the bargaining table” and “participating in negotiations”:

Sources close to the talks say the banks financing the deal are balking at the proposed purchase price of $42.75 a share, and are instead insisting that the company should be valued on the same basis as rival Telus Corp., which would imply a steeply discounted price of between $35 and $38 a share.

 Although the two sides are still talking, several sources described the tenor of the discussions as grinding and suggested that the parties remained far apart on a number of key issues.

 ‘Everyone has underestimated when this deal gets done,’ said one executive at the bargaining table. ‘It’s Christmas’.

 The source added he did not think the buyers and the banks would reach an agreement over the financing terms this summer, if at all.

 Sources say given the current uncertainty around the acquisition, there is almost no chance BCE will pay out [its $294 million quarterly dividend].

 Two high-level sources, one at BCE and another that is participating in negotiations, insisted that the company’s embattled board had little appetite for lowering the price of the offer.

 ‘They’re at $42.75 and damn the torpedoes,’ said one of the sources.[1]

[12] Stewart, on cross-examination, indicated that the “high-level” source at BCE was privy to the BCE board negotiating position and that the source consented to being identified as being with BCE.

[13] The appellant claims that on the trading day following the publication of the article, the price of BCE shares fell 3.3% and the market price of BCE call options fell precipitously. On July 2, 2008 the appellant disposed of BCE shares and BCE call options at a loss of $35,900.

[14] On July 4, four days after the article was published, BCE issued a press release announcing that a “final agreement” had been achieved and the transaction would proceed at the purchase price of $42.75 per share. After the July 4 announcement, the appellant claims the shares jumped from $35.15 to $39.50, about 12%; and the call options from $0.17 the day before to $1.90, an increase of over 1000%.

[15] Ultimately the transaction did not proceed.

[16] The appellant believed that the confidential sources had breached the Ontario Securities Act. MacIntosh wrote to and spoke with enforcement officers of the Ontario Securities Commission attempting to prompt it to commence a formal investigation. He wrote two op-ed pieces in the National Post opining that the OSC should investigate the possible manipulation of the options market during the failed BCE bid.

[17] With a view to commencing an action, the appellant requested that Stewart and the Globe and Mail provide him with the identities of the unnamed sources quoted in the article, but they refused to do so. The appellant then brought its Norwich application and then issued its statement of claim.

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[146] I would conclude that the respondents have satisfied the Wigmore test, and hence, the appellant has failed to satisfy the Norwich test. I would dismiss the appeal.

[147] This was a difficult case. Corporate executives who engage in the dangerous practice of providing journalists with information anonymously during the course of sensitive negotiations should understand the courts may not uphold a journalist’s assurances of confidentiality.

The story may not yet be over. I suspect leave to appeal to the SCC will be sought.