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
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions