THE TSX WASN’T TOLD ABOUT THE PROXY BATTLE

Here’s why. Some dissident shareholders had launched a proxy battle to take control of Eco Oro’s board. In advance of the special meeting, Eco Oro’s board got the Toronto Stock Exchange to approve an “accelerated” private placement that would boost the percentage of shares held by the board’s supporters to 46 per cent from 41 per cent.

During the hearing, the commission determined that the TSX wasn’t told about the pending proxy battle and the upcoming special meeting. This was an important omission. Both sides weren’t that far apart supportwise coming into the vote. Giving one side an extra four per cent support could have been enough to tip the balance. TSX rules require that shareholders approve any transactions that materially affect the control of the issuer. The OSC therefore concluded that Eco Oro investors should have had a vote before the private placement closed.

There’s a broader context here. Eco Oro is the latest case to test National Policy 62-202, which sets out Canada’s rules on defensive tactics to hostile takeover bids.

Last year, regulators in B.C. and Ontario put NP 62-202 front and centre in a case involving a junior miner called Dolly Varden. The regulators acknowledged that a private placement could thwart an unwanted bid, but they found that in the Dolly Varden case, the company’s board established that it had a legitimate need for the financing.

Eco Oro shows that NP62-202 can have broad application. The OSC found that the policy gives regulators jurisdiction to review proxy battles in which the issuance of shares is used as a defensive measure.

“Proxy contests and takeover bids provide alternative means of effecting a change of control of a public company that have very material consequences for shareholders,” the decision states.

In a note on the case, lawyers with Osler, Hoskin & Harcourt LLP said Eco Oro establishes that the OSC has a broad jurisdiction to remedy or unwind transactions that may disenfranchise the voting rights of shareholders.

“Given the increased prevalence of proxy contests in the Canadian marketplace in recent years, the OSC’s acknowledgment that this alternative method of acquiring corporate control raises similar policy issues to a take over bid is a significant development,” conclude Jeremy Fraiberg, Donald Gilchrist, Emmanuel Pressman, Lawrence Ritchie and Alex Gorka in their note.