Anita Anand holds the J.R. Kimber Chair in Investor Protection and Corporate Governance at the Faculty of Law, University of Toronto.
One recent case that consistently crops up among those interested in mergers and acquisitions is the Eco Oro decision, in which the Ontario Securities Commission exercised its public interest jurisdiction and ordered extraordinary relief in considering a proxy contest.
The public interest power allows the OSC "to make an order if in its opinion it is in the public interest to make the order or orders." The case is an unusual example of the usefulness of this power in the context of reviewing decisions of the Toronto Stock Exchange.
The case involved a company (Eco Oro) that issued 10 per cent of its common shares to four shareholders with the apparent intention to prevent the replacement of its board of directors. In fact, it issued the shares just before the record date for a requisitioned shareholders' meeting at which the overthrow of the board was to be considered. The issuance of the Eco Oro shares required TSX approval. The TSX approved and the shares were issued before the OSC could consider the dissident shareholder appeal from the TSX decision.
In considering the appeal from the TSX decision, the question for the OSC was twofold: Would it undo a transaction already permitted by the TSX and was the share issuance in the "public interest"? Referring to the factors in the Canada Malting case, which include whether the TSX erred in law or overlooked material evidence, the OSC set aside the TSX decision and ordered a meeting to occur at which shareholders could vote on the issuance. The OSC reasoned that each of the Canada Malting factors justified OSC intervention, especially since new evidence, which the TSX did not consider, was presented. The OSC also held that if the shareholders vote to instruct the Eco Oro board to reverse the issuance, the board should forthwith comply. The OSC was particularly attuned to the fact that there was no pause between the announcements of the share issuance and the closing of the transaction. In other words, the dissident shareholders did not have time to register their objections and, of course, the OSC did not have time to review the transaction.
Central to the OSC's decision was the TSX approval process and a particular form that requires disclosure of "any significant information regarding the proposed private placement." Strikingly, Eco Oro provided no information about the proxy contest and its CEO certified that the notice was complete, accurate and contained no omissions or untrue statements of material fact. Furthermore, the closing of the share issuance occurred a mere eight days before the record date for the requisitioned shareholders' meeting. The shares were issued only to selected individuals including three shareholders who, immediately before the issuance, were solicited by Eco Oro's management to execute support letters.
The TSX's test as to whether to permit the share issuance is whether it would materially affect control of Eco Oro. The OSC opined that the TSX was not wrong in deciding that the share issuance would not materially affect control of Eco Oro – it did not have knowledge of key facts including information about the proxy contest and voting arrangements required to be disclosed on the form.
The key question is: Why did the corporation submit the required form with incomplete information? Although the matter came to the OSC via an appeal from the TSX decision, the OSC applied broader public-interest considerations. Its approach is consistent with the law relating to defensive tactics as well as National Policy 62-202, both of which are concerned with ensuring that management is not entrenched in the face of a change of control. The OSC acknowledged that shareholders are justified in expecting to be treated fairly .
The considerations that the OSC brought into play in its reasons are similar to those developed in tactical poison-pill jurisprudence, where poison pills have been implemented without shareholder approval. Securities regulators have been wary of these pills and, similarly, as Eco Oro shows, it will not allow share issuances that seek to entrench management and prevent changes of control in other ways. Consistent with the Dolly Varden case, which considered a target's issuance of shares as a takeover bid defence, the OSC stated, "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, thwarting the justified expectations of shareholders trusting in a system that appropriately promotes shareholder democracy and board accountability."
The OSC went further. In addition to overturning the decision of the TSX, it also said that the TSX itself should order a shareholder vote in the context of close votes in board elections. Why? Voting "promotes the fair treatment of shareholders and the quality and integrity of Ontario capital markets." The Eco Oro case thus may be telling of the direction in which securities regulators are headed in overseeing changes of control. The OSC sent an explicit message to Eco Oro, its counsel and capital-market participants at large that it will not allow TSX decisions to stand in cases where "significant information" has not been revealed in the context of TSX-required filings. It will also seek to prevent management entrenchment in changes of control. The OSC even set out factors that it will consider when deciding whether to reverse a transaction. In its view, the public interest interpreted in this way is more important than the commercial interests of the company and those shareholders who supported its conduct.
The public-interest power has legitimately been criticized as being overly broad, without clearly articulated parameters to guide capital-market participants about when and in what circumstances it will be invoked. But sometimes, as in the Eco Oro case, a broad public-interest concept is useful because of its flexibility that in turn allows the OSC to attend to the interests of dissident shareholders. It is reassuring to have such an example crop up from time to time.