By Thien Hoang
Welcome back to Friday Finds! This week, we will be discussing a case involving Canada’s take-over bid regime, the results of the Competition Bureau’s investigation into FlightHub, and the conclusion of the Cameco transfer pricing tax dispute.
On February 23, 2021, the Ontario Securities Commission (OSC) released the reasons for its order, dated September 14, 2020, which dismissed an application for relief brought on by ESW Capitals Inc. (ESW), the largest shareholder of Optiva Inc. (Optiva). Optiva is a leading Canadian provider of operating support systems software and services in the telecommunications industry and the application concerned the mandatory 50% minimum tender condition required under the Canadian take-over bid regime. ESW sought an exemption from the mandatory tender requirement before it formally launched an unsolicited offer to acquire outstanding Optiva shares not already owned by ESW. ESW proposed that the requirement include only a majority of outstanding shares held by shareholders other than ESW and rival shareholders, Maple Rock Capital Partners Inc. (Maple Rock) and EdgePoint Investment Group Inc. (EdgePoint). In its reasons, the OSC emphasized the predictability and certainty that the take-over bid regime offered to market participants. Therefore, relief would only be granted on the basis of exceptional circumstances or improper or abusive conduct. Notwithstanding the sufficient premium being offered in the proposed bid, the OSC found it was insufficient to justify the granting of relief. Subsequently, on March 1, 2021, Optiva announced that ESW had agreed to sell all of its subordinate voting shares of Optiva in a private sale to Maple Rock, EdgePoint, OceanLink Management Ltd., and Meson Capital at $39.90/share.
On February 24, 2021, the Competition Bureau announced it had concluded its investigations into allegations of misleading advertising by FlightHub, an online travel company based in Montréal, Quebec. Back in 2019, the Competition Bureau executed search warrants at FlightHub’s headquarters in Montréal. Prior to this, FlightHub had been subject to multiple consumer complaints regarding misleading advertising, both in Canada and in the U.S. Specifically, the Competition Bureau had concerns regarding FlightHub’s practice of 1) Drip Pricing – charging customers for selecting seats and for cancellations/re-bookings, despite giving customers the impression that such services would be at no extra costs; 2) Astroturfing – promoting positive online reviews, created by FlightHub, despite creating the impression that they were created by independent customer reviewers; 3) Misleading Claims – this includes, but is not limited to, the fact that selected seats were not secured with the airlines and important restrictions/costs on the use of cancelled flight credits was not communicated. The investigation into FlightHub ended with a consent agreement, whereby FlightHub agreed to pay an administration monetary penalty (AMP) of $5 million and two directors agreed to pay an AMP of $400,000 each. The agreement also prohibits FlightHub and the two directors from making false or misleading claims for 10 years.
On February 18, 2021, the Supreme Court of Canada (SCC) dismissed the Minister of National Revenue’s (the Minister) application for leave to appeal the Federal Court of Appeal’s (FCA) judgement in Canada v. Cameco Corporation (2020 FCA 112). On June 26, 2020, the FCA dismissed the Minister’s appeal of the Tax Court of Canada’s (TCA) judgement, which reversed the Minister’s 2003, 2005, and 2006 tax reassessments of nearly $500 million to the income of Cameco Corporation (Cameco), a publicly-traded Canadian uranium miner. The case involved the application of the transfer pricing rules contained in section 247 of the Income Tax Act (ITA). Cameco undertook to have its uranium trading business in a European sales subsidiary (Salesco). Salesco entered into various agreements to acquire uranium from arm’s length third parties while Cameco entered into long-term contracts to sell its produced uranium to Salesco. The profits from uranium sales by Salesco to buyers outside of Canada were realized in Switzerland by Salesco rather than in Canada by Cameco. The FCA, affirming the TCC’s decision, observed that the relevant transactions in this case did not amount to an exceptional circumstance to justify the application of the re-characterization rule. Specifically, the transfer pricing re-characterization rule, as stipulated in s. 247(2)(b) of the ITA, applies only in very limited circumstances of “commercial irrationality,” where no arm’s-length parties would have agreed to the transactions entered into. However, this does not require businesses to organize their transactions in a manner that conforms perfectly with that of arm’s-length circumstances. The SCC’s dismissal of the case bars the Minister from enforcing its reassessments for the taxation years in question.
That wraps up this week’s Friday Finds! Thanks for reading and be sure to check back next week for more business law news stories.