On August 22, 2016, a group of shareholders commenced a proxy contest to change the entire board of Hemostemix Inc. (Hemostemix), a widely-held, micro cap, clinical-stage biotechnology company (TSXV:HEM, OTCQX:HMTXF).

Hemostemix’s business activities focus on the development and planned future commercialization of ACP-01, a proprietary, blood-derived cell product designed to treat critical limb ischemia, a painful obstruction of the arteries that reduces blood flow to the extremities. Hemostemix had reached an agreement in 2014 with a contract research organization (CRO) to manage most aspects of the phase 2 clinical trial of ACP-01, but Hemostemix announced on June 28, 2016, that the CRO had terminated the agreement, and that phase 2 clinical trials would be placed on hold.

On August 8, 2016, Hemostemix filed an information circular for its Annual General and Special Meeting of Shareholders to be held on Thursday, September 8, 2016. The special business to be considered at the meeting includes confirmation of two amendments to the company’s by-laws:

  • the adoption of an advance notice by-law, requiring shareholders that seek to nominate persons for election to the board to provide notice to Hemostemix in advance of the meeting of shareholders when the election will occur; and
  • the adoption of an enhanced quorum by-law, whereby the quorum for a shareholder meeting is raised to 50% (from 5% normally) in the event of a contested meeting where incumbent directors may cease to constitute a majority of the board.

The next day, Hemostemix publicly announced the resignation of its Chief Medical Officer and one of its directors, the latest in a series of changes to the management team and board.

Two days later, on August 11, Hemostemix publicly announced a private placement that raised $1,000,000 through a convertible, senior, secured debenture from an arm’s length party, and $610,000 of unsecured promissory notes, of which $430,000 comes from current insiders.

Subsequently, on August 22, a group of shareholders filed a dissident circular proposing a full slate of new directors. The dissidents report a number of grievances, among them:

  • a falling share price (from a high of $1.25/share in December of 2014 to $0.17/share on August 11, 2016),
  • failure to raise necessary funds to support development of ACP-01 (arguing that the August 11 financing will only support the company through three months at current burn rate),
  • termination of the CRO agreement, and
  • high turnover among directors and executive officers.

The dissidents further allege the Hemostemix by-law amendments were made in direct anticipation of the pending proxy battle, and recommend voting against both amendments.

In response, Hemostemix alleges that the dissident plan requires all Hemostemix assets to be used as security for a loan where the dissidents are the financing party (which could allow the dissidents to seize all Hemostemix assets in the event of default), that the dissident team is inexperienced in the pharmaceutical space, and that management’s plan for ACP-01 development remains viable.

As we noted in our 2013 Canadian Proxy Contest Study and subsequent updates, seeking a clean sweep of the boardroom may be a high-risk strategy for dissidents, but it is a strategy that has tended to produce more favourable results for the dissident. As we note in our most recent 2016 update, management appears to be turning the tide generally in their ability to successfully defend against dissidents. We will continue to monitor the progress of the Hemostemix contest to see which of the competing trends that we have noted in our historical analysis prevails.