Deleveraging During a Proxy Contest: Lessons from the BC Securities Commission’s Decision in Zefiro

The British Columbia Securities Commission (BCSC) recently released its reasons in Re Zefiro Methane Corp., in which it declined to rescind a share issuance that Zefiro Methane Corp. (“Zefiro”) effected during a proxy contest as part of Zefiro’s plan to deleverage.

Zefiro is the latest in a series of decisions over the past decade in which Canadian securities regulators have applied National Policy 62-202 – Take-Over Bids – Defensive Tactics (“NP 62-202”) and its underlying principles to determine whether share issuances during contests for control (i.e., take-over bids and proxy contests) are improper defensive tactics warranting regulatory intervention. Specifically, Zefiro builds on Hecla Mining Company (Re) (see our Update, OSC and BCSC Establish New Framework for Regulating Tactical Private Placements), Eco Oro Minerals Corp. (Re) (see our Update, OSC Clarifies Basis for Intervening in Eco Oro Tactical Private Placement) and Mithaq Canada Inc. (Re), and is the first decision to apply the Hecla framework to a private placement completed during a proxy contest.

Background

Zefiro is a British Columbia corporation listed on the Cboe Canada stock exchange. In May 2025, Zefiro obtained a high-interest bridge loan from a group of its existing investors (including one Zefiro director) to repay a debt that had gone into default. In connection with the refinancing, Zefiro also issued the investors warrants to purchase additional Zefiro shares.

Following the refinancing, the relationship between Zefiro and its founder and CEO began to deteriorate rapidly. The board terminated the CEO in June 2025 (although he remained on the board) and one of the new lenders later commenced litigation against him in New York. In October, the former CEO announced his intention to nominate an alternative slate of directors at Zefiro’s upcoming shareholder meeting. Around the same time, Zefiro announced that it had formed a special committee to investigate allegations against the former CEO. In December, the board (without the former CEO) amended Zefiro’s advance notice policy to permit the board to exclude director nominees under investigation, although Zefiro ultimately decided not to enforce those provisions.

Zefiro’s financial position remained precarious throughout the balance of 2025. In January 2026, facing significant near-term debt maturities and unable to secure conventional financing, Zefiro’s management proposed that the lenders exercise their warrants, with a significant portion of the proceeds set off against their loans and the balance of the loans settled in shares. To compensate for the forgone interest, participating lenders would receive additional common shares equal to 18% of the total loan amount. Three of the lenders agreed to the transaction, which Zefiro’s board (including all three independent directors) approved over the former CEO’s dissent. Cboe also approved the transaction after requesting and receiving detailed submissions.

The former CEO applied to the BCSC alleging that the debt settlement share issuance was an improper defensive tactic and seeking an order rescinding the transaction or, alternatively, restraining the lenders from voting the newly issued shares at the upcoming shareholder meeting.

The BCSC’s Decision

The BCSC dismissed the application and declined to exercise its public interest jurisdiction to rescind the share issuance. In doing so, the BCSC applied the two-stage analysis initially set out in Hecla, modified to reflect that the private placement was undertaken during a proxy contest rather than a take-over bid.

1. Is the private placement clearly not a defensive tactic?

In the first stage of the analysis, the BCSC considered whether the private placement was clearly not a defensive tactic designed, in whole or in part, to alter the dynamics of the contest for control. If it was clearly not defensive, the BCSC would not intervene in the private placement on the grounds that it was a defensive tactic (it could still intervene on other public interest grounds, though none were alleged in this case).

At this stage, the applicant (i.e., the former CEO) bears the initial burden of showing that it is at least unclear whether the private placement was a defensive tactic and that the private placement has a “material impact” on the contest for control, in which case the onus shifts to the issuer to prove that it was clearly not a defensive tactic. Relevant factors at this stage include whether the issuer has a serious and immediate need for financing, whether it considered alternatives to the private placement, whether the private placement was planned or modified in response to, or in anticipation of, the contest for control, and whether the private placement forms part of a good faith, non-defensive business strategy.

Given other conduct of the Zefiro board around the time of the debt settlement that demonstrated a desire to keep the former CEO from regaining control (including his removal as CEO, the amended advance notice policy, and the publicity given to the allegations against him as he launched his proxy contest), the BCSC could not conclude that the private placement was clearly not a defensive tactic.

2. Is the private placement clearly abusive?

If a private placement is not shown to be clearly not a defensive tactic, NP 62-202 is engaged and the second stage of the analysis asks whether the transaction is clearly abusive of the issuer’s shareholders or the capital markets. Relevant factors include whether the private placement benefits the issuer’s shareholders, the extent to which it alters the pre-existing dynamics of the contest for control, whether the investors are related to the issuer or each other in a way that enables the issuer’s board to effectively dictate the outcome of the contest for control, the views of other shareholders (if known), and whether the board appropriately considered the interplay between the private placement and the contest for control.

In determining that the private placement was not clearly abusive, the BCSC placed determinative weight on Zefiro’s urgent need for financing and its conclusion that the debt settlement transaction (including the additional shares issued in lieu of forgone interest) was the only reasonably available refinancing option. Accordingly, the BCSC dismissed the application.

Key Takeaways

Zefiro is notable as the first decision of a Canadian securities regulator to apply NP 62-202 using the Hecla framework to a private placement effected during a proxy contest under its standalone public interest jurisdiction. Hecla and Mithaq were each decided in the context of a take-over bid and, while Eco Oro involved a proxy contest, the OