Following recent amendments to Canada’s takeover bid rules, private placements in the face of hostile bids have become newly controversial. Private placements in the context of proxy contests have received less attention. Yet this is somewhat surprising, because they are another facet of the same underlying question: whether regulators should allow a financing that may significantly affect the voting power of hostile shareholders in an ongoing shareholder persuasion campaign.
The Alberta Securities Commission (ASC) has just released its reasons for upholding the TSXV’s allowance of a private placement in the context of a proxy contest, without requiring shareholder approval. Re Hemostemix Inc. carries important lessons for companies contemplating a private placement amidst shareholder agitation. It also re-affirms that the ASC will generally defer to judgments of the TSX and TSXV on this and other matters, absent compelling evidence they were unreasonable or contrary to the public interest.
Hemostemix Inc. (Hemostemix or the Company) is an early-stage company listed on the TSXV. In August of 2016, the Company announced a private placement (the Placement). The Placement included a $1 million debenture (the Debenture) issued to Wunderlich. In applying for TSXV approval, the Company stated that if Wunderlich converted his debenture and exercised the warrants issued under the Placement, he would hold 19.47% of the outstanding common shares. The Debenture was secured by a general security agreement (the GSA) and contained several negative covenants binding on the Company.
The TSXV accepted the Placement. Before doing so, the TSXV was in communication with counsel for both the Appellants and the Company, and received representations including an acknowledgement from Wunderlich that he was not acting “jointly or in concert” with the Company or management (the Acknowledgment). Among its reasons for approval were that the 20% threshold for “control person” was not met; the Company demonstrated a need for financing; the overall terms of the financing were not punitive within the context of the venture marketplace; and the fact that there would be no effect on the results of the shareholder meeting (the record date had elapsed). The Appellants appealed under s. 30 of Alberta’s Securities Act.
The ASC’s reasoning
The ASC declined to overturn the approval. In doing so, it first noted that as a matter of administrative law, a decision of the TSXV is reviewable on a standard of reasonableness, entitling it to significant deference. The Appellants cited three grounds from the case law for not deferring: that the TSXV erred in law; that the TSXV overlooked material evidence; and the TSXV failed to consider the perception of the public interest.
In considering whether the TSXV erred in law, the ASC looked at whether Wunderlich was a control person. Wunderlich’s holding did not exceed the 20% threshold in the TSXV definition. To the ASC, the TSXV adequately accounted for evidence that Wunderlich would not be acting “jointly and in concert” with Baker (a director) and Redekop (a former director and CEO), who between them owned approximately 26% of the shares, to bring his holding over 20% or otherwise “materially affect control of the issuer”.
They next considered whether the TSXV overlooked material evidence. First, they extensively reviewed the TSXV’s use of the Company’s Board minutes. The Appellants noted that Wunderlich was present at both of the meetings where the Placement was considered (one as an “Insider”, the other as a “Nominated Director”), and stated that he may have been acting in concert with others. Nonetheless, the TSXV had contended that “special access” was not a relevant consideration in determining who was a “control person” under their internal guidance on control persons (the Guidance), and that the Guidance was carefully thought through. The ASC accepted that the TSXV considered the minutes carefully with respect to Wunderlich’s relationships and was entitled to rely on the Acknowledgment.
Second, they looked at whether the TSXV overlooked material evidence that the Debenture gave Wunderlich “superior rights” within the meaning of the Guidance, thus potentially making him a “control person”. Here, they noted that even though the TSXV did not obtain a copy of the GSA, the TSXV was aware of it, Hemostemix’s filing with the TSXV contained a full summary of its terms and conditions, and those terms and conditions were not unusual in the circumstances.
The ASC next considered the public interest. The ASC distinguished this case from Hudbay and Mercury, two cases in which shareholder votes were required. In contrast to those cases, this case involved a “relatively modest financing”, which the TSXV considered in the context of Hemostemix’s difficult financial circumstances and market conditions. The Guidance was designed to promote the public interest in fair and efficient capital markets and facilitate an efficient administrative process. The ASC rejected the Appellants’ submission that the TSXV should have probed the representations made by Hemostemix’s counsel and in the Acknowledgement, referring again to the interest in fair and efficient markets. The ASC concluded that a shareholder vote could have delivered a pyrrhic victory for dissident shareholders and worthless shares for all holders.
It is important to re-iterate that this case was a review of the TSXV’s decision rather than a fresh re-hearing of all of the evidence. It thus re-enforces that the ASC will generally defer to the judgment of the TSX and TSXV unless there are compelling reasons to depart from it.
That said, in considering complaints about private placements, securities regulators are clearly alive to market conditions and the need for a given financing. In this respect, the ASC’s reasons provide a faint echo of the Dolly Varden decision regarding private placements and hostile bids. The ASC’s reasons appear especially sensitive to the implications of unwinding a financing that had already occurred, when there was clear evidence that the Board had carefully deliberated.
Nonetheless, the TSXV’s and ASC’s extensive reviews of the Company’s Board minutes suggest that where these kinds of financings are concerned, companies should be prepared to show that they fully and fairly considered various options. They should also prepare their board minutes in anticipation that they may end up before a regulator.
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The author would like to thank Joe Bricker, Articling Student, for his assistance in preparing this legal update.
 2017 ABASC 14.
 2016 BCSECCOM 359, 39 OSCB 8927.