The Ontario Securities Commission’s (OSC) reasons in In the Matter of Eco Oro Minerals Corp. were recently released, providing important guidance regarding private placements of voting securities in the context of proxy contests and articulating the OSC’s views on the public interest in ensuring fairness in contested shareholder meetings.
In February 2017 Eco Oro Minerals Corp. (Eco Oro) became embroiled in a proxy contest with dissident shareholders seeking to replace the incumbent board of directors at a requisitioned shareholders’ meeting then scheduled for April. In the midst of this proxy contest, the board of Eco Oro approved the private placement of common shares (Subject Shares) to certain shareholders (Supporting Shareholders) who collectively held approximately 41% of the then‑outstanding common shares and who had been solicited by Eco Oro management to deliver, and agreed to deliver, letters in support of the incumbent board. The issuance of the Subject Shares was effected by an early conversion, in part, of convertible notes of Eco Oro that had been issued to the Supporting Shareholders several months earlier and resulted in the Supporting Shareholders increasing their ownership to approximately 46% of the outstanding common shares.
Prior to the record date for the requisitioned shareholders’ meeting, the Toronto Stock Exchange (TSX) conditionally approved the private placement. The TSX did not require prior shareholder approval for the private placement, and the issuance of the Subject Shares was completed without advance public disclosure, shortly before the record date for the meeting. The TSX’s approval was based on its determination that the private placement did not “materially affect control of Eco Oro”, because the issuance of the Subject Shares would not result in a single shareholder, or a combination of shareholders acting together, holding more than 20% of the outstanding voting securities.
The dissident shareholders applied to the OSC for a review of the TSX decision that approved the private placement and, in April, the OSC issued an order setting aside the TSX decision. In so doing, the OSC cease-traded the Subject Shares and ordered that shareholder approval be obtained for the issuance of the Subject Shares unless such issuance was reversed by Eco Oro and the Supporting Shareholders. In addition, the OSC ordered that until shareholder approval was obtained, Eco Oro was not to consider the Subject Shares to be outstanding for voting purposes and if shareholder approval was not obtained, Eco Oro was to take all necessary steps to reverse the issuance of the Subject Shares.