The Ontario Securities Commission has overturned the Toronto Stock Exchange’s approval of Eco Oro Minerals’ private placement. REUTERS/Mark Blinch.
AS SKIRMISHING CONTINUES in the Eco Oro Minerals saga, its true significance — the key role that full disclosure plays when private placements become a weapon in proxy battles — has yet to see broad daylight.
Observers have characterized the key issues as being the extent to which the Ontario Securities Commission (OSC) will tolerate private placement during proxy contests, and the jurisdictional and pragmatic problems that emanate from the joint jurisdiction that courts and securities commissions have over securities-related disputes in Canada.
It may turn out, however, that Eco’s failure to disclose the impact of the private placement on the proxy battle that was taking place in its application to the TSX seeking approval of the placement, was the determinative factor in the OSC’s refusal to approve the placement.
The private placement took place by way of a partial conversion of certain notes to 10.6 million common shares during the course of a proxy battle in which dissident shareholders, led by Courtenay Wolfe and Harrington Global Opportunities Fund Ltd., sought to displace Eco’s board of directors. Eco required and sought TSX approval of the conversion.
But when Eco completed the requisite form, it answered “no” to the question “Could the placement materially affect control of the company?” That question, according to the TSX Company Manual, includes anything that could influence the outcome of a vote.
As is frequently the case in private placements, the transaction closed before the OSC could deal with the matter.
“What Eco was effectively doing is giving misinformation to the TSX, closing the transaction really quickly after obtaining approval, and then arguing that the OSC was hamstrung because the transaction had closed,” says Markus Koehnen of McMillan LLP in Toronto, who represented the dissidents. “The OSC response, as evidenced by its order voiding the transaction, clearly indicates that that can’t be in the public interest.”
Linda Fuerst of Norton Rose Fulbright Canada LLP in Toronto, who represents Eco, says there was no misinformation. “The TSX form was completed in a manner that was consistent with the TSX’s own interpretation of the relevant provisions of the TSX Manual,” Fuerst stated. “The dissident shareholders’ February 10 requisition for a shareholders meeting and the company’s response to that request were both publicly disclosed at the time that the TSX approved of the listing of the 10.6 million shares. It was reasonable to assume that that information was known to the TSX.”
According to Koehnen’s colleague Paul Davis, who also attended the OSC hearing, the evidence revealed that Eco told TSX about the proxy battle “in a 10-minute phone call.” A TSX witness testified that although “someone may have told me,” the witness didn’t realize that a proxy battle was ongoing.
“The question is whether you fill in the form candidly and transparently, or do you inform the TSX in a way that doesn’t raise the flag?” Davis said.
As Koehnen sees it, the OSC’s message is clear. “The Commission wants communication with regulators to occur in a forthright, transparent way,” he said.
At the heart of the case is a deal that cash-strapped Eco, which had only $31,000 in the bank at the time, made with Trexs Investments, LLC last summer. Eco’s only real asset at the time was an arbitration claim against the Colombian government. Ultimately, in return for a US$15 million investment that allowed Eco to fund the arbitration, the company issued contingent value rights and convertible notes to Trexs and certain participating shareholders and insiders that entitled them to 78 percent of the gross proceeds from the arbitration.
“The deal was a pretty extraordinary one,” said Douglas Bryce, who practises with Osler, Hoskin & Harcourt LLP in Toronto.
In February, the dissident shareholders requisitioned a special meeting for the purpose of replacing the existing directors and electing a new board. That meeting was set for April 25.
In March, Eco, after obtaining conditional approval from the TSX, converted a portion of the notes by issuing 10.6 million common shares to the investors. This served to reduce the company’s debt, but increased investors’ control of the company from approximately 41 percent to 46 percent.
Later in March, the dissidents asked the British Columbia Supreme Court (BCSC) to overturn the share issuance on the basis that it was oppressive. They also applied to the OSC to overturn the TSX’s approval of the transaction.
On April 24, the OSC overturned the TSX’s approval and ordered a shareholder vote. Later that day, however, BCSC Justice Gordon Weatherill found that the share issuance was not oppressive because its primary purpose was debt reduction. He also adjourned the meeting scheduled for April 25 and ordered that a new meeting date be set by September 30.
“In effect, the OSC’s decision and my decision are at odds,” Weatherill wrote. “In my view, it is not realistic that the April Meeting can proceed tomorrow.”
One month later, the British Columbia Court of Appeal (BCCA) set aside the adjournment order and required the company to hold the meeting no later than July 10. Eco will reportedly be seeking an extension from the BCSC. Naturally, the dissidents will oppose it, including on jurisdictional grounds premised on the argument that the OSC is the appropriate forum to decide on the issue of the meeting.
It all speaks of a narrative that, according to Bryce, is only too familiar in the Canadian securities environment.
“Eco is just the latest in a line of messy cases regarding private placements that fall squarely in the middle between the jurisdiction of the courts and the jurisdiction of the securities commissions,” he says.