Canada: OSC Clarifies Basis For Intervening In Eco Oro Tactical Private Placement

On June 19, 2017, the Ontario Securities Commission (OSC) released its much anticipated reasons for its decision, In the Matter of Eco Oro Minerals Corp. (available here), in which the OSC overturned the decision of the Toronto Stock Exchange (TSX) to approve a private placement by Eco Oro Minerals Corp. (TSX: EOM) ("Eco Oro") – without requiring prior approval of Eco Oro's shareholders – in the midst of a proxy contest to replace the Eco Oro board. The OSC's decision provides important guidance about the regulation of so-called "tactical" private placements implemented during a proxy contest, while also leaving a number of important questions unanswered.

Background

The background and facts of this case are described in detail in our May 1, 2017 Update, OSC Intervenes in Private Placement Implemented During Proxy Contest (available here).

At a high level, the case involved a decision by the Eco Oro board of directors, to convert, just days before the record date for a special shareholders meeting requisitioned to replace Eco Oro's board, a portion of Eco Oro's outstanding convertible notes held by certain shareholders who were supportive of the incumbent board and management. The note exchange increased the voting interest of the supportive shareholders from approximately 41% to 46%.

The TSX did not require Eco Oro to obtain shareholder approval for the note exchange, primarily on the basis that the transaction did not "materially affect control" of Eco Oro because the transaction would not result in the creation of a new 20% shareholder (or group). As a result, Eco Oro was able to close the note exchange concurrently with the first public announcement of the transaction.

The requisitioning shareholders applied to the BC Supreme Court to set aside the note exchange using the corporate law oppression remedy. The dissident shareholders also applied to the OSC for an order setting aside the TSX's decision to approve the note exchange without requiring the prior approval of Eco Oro's disinterested shareholders (based on the OSC's authority to review decisions of the TSX) or, alternatively, an order (under the OSC's broad "public interest" jurisdiction) to, among other things, cease trade the shares issued under the note exchange on the basis that the transaction was contrary to the public interest.

BC Supreme Court Proceedings

The BC Supreme Court rejected the dissidents' oppression claim, following the longstanding practice of Canadian courts in deferring to the business judgement of the board of directors, particularly where the court determines that the board acted with a view to the best interests of the corporation and not in violation of any reasonable expectation held by the relevant stakeholders (in this case, the dissident Eco Oro shareholders). While the decision is being appealed, the Court's decision highlights the significant challenges faced by applicants when challenging corporate actions in court.

Key Findings of the OSC

While the OSC reiterated its general reluctance to substitute its own judgement for that of the TSX, in this case the OSC determined that it was not appropriate to defer to the TSX's decision, given the OSC's conclusions that, among other things:

  •    the TSX did not have (or did not absorb) all n concerning the proposed exchange (including the pending proxy contest and the fact that the noteholders had signed letters of support for the incumbent board immediately before Eco Oro proceeded with the note exchange) in part due to the OSC's view that Eco Oro was "less than forthcoming" in its disclosure to the TSX; and
  • the analysis of whether a private placement "materially affects control" of an issuer must take into account the particular circumstances of the transaction and the issuer, including the potential implications on any pending contest for control of the issuer (in this case, the OSC concluded the TSX decision did not fully account for the status of the pending proxy contest).

Accordingly, the OSC proceeded to conduct its own analysis of whether the note exchange materially affected control of Eco Oro. After considering the particular facts of this case, the OSC determined that the note exchange did indeed materially affect control of Eco Oro because it was reasonably expected to "tip the scales" in the proxy contest for control of Eco Oro in favour of the incumbent board. In doing so, the OSC concluded that a private placement that impacts the outcome of a pending proxy contest can materially affect control of the issuer even if the transaction does not result in the creation of a new control person (usually a 20% voting interest, absent unusual circumstances) or group.

Since the note exchange had already been completed without shareholder approval, the OSC imposed the following terms and conditions to give practical effect to its decision:

  • an obligation on Eco Oro to allow shareholders to vote to either approve or reverse the note exchange (unless Eco Oro otherwise voluntarily unwound the note exchange), and to unwind the transaction if shareholders voted to reverse it;
  • a cease-trade order in respect of the shares issued under the note exchange pending the outcome of the shareholder vote; and
  • a requirement that Eco Oro not count any votes attached to the shares issued under the note exchange pending the outcome of the shareholder vote.

Since the OSC reached its decision and issued its orders (including the additional terms and conditions described above) solely on the basis of its authority to review decisions of the TSX, the OSC did not discuss whether it would intervene in the note exchange on the basis that it was contrary to the public interest.

Leave to appeal the OSC's decision to Ontario's Divisional Court has been granted, and the hearing is scheduled for August 1, 2017.

