OSC criticizes TSX for casual proxy tactic approval

Reasons in Eco Oro decision effectively reverses TSX approval, "sterilizes" shareholder voting rights
REUTERS/Mark Blinch
REUTERS/Mark Blinch
The Ontario Securities Commission, in its reasons for the recent Eco Oro decision, chastises the Toronto Stock Exchange for approving a private placement that uses questionable tactics meant to block a proxy challenge.

Boards of listed companies that find themselves the objects of unwelcome takeover bids have the option of triggering a poison pill, issuing new equity to shareholders to make an unwanted acquisition more expensive and lessen the chances of success. A board faced with a proxy challenge by dissidents seeking to throw out incumbent members has no such recourse.

What the board of Eco Oro Minerals Corp. did when it faced a proxy challenge was to accelerate the conversion of convertible notes, issuing shares
equal to approximately 10-per-cent of the outstanding common shares though a private placement to certain existing note holders who supported the incumbents and collectively held approximately 41 per cent of the company’s stock. After the new shares were issued, their holding would increase to 46 per cent.

The new shares were issued in March, with TSX approval — eight days before the meeting to vote on the board challenge. The exchange conditionally approved the placement, saying it did not “materially affect control of Eco Oro” because it didn’t hit the threshold of 20 per cent of outstanding securities, the usual standard.

The OSC set aside the TSX decision without reasons in late April but, because the new shares had already been issued, it ordered that they be stripped of voting rights and a special shareholder vote be held to see whether the issuance should stand.

Those reasons are now out. In them, the OSC, which normally defers to the TSX, was highly critical of the exchange, saying it had “approved the transaction and permitted an unannounced, accelerated closing” without knowing that a proxy contest was underway; that a meeting requisitioned by dissident shareholders was imminent; and that support letters were solicited and provided by most of the new-share recipients.

It also noted the TSX manager who reviewed and approved the placement “admitted that he was either unaware of the information about the requisitioned Meeting, or he failed to absorb it,” saying it follows that the TSX did not even consult the SEDAR public filings involving Eco Oro.

Jeffrey Read, a partner in the corporate finance and securities group at Lawson Lundell LLP in Vancouver, says the decision is important because “it shows the deal community when the OSC will reverse something like this.” And it also tells the TSX to “be more vigilant” and find out whether there are other elements driving the decision-making when a company applies to issue more shares.

In fact, Read and others say the tone of the OSC decision was unusually sharp in its criticism of the Toronto exchange.

The commission wrote that, in failing to consider the new shares as materially affecting control given the upcoming board vote, “we find that the TSX proceeded on incorrect principle,” and added that, if the exchange has started interpreting its rules differently, any such change “would need further rule-making by the TSX to be effective.”

By ordering the newly issued shares cease-traded until all shareholders can vote on the issuance, the OSC effectively “sterilized” them. It said it did so as part of its role “to ensure that listing standards, which are required to be approved by the Commission as consistent with the public interest, are properly administered.”

Patricia Olasker, a corporate partner at Davies Ward Phillips & Vineberg LLP in Toronto, says the decision is part of the trend that has seen the OSC increasingly engaged in the proxy-contest arena. “This is a whole new area for the OSC and they’ve been slowly but surely entering the field, and taking the principles they developed in the takeover-bid world and applying them to this new area of activity. I think it’s further evidence of the OSC’s view that their mandate goes beyond their traditional role as the protector of buyers and sellers of securities to protecting investors as holders of securities.”

In its reasons, the OSC warned that, if the new issuance fails to win stockholder support, the exchange and Eco Oro must reverse it or “deny shareholders the consequences of their vote to which they are entitled under TSX rules.”

Alex Gorka, an associate in the corporate and M&A groups at Osler, Hoskin & Harcourt LLP in Toronto, says “I think the number one takeaway here is that the OSC is attempting to unscramble the egg. What I mean by that is, they ordered the board of Eco Oro to take all actions needed to unwind the private placement, if shareholders tell them to do so. That’s relevant to the community because, while this remedy is not entirely unprecedented, it is a fairly significant new approach being taken by the OSC.”

In previous instances where the OSC has faced this kind of problem, “they’ve been able to get in front of it and get an undertaking from the company” not to act on the results.

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

Olasker of Davies expects the really interesting element of the appeal to be “the scope of the commission’s jurisdiction on the order. They were very creative in using their frankly very limited powers to construct an order to achieve a good result. They don’t have the power to sterilize voting rights but by working backwards from the powers they have, they got to the same place. I think that will be the issue.”
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