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Friday, July 7, 2017

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On June 16, 2017, the Ontario Securities Commission (the “OSC”) issued its reasons in Re Eco Oro Minerals Corp. The reasons relate to an order made by the OSC on April 23, 2017. The OSC’s reasons provide a number of important insights, one of them being the analogizing of the OSC’s jurisdiction to regulate proxy contests with its jurisdiction to regulate take-over bids.


Eco Oro Minerals Corp. (“Eco Oro”) is a precious minerals exploration and development company incorporated under the Business Corporations Act (British Columbia). Its principal asset is an arbitration claim.

In July 2016, Eco Oro entered into an agreement with an investor (the “Investment Agreement”) in order to fund the arbitration. Pursuant to the Investment Agreement, the investor committed to funding Eco Oro in two tranches in exchange for common shares of Eco Oro and an unsecured convertible note. One of the tranches (“Tranche 2”) required the approval of Eco Oro’s shareholders pursuant to the TSX Company Manual (the “Manual”) because of the number of Eco Oro common shares that were to be issued to the investor. In the event shareholder approval was not obtained for the issuance of the Eco Oro common shares to the investor in Tranche 2, the investor would be issued secured contingent value rights, which issuance would not be subject to shareholder approval pursuant to the Manual.

The Investment Agreement also provided for the right of existing Eco Oro shareholders, selected by Eco Oro, to participate in Tranche 2. Eco Oro offered the right to five shareholders, certain of whom had already invested very substantial amounts in Eco Oro.

On November 3, 2016, Eco Oro’s shareholders voted against the common share issuance pursuant to Tranche 2. As a result, the investor and the other participating shareholders selected by Eco Oro were issued unsecured convertible notes and secured contingent value rights.

On February 10, 2017, certain shareholders of Eco Oro requisitioned a meeting of shareholders for the purpose of reconstituting Eco Oro’s board by electing six new directors. On March 2, 2017, Eco Oro announced that it had set April 25, 2017 as the date of its annual meeting, which would also be a special meeting (the “Meeting”), and set March 24, 2017 as the record date (the “Record Date”) for determining shareholders entitled to vote at the Meeting.

During March 2017 and before the Record Date, Eco Oro approached the holders of the unsecured convertible notes issued under Tranche 2 to convert a portion of the notes into what would amount to approximately 10% of the outstanding Eco Oro common shares after the conversion. The conversion was to be effected pursuant to an exclusive right of Eco Oro, and not the holders, to convert the notes. As the issuance resulted from a partial conversion of the notes, no additional funds were to be obtained by Eco Oro, and none of the restrictions affecting Eco Oro in the notes were to be diminished.

On March 10, 2017, the TSX approved (the “TSX Decision”) the issuance of the Eco Oro shares upon partial conversion of the notes (the “New Shares”) without requiring shareholder approval, and on an unannounced, accelerated basis. The TSX was unaware of the proxy fight initiated by the shareholder requisition on February 10, as well as the Meeting and Record Date. The TSX was also unaware that support letters were solicited by Eco Oro from the intended recipients of the New Shares (the “New Share Recipients”). The New Shares were only issued to the New Share Recipients after Eco Oro had received letters of support from them.

Certain Eco Oro shareholders sought an order from the OSC setting aside the TSX Decision and directing that disinterested shareholder approval of the issuance of the New Shares be required as soon as practicable and, if no such approval was obtained, that Eco Oro and the New Share Recipients take all necessary steps to reverse the issuance of the New Shares.

TSX Requirement for Shareholder Approval of Share Issuances

The Manual provides that the TSX generally requires shareholder approval of a share issuance if the transaction “materially affects control of the listed issuer.” “Materially affect control” is defined in the Manual as:

“The ability of any security holder or combination of security holders acting together to influence the outcome of a vote of security holders, including the ability to block significant transactions. Such an ability will be affected by the circumstances of a particular case, including the presence or absence of other large security holdings, the pattern of voting behaviour by other holders at previous security holder meetings and the distribution of the voting securities. A transaction that results, or could result, in a new holding of more than 20% of the voting securities by one security holder or combination of security holders acting together will be considered to materially affect control, unless the circumstances indicate otherwise. Transactions resulting in a new holding of less than 20% of the voting securities may also materially affect control, depending on the circumstances outlined above.”

