Court Rejects Metal Trusts’ Bid to Block Sprotts’ Takeover

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A bid to block Sprott Asset Management’s hostile takeover of two Canadian metal trusts has been rejected by the Ontario Superior Court of Justice.

Sprott announced its plans in April to make an unsolicited offer to buy Central GoldTrust and Silver Bullion Trust through a share swap valued at $898 million, arguing their units were undervalued.

Both targets launched a suit in June aiming to block the takeover, alleging that among other things Sprott’s bid failed to abide by the advance notice rules adopted by the trusts.

The lawsuit was also seeking a declaration that Sprott allegedly failed to disclose that it had acted in concert with some of the trusts’ shareholders, including activist investor Polar Securities, which has been agitating for changes at both Central GoldTrust and Silver Bullion, and Central GoldTrust’s largest investor, Pekin Singer Strauss Asset Management, which has since said it supports the unsolicited bid by Sprott.

The Ontario court rejected the trusts’ application for injunctive relief of the takeover bid provided certain conditions were met in its decision Friday and said, among other things, they failed to prove that Sprott had acted in concert with the other shareholders.

“There is no basis for such relief and such request is therefore denied,” Justice Herman J. Wilton-Siegel said in his decision.

Offers’ Conditions

Central Gold Trust said in a statement Monday morning it is considering what additional steps, if any, it will take arising from the court’s decision. In the meantime, it urged shareholders to take no action and not tender their shares to the Sprott offer.

Sprott said in a statement it was extending its tender offer for the metal trusts until Sept. 18.

It also said several concerns presented themselves during the court proceedings, including some apparent conflicts of interest for the metal trusts’ management and trustees.

In particular, it noted the trusts’ lead director and the chair of the governance committee Ian McAvity who had an arrangement to receive 6 percent of the revenue from the family-controlled administrator of the trust for life, and has received C$3.3 million ($2.5 million) between 2005 and 2014.

Sprott alleges the arrangement is a conflict of interest because part of his duties includes evaluating and reporting on the performance of the administrator.

“It is unfortunate that unitholders have not only had to endure years of underperformance, but that their trustees are now spending millions of dollars of unitholder funds to seemingly advance their own personal interests,” said John Wilson, Sprott chief executive officer.

Under the terms of the bid, Sprott would exchange units of its own trusts, Sprott Physical Gold Trust and Sprott Physical Silver Trust, for units of Central GoldTrust and Silver Bullion Trust on a net asset value basis. The offers will happen simultaneously and be conditional on the approval of both companies’ unitholders and other conditions.

Before the offer, Central GoldTrust’s units were trading at a discount to net asset value, or NAV, of 7.6 percent, according to data compiled by Bloomberg. It has since closed that gap to 6.1 percent. Sprott Physical Gold Trust units are trading at a 0.9 percent discount to NAV.

Silver Bullion Trust traded at a 10.9 percent discount to NAV prior to the offer and has since narrowed that 5.9 percent. Sprott Physical Silver Trust units trade at 0.5 discount to NAV, the data compiled by Bloomberg shows.

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