Guide to Shareholder Activism and Proxy Contests in Canada

The OSC reversed the TSX decision and cease-traded the shares issued upon conversion of the notes and ordered that if shareholder approval for the issuance of the shares was not obtained, Eco Oro must unwind the private placement. In addition, the OSC ordered that until shareholder approval was obtained, the shares could not be voted. In considering whether the TSX properly considered whether the private placement “materially affected control of Eco Oro,” the OSC found that looking exclusively at whether a new 20% shareholder was created was insufficient and contrary to the TSX’s own listing manual, 30 which requires the TSX to consider the particular fact situation (in this case, a proxy contest) where a transaction materially affects control of the issuer. The OSC found that the TSX had failed to consider the impact that the private placement may have on the upcoming vote in assessing whether it “materially affected control,” and that “the public interest requires an evaluation of whether an issuance of shares by a listed issuer is for the purpose of entrenching management in the face of a proxy contest.” The OSC concluded that there was overwhelming evidence of a tactical motivation by Eco Oro to influence the vote at the upcoming meeting and that the issuance of the shares to the friendly shareholders “could reasonably tip the balance in favour of management.” Moreover, the OSC found no compelling business objective for the private placement to be completed prior to the record date for the requisitioned meeting so as to negate this tactical motivation. Indeed, the OSC found that the private placement, which provided no new funds and no covenant relief under the convertible notes, had little practical positive effect for Eco Oro.

In concurrent proceedings before the British Columbia Supreme Court, the Court found that the share issuance was not oppressive because its primary purpose was debt reduction.

As a result of Re Eco Oro , companies, shareholders and regulators more closely scrutinize private placements proposed during the pendency or in anticipation of a proxy contest and consider what impact proposed share issuances will have on battles for control. The decisions may also drive shareholders to seek remedies before securities commissions rather than the courts, which are more reluctant to question a company’s decisions due to the deference paid to directors under the business judgment rule.

30 T SX Company Manual, Part I, sections 603-604. See also Request for Comments – Amendments to Parts V, VI and VII of the Toronto Stock Exchange Company Manual in Respect of Non-Exempt Issuers, Changes in Structure of Issuers’ Capital and Delisting Procedures (2004), 27 OSCB 249, at 319.