A RECENT Toronto Stock Exchange (TSX) staff notice clarifying disclosure expectations for private placements means that closings will likely take longer to get regulatory approval.
“We can expect the TSX to be more conservative, take more time, take a much wider view of what materially impacts control, ask more questions and elevate decisions to more senior levels when dealing with applications for approval of private placements,” says Manny Pressman in Osler, Hoskin & Harcourt LLP’s Toronto office.
The staff notice follows on the Ontario Securities Commission’s decision in Eco Oro Minerals Corp. earlier this year. The June ruling suggested that private placements, whether made in the context of takeovers or proxy contests, would be closely scrutinized.
“Issuers now have a responsibility to disclose anything that might impact a takeover or proxy battle going forward,” says Chris Sunstrum of Goodmans LLP in Toronto. “Before this staff notice was released, most issuers would not have felt compelled to provide the same level of detail about what was going on in the company.”
All listed companies must obtain TSX approval of proposed private placements. TSX policy mandates a shareholder vote where placements would “materially affect control.” In Eco Oro, the OSC opined that a private placement materially affects control even if its effect on is only transient.
“One example of a transient effect might be a placement that impacts the results of a vote at a particular meeting,” Sunstrum explains.
The OSC also found that the TSX should require shareholder approval even when it is in doubt about the effect that a private placement might have on control.
The staff notice responds to Eco Oro by confirming that issuers must disclose “any relevant significant matters” when they are seeking private placement approval. These matters include upcoming shareholder meetings for which the record date has been set or will shortly be set; pending mergers, acquisitions, take-over bids, changes to capital structure and other significant transactions; and details regarding potential dissident shareholders and anticipated proxy contests.
“These days, even a vote on removing directors could be seen as materially impacting control,” Pressman says.
At the heart of Eco Oro was the deal that cash-strapped Eco Oro, which had only $31,000 in the bank at the time, made with Trexs Investments, LLC in the summer of 2016. Eco’s only real asset then was an arbitration claim against the Colombian government. In return for a US$15 million investment that allowed Eco to fund the arbitration, Eco issued contingent value rights and convertible notes to Trexs and certain participating shareholders and insiders that entitled them to 78 per cent of the gross proceeds from the arbitration.
In February 2017, Eco’s 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.
Meanwhile, Eco applied to the TSX for approval of the private placement. But when the company completed the requisite form, it answered “no” to the question, “Could the placement materially affect control of the company?”
Eco then 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 per cent to 46 per cent.
The OSC, concluding that Eco had been “less than forthcoming” in its disclosure, overturned the TSX’s approval of the transaction and ordered a shareholder vote.
Initially, Eco Oro created uncertainty as to whether the OSC would tolerate private placements during proxy contests. But it now appears that the securities commission is more likely to defer to the TSX where full disclosure has occurred.
Because the OSC specifically declined to discuss whether it viewed the Eco Oro placement as contrary to the public interest, however, key questions remain as to how the Commission will approach these placements.
“The decision leaves open whether tactical private placements during a proxy contest can be challenged under the OSC’s public interest jurisdiction if they otherwise comply with the TSX’s rules and, if so, what analytic framework might be applied,” Sunstrum says.