Sanctioning Dilutive Private Placements in Proxy Contests: A Two-Part Public Interest Test

Part One: Can the issuer show that the debt settlement was clearly not a defensive tactic?

The first part of the test is for the panel to determine whether the evidence clearly establishes that the issuance of the private placement shares was not, in fact, a defensive tactic designed in whole or in part to alter the dynamics of the contested shareholder vote. The BCSC concluded that Debs had met the initial burden of demonstrating that it was at least unclear whether the private placement was not a defensive tactic because Zefiro demonstrated a clear motivation to exclude Debs from management.

Applying Hecla/Mithaq, the BCSC then placed the onus on Zefiro to demonstrate that the private placement was clearly not a defensive tactic. Drawing on factors considered in those decisions, the Commission held that, although Zefiro was in a difficult financial position and in need of further financing with no alternative financing options available, the fact that the company had conceived of the make-whole payment to induce the Investors to participate in the debt settlement only after Debs’ announcement of the proxy contest and had also taken steps to exclude Debs from management conclusively undercut Zefiro’s efforts to establish that the issuance of the debt settlement shares was clearly not a defensive tactic.

Part Two: Was the debt settlement clearly abusive?

Since Zefiro could not demonstrate that the private placement was clearly not a defensive tactic, the panel had to determine whether the private placement “constitutes a clear abuse of shareholders and/or the capital markets.” In this part of the test, the principles underlying National Policy 62‑202 are engaged “and it is necessary to find the appropriate balance between respecting those principles, which favour facilitating shareholder choice, and respecting a board’s business judgment.”

To assist in its analysis, the panel adopted a set of non-exhaustive factors that had been proposed by staff of the BCSC. These factors, which were derived from Hecla/Mithaq¹ but adapted for proxy contests, include

the issuer’s governance process and management of conflicts;
the impact of the private placement on voting dynamics (for example, whether the issuance tipped the balance in favour of management and affected the ability of shareholders to determine the outcome of the proxy contest); and
the structure and timing of the private placement, including whether the private placees are related parties of the issuer or likely to cast votes aligned with management; the proximity of the share issuance to the record date for the contested meeting; and any other evidence the transaction is designed as a defensive tactic, such as pricing or size of the issuance and resulting dilution.

Groundbreaking B.C. Securities Commission Decision on Review of Defensive Tactics in Proxy Contests