Canada: Re Hemostemix Inc: Alberta Securities Commission Upholds Decision Of TSXV In Contested Private Placement

Following recent amendments to Canada's takeover bid rules, private placements in the face of hostile bids have become newly controversial. Private placements in the context of proxy contests have received less attention. Yet this is somewhat surprising, because they are another facet of the same underlying question: whether regulators should allow a financing that may significantly affect the voting power of hostile shareholders in an ongoing shareholder persuasion campaign.

The Alberta Securities Commission (ASC) has just released its reasons for upholding the TSXV's allowance of a private placement in the context of a proxy contest, without requiring shareholder approval. Re Hemostemix Inc.1 carries important lessons for companies contemplating a private placement amidst shareholder agitation. It also re-affirms that the ASC will generally defer to judgments of the TSX and TSXV on this and other matters, absent compelling evidence they were unreasonable or contrary to the public interest.

Facts

Hemostemix Inc. (Hemostemix or the Company) is an early-stage company listed on the TSXV. In August of 2016, the Company announced a private placement (the Placement). The Placement included a $1 million debenture (the Debenture) issued to Wunderlich. In applying for TSXV approval, the Company stated that if Wunderlich converted his debenture and exercised the warrants issued under the Placement, he would hold 19.47% of the outstanding common shares. The Debenture was secured by a general security agreement (the GSA) and contained several negative covenants binding on the Company.

The TSXV accepted the Placement. Before doing so, the TSXV was in communication with counsel for both the Appellants and the Company, and received representations including an acknowledgement from Wunderlich that he was not acting "jointly or in concert" with the Company or management (the Acknowledgment). Among its reasons for approval were that the 20% threshold for "control person" was not met; the Company demonstrated a need for financing; the overall terms of the financing were not punitive within the context of the venture marketplace; and the fact that there would be no effect on the results of the shareholder meeting (the record date had elapsed). The Appellants appealed under s. 30 of Alberta's Securities Act.

The ASC's reasoning

The ASC declined to overturn the approval. In doing so, it first noted that as a matter of administrative law, a decision of the TSXV is reviewable on a standard of reasonableness, entitling it to significant deference. The Appellants cited three grounds from the case law for not deferring: that the TSXV erred in law; that the TSXV overlooked material evidence; and the TSXV failed to consider the perception of the public interest.

In considering whether the TSXV erred in law, the ASC looked at whether Wunderlich was a control person. Wunderlich's holding did not exceed the 20% threshold in the TSXV definition. To the ASC, the TSXV adequately accounted for evidence that Wunderlich would not be acting "jointly and in concert" with Baker (a director) and Redekop (a former director and CEO), who between them owned approximately 26% of the shares, to bring his holding over 20% or otherwise "materially affect control of the issuer".

They next considered whether the TSXV overlooked material evidence. First, they extensively reviewed the TSXV's use of the Company's Board minutes. The Appellants noted that Wunderlich was present at both of the meetings where the Placement was considered (one as an "Insider", the other as a "Nominated Director"), and stated that he may have been acting in concert with others. Nonetheless, the TSXV had contended that "special access" was not a relevant consideration in determining who was a "control person" under their internal guidance on control persons (the Guidance), and that the Guidance was carefully thought through. The ASC accepted that the TSXV considered the minutes carefully with respect to Wunderlich's relationships and was entitled to rely on the Acknowledgment.

Second, they looked at whether the TSXV overlooked material evidence that the Debenture gave Wunderlich "superior rights" within the meaning of the Guidance, thus potentially making him a "control person". Here, they noted that even though the TSXV did not obtain a copy of the GSA, the TSXV was aware of it, Hemostemix's filing with the TSXV contained a full summary of its terms and conditions, and those terms and conditions were not unusual in the circumstances.

The ASC next considered the public interest. The ASC distinguished this case from Hudbay and Mercury, two cases in which shareholder votes were required. In contrast to those cases, this case involved a "relatively modest financing", which the TSXV considered in the context of Hemostemix's difficult financial circumstances and market conditions. The Guidance was designed to promote the public interest in fair and efficient capital markets and facilitate an efficient administrative process. The ASC rejected the Appellants' submission that the TSXV should have probed the representations made by Hemostemix's counsel and in the Acknowledgement, referring again to the interest in fair and efficient markets. The ASC concluded that a shareholder vote could have delivered a pyrrhic victory for dissident shareholders and worthless shares for all holders.

Key takeaways

It is important to re-iterate that this case was a review of the TSXV's decision rather than a fresh re-hearing of all of the evidence. It thus re-enforces that the ASC will generally defer to the judgment of the TSX and TSXV unless there are compelling reasons to depart from it.

That said, in considering complaints about private placements, securities regulators are clearly alive to market conditions and the need for a given financing. In this respect, the ASC's reasons provide a faint echo of the Dolly Varden decision regarding private placements and hostile bids.2 The ASC's reasons appear especially sensitive to the implications of unwinding a financing that had already occurred, when there was clear evidence that the Board had carefully deliberated.

Nonetheless, the TSXV's and ASC's extensive reviews of the Company's Board minutes suggest that where these kinds of financings are concerned, companies should be prepared to show that they fully and fairly considered various options. They should also prepare their board minutes in anticipation that they may end up before a regulator.

The author would like to thank Joe Bricker, Articling Student, for his assistance in preparing this legal update.

Footnotes

1. 2017 ABASC 14.

2. 2016 BCSECCOM 359, 39 OSCB 8927.


About Norton Rose Fulbright Canada LLP

Norton Rose Fulbright is a global law firm. We provide the world's preeminent corporations and financial institutions with a full business law service. We have 3800 lawyers and other legal staff based in more than 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia.

Recognized for our industry focus, we are strong across all the key industry sectors: financial institutions; energy; infrastructure, mining and commodities; transport; technology and innovation; and life sciences and healthcare.

Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our offices and to maintain that level of quality at every point of contact.

For more information about Norton Rose Fulbright, see nortonrosefulbright.com/legal-notices.

Law around the world
nortonrosefulbright.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.