The OSC’s Analysis and Findings

In reviewing the TSX Decision, the OSC identified that the primary issue to determine was whether the issuance of the New Shares “materially affected control” of Eco Oro, such that the TSX, in accordance with the Manual, should have required shareholder approval as a condition to the issuance of the New Shares.

In pursuing its analysis, the OSC made a number of findings from its examination of the circumstances surrounding the issuance of the New Shares:

  • The TSX did not seem to have considered in its approval of the issuance of the New Shares that the issuance was to take place before the Record Date and in the midst of a proxy fight whose outcome was to be determined at the Meeting.
  • The TSX had improperly interpreted “materially affect control” in the Manual so as to prevent consideration of the effect of the issuance of the New Shares on the vote for the Meeting; according to the OSC, the TSX’s interpretation drew a distinction between “permanent and transient effects on control” which improperly considered only permanent effects to be relevant to the definition.
  • Even if the issuance of the New Shares was supported by the objective of an improved balance sheet for Eco Oro, there was no compelling business objective for the issuance to close prior to the Record Date that would negate the tactical motive to tip the vote at the Meeting in favour of Eco Oro’s management.
  • The closing of the issuance of the New Shares was clearly designed to have a material effect on the Meeting.  The issuance reflected the New Share Recipients’ intention to support Eco Oro’s management by securing enlarged voting rights. While the motivation of the issuance was “at best” a mixed one that included a bona fide business purpose, the evidence of the tactical motivation underlying the timing of the New Share issuance and the accelerated closing was “overwhelming”.
  • This evidence of tactical motivation, in turn, demonstrated that Eco Oro’s management sought to influence the vote at the Meeting that would decide whether Eco Oro’s board would be removed. As the competing press releases issued during the proxy contest showed a close vote, it was reasonable for the OSC to infer that a tipping of the balance was sought and could reasonably have been accomplished if the New Shares could be voted. The Manual required a vote to consider whether this effect on control was supported by Eco Oro’s shareholders, not just by its management and the New Share Recipients.
  • Even if the effect on control was not apparent, in the context of a close vote on a board election, such as was the case for the Meeting, the TSX should generally exercise its discretion to require a vote to promote the fair treatment of shareholders and the quality and integrity of Ontario’s capital markets.
  • Whether management was pursuing the best course of action for Eco Oro or whether the Eco Oro’s board should be reconstituted was for Eco Oro’s shareholders to decide without management’s ability to manipulate the vote. Allowing such conduct would directly affect the integrity of Ontario’s capital markets contrary to the OSC’s mandate and the public interest.

The Decision of the OSC

Based upon this analysis and these findings, the OSC issued an order setting aside the TSX Decision. The  OSC also ordered  Eco  Oro  to seek, at a meeting of shareholders, approval of the issuance of the New Shares to the New Share Recipients by a vote of disinterested shareholders. The OSC further ordered that unless and until the shareholders of Eco Oro ratified the issuance of the New Shares, the New Shares were to be cease traded, and that the New Shares should not be considered to be issued and outstanding for the purposes of voting at any meeting of shareholders of Eco Oro.

Eco Oro has appealed to the Ontario Divisional Court to overturn the OSC’s decision.

Issuer Actions in Take Over Bids and Proxy Contests

The OSC took the opportunity to address wider considerations at stake in the matter:

“…Whether management is pursuing the best course of action for Eco Oro or whether the Board should be reconstituted is for the shareholders to decide without management being permitted to manipulate the vote. To allow a vote to proceed that has been affected by such conduct would directly affect the integrity of Ontario capital markets, contrary to the Commission’s mandate and the public interest.

… The public interest is served by respecting the right of shareholders of TSX-listed issuers to have a fairly conducted vote to determine the composition of their boards of directors.