Key Takeaways

There has been increased use by issuers, and scrutiny by regulators, of tactical private placements in recent years, particularly in the context of take-over bids (see our paper, The Role of Tactical Private Placements in Canada's New Take-Over Bid Regime). Most notably, the OSC and the British Columbia Securities Commission (BCSC) – in their joint decision In the Matter of Hecla Mining Company and Dolly Varden Silver Corporation – recently developed a comprehensive framework for evaluating tactical private placements implemented in the context of a take-over bid (see our October 27, 2016 Update, OSC and BCSC Establish New Framework for Regulating Tactical Private Placements, available here).

The Eco Oro decision clearly signals to market participants that private placements implemented during proxy contests will also be scrutinized, and provides a number of important lessons for issuers, investors and other stakeholders:

  • Enhanced Scrutiny of Private Placements. Before the Eco Oro decision, the TSX generally accepted representations from an issuer that a private placement did not "materially affect control" of the issuer (absent contrary information being brought to its attention). The OSC's decision clarifies that the TSX is now expected to conduct a reasonable degree of due diligence regarding the circumstances of the transaction and the issuer. Market participants should therefore expect that the TSX may scrutinize a private placement more carefully and require additional information. We expect that the scope and mechanics of this process will evolve as the TSX addresses this expectation going forward.
  • More Frequent Shareholder Approval. The Eco Oro decision highlights the fact that the creation eholder (or group) is not the basis on which a private placement can
  • Relevance of Business Purpose. At its cor framework established in He cal private placements implemented in the context of take-over bids requires a balancing of the benefits of the private placement and its impact on the bid, in order to determine whether it is contrary to the public interest. In Eco Oro, the OSC's conclusion that the note exchange had minimal benefits to Eco Oro and its shareholders generally does not appear to have been a significant factor in the OSC's analysis, likely because it was focused on whether the transaction materially affected control of Eco Oro, as opposed to a public interest analysis. If private placements during proxy contests are regulated primarily on the basis of the TSX's rules (rather than public interest grounds), it is unclear how the potential benefits of the private placement – which are of critical importance in the Hecla framework – would factor into the analysis, if at all.
  • Jurisdiction to Unwind Transactions. In this case, the OSC concluded that it has the authority to effectively unwind a completed private placement. Prior to Eco Oro, this question had attracted considerable debate among market participants. At the same time, the OSC clearly recognized that it must proceed cautiously in unwinding completed transactions. In this case, the OSC had concluded that unwinding the private placement (if not ratified by Eco Oro's disinterested shareholders) was appropriate, given its conclusion that the private placement provided minimal benefits to Eco Oro and its shareholders generally, as well as the fact that unwinding the note exchange presented no practical challenges (particularly since it was a non-cash transaction) or any adverse impact on the rights of third parties. It will be interesting to see how securities regulators, if called upon to do so, approach a situation where unwinding a private placement would potentially deprive the company and its shareholders of substantial benefits or materially adversely impact the rights of innocent third parties.
  • Implications for the Take-Over Bid Context. In Hecla, the OSC and BCSC declined to intervene in Dolly Varden's substantial private placement on the basis that it was not, even in part, a defensive tactic. However, Dolly Varden's private placement was not challenged on the basis that it materially affected control of Dolly Varden (and therefore should have required shareholder approval), notwithstanding the profound impact the private placement had on Hecla's take-over bid for 100% of Dolly Varden. It remains to be seen whether the TSX or OSC will, in light of Eco Oro, determine that a private placement that would reasonably be expected to affect the outcome of a take-over bid materially affects control of the issuer and require shareholder approval as a condition to the private placement.

If the OSC's decision in Eco Oro is upheld on appeal, it could have a significant effect on the ability of issuers to implement private placements during a proxy contest. However, the ultimate impact of the decision will likely only be understood as the TSX – and potentially the OSC – apply the lessons of Eco Oro to other similar transactions.

The Saga Continues

The requisitioned meeting of Eco Oro's shareholders that was originally scheduled for April 25, 2017 was adjourned by the BC Supreme Court. Eco Oro has scheduled the special shareholders meeting to consider the note exchange for August 15, 2017, with its annual general and special meeting (at which directors will be elected) for later the same day. Eco Oro has said that the decision to convene the special meeting to approve the note exchange has been made without prejudice to its appeal of the OSC's decision to the Divisional Court, and that if the appeal is successful, the board of directors may determine to cancel the meeting.

Meanwhile, the dissidents recently announced that they would apply to the BC Supreme Court for an order requiring that the requisitioned meeting to vote on (and potentially replace) the Eco Oro board be held immediately, before the meeting to approve the note exchange has been completed.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific 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.