Lexpert Magazine

68 LEXPERT MAGAZINE | NOVEMBER/DECEMBER 2017 | TACTICAL PRIVATE PLACEMENTS | the transaction could have a tactical impact on the bid." As it turns out, Dolly Varden's impact may not be limited to M&A take- over situations. e OSC's June 2017 rea- sons in Re Eco Oro Minerals (2017 ONSEC 23) suggest that private placements made during proxy contests will also be closely scrutinized. "Eco Oro recognizes the reality that some changes in control are effected by way of bids and some by way of proxy con- tests," Woollcombe says. At the heart of Eco Oro is the deal that cash-strapped Eco made with Trexs Invest- ments, LLC in the summer of 2016. e company had only $31,000 in the bank at the time, and its only real asset was an arbitration claim against the Colombian government. 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 per cent of the gross proceeds from the arbitration. In February 2017, the dissident share- holders requisitioned a special meeting for the purpose of replacing the existing direc- tors and electing a new board. at meet- ing was set for April 25. In March, Eco, aer obtaining condi- tional approval from the Toronto Stock Ex- change, converted a portion of the notes by issuing 10.6 million common shares to the investors. is served to reduce the com- pany's debt, but increased investors' control of the company from approximately 41 per cent to 46 per cent. e dissidents asked the OSC to over- turn the TSX's approval of the transaction. In April, the OSC agreed and ordered a shareholder vote. But whereas the OSC and BCSC decided Dolly Varden based on their public interest jurisdiction, the Eco the regulators are looking for: having lev- elled the field by giving boards significantly more time to find alternatives than they had before, they want to protect sharehold- ers' primacy." So while M&A lawyers have welcomed the analytical framework that Dolly Var- den establishes, many believe that regula- tors' substantive position on private place- ments remains true to its historical roots. "Nothing's changed, in the sense that good-faith private placements will be sup- ported and allowed no matter when they are effected," says Walied Soliman in Nor- ton Rose Fulbright Canada LLP's Toronto office. "But when indications exist that the private placement or other financing is de- signed primarily to hinder the corporate democratic process, regulators will at the least take a closer look at the situation." What seems clear is that private place- ments will not approach the ubiquity that poison pills had as a defensive tactic. In- stead, their role will likely be more focused. "Firstly, if there's a financing need — even one that is not immediate, but is in fact in the best interests of shareholders — a pri- vate placement could well get regulatory approval," Sunstrum says. "Secondly, if a great financing transaction comes along, and it's not yet clear what's going to happen with the bid, doing the transaction could be regarded as acting in good faith even if Oro ruling is based on TSX rules and not on the OSC's public interest jurisdiction. While many observers have character- ized the key issues as being the extent to which the OSC will tolerate private place- ments during proxy contests, its precise im- pact is clouded by the fact that the determi- native factor in the OSC refusal to approve the placement was Eco's failure to make full disclosure to the TSX when it sought that approval. e issue arose because, when Eco com- pleted the requisite TSX form, it answered "no" to the question, "Could the placement materially affect control of the company?" at question, according to the TSX Com- pany Manual, included anything that could influence the outcome of a vote. e OSC concluded that Eco had been "less than forthcoming" in its disclosure. is meant that the TSX did not have all the material information before it, a fact that was central to the OSC's decision to over- turn the placement. But even in this context, Eco leaves im- portant questions unanswered. e ruling provides no guidance as to the standard of proof the TSX must require to conclude that a transaction materially affects control of a company, or as to who will bear the burden of proof. And because the OSC specifically de- clined to discuss whether it viewed the placement as contrary to the public inter- est, key questions also remain as to how the commission will approach these place- ments. "e decision leaves open whether tactical private placements during a proxy contest can be challenged under the OSC's public interest jurisdiction if they other- wise comply with the TSX's rules, and if so, whether the analytical framework would be the same as Dolly Varden or whether different considerations would apply," Sun- strum says. "Still, my reading of Eco is that the OSC is saying that they will scrutinize private placements in proxy contexts as carefully as they do in bids." However that may be, Sunstrum be- lieves that there may be more room for pri- vate placements in proxy situations than in takeover situations. "In a broad sense, Eco recognizes the principle that it is at least as important to protect a shareholder's right to vote as it is to protect the right to tender to a bid, so there's no clear reason why the CHRIS SUNSTRUM > GOODMANS LLP "Private placements, unlike rights plans, can serve purposes ... beyond simply blocking a bid … So, for this and other reasons, securities regulators have expressed the need for caution when intervening in private placements on public interest grounds."

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