Considered more broadly, the jurisdiction asserted [by the OSC] in the present case, which involves a contest for control of a public company by way of a proxy contest, can be analogized to the jurisdiction of the Commission over change of control transactions effected by way of a takeover bid. Proxy contests and takeover bids provide alternative means of effecting a change of control of a public company that have very material consequences for shareholders. Issuances of shares as a defensive measure in the face of a contest for control of a public company to influence the outcome in management’s favour are subject to review by the Commission. Private placements with this tactical motivation have more typically arisen in the context of takeover bids and may constitute defensive tactics contrary to the public interest and to National Policy 62-202-Take-over Bids-Defensive Tactics…”


Re Eco Oro Minerals Corp. is an important decision for a number of reasons, one being that in it the OSC draws a parallel between inappropriate issuer behaviour in the midst of a hostile take-over bid and a proxy fight, in particular, issuances of securities intended to impact the success of the hostile bidder or the dissidents in the proxy fight: “In considering whether to exercise [the OSC’s] discretion to require shareholder approval based on our view of the public interest, control transactions, regardless of form, may involve similar public interest concerns.”

Pursuant to National Policy 62-202-Take-Over Bids-Defensive Tactics, defensive tactics that may come under the scrutiny of Canadian securities regulators if undertaken during the course of a bid, or immediately before a bid (if the board of directors has reason to believe that a bid may be imminent) include the issuance of securities representing a significant percentage of the outstanding securities of the target company. In Re Eco Oro Minerals Corp., the OSC has now applied the principles of National Policy 62-202 to proxy fights as well as hostile take-over bids.

In the future, issuers will be required to convince the TSX (and by implication the OSC) that an issuance of securities will not affect who controls the issuer, either on a transactional basis (eg. tipping the balance in a security holder vote) or on a long term basis (eg. the creation of an increased or new substantial voting interest). Issuers will be expected to provide the TSX with enough information to make a thorough evaluation.

Tactical share issuances have now drawn the attention of Canadian securities regulators because the practical effect of poison pills has been mitigated by recent amendments to Canadian take-over bid rules. In Canada, poison pills have not been generally used to hinder proxy fights.

In their decision in Re Hecla Mining Co., the OSC and British Columbia Securities Commission set out an analytical framework to determine whether a share issuance in the midst of a hostile take-over bid is appropriate (see our November 22, 2016 update, Private Placements as Defensive Tactics in Take-Over Bids). One of the principal determinations to be made in the analysis is whether the share issuance is truly required to sustain the issuer’s capital resources.

Eco Oro argued that the issuance of the New Shares was beneficial to Eco Oro because it removed a portion of debt from the company’s capital structure. The OSC found, however, that the benefit to Eco Oro from the issuance of the New Shares in this regard was minimal.

The OSC was also careful to suggest that its decision did not involve a matter of the proper application of corporate law principles: instead, the OSC based its decision on what it decided was a misapplication of the TSX of the requirements of the Manual as it related to the issuance of the New Shares. By doing so, the OSC was not drawn into an argument that the issuance of the New Shares should be protected by a deference to the business decision of Eco Oro’s board, the so-called and often relied upon “business judgement rule”:

“The Commission’s Decision is not in any way an assessment of the merits of either side in the proxy contest or the differing views of management and the Applicants of the corporate strategy that should best be followed by Eco Oro. Despite the efforts of counsel to advance arguments as to whether Eco Oro management or the Applicants were genuinely pursuing the best interests of the company, we are not engaged  in  an  assessment  of  whether  conduct  is oppressive to shareholders or whether a board of directors has conducted itself in accordance with the standards set out in governing corporate statutes, including the business judgment rule.

This decision is not based on corporate law considerations. Our role is to ensure that listing standards, which are required to be approved by the Commission as consistent with the public interest, are properly administered. It has always been recognized that listing standards for companies given the imprimatur of exchange listing go beyond the requirements of corporate law.”

The OSC was prophetic in this regard: in a separate action in the Supreme Court of British Columbia, that court relied in part upon the business judgement rule to defer to the business decisions of Eco Oro’s board and found that the issuance of the New Shares was not oppressive to dissenting shareholders.

If you have any questions with respect to the matters discussed above, please contact Mark Wilson by email at or Rob Wortzman by email at or any other member of our Corporate Governance practice group.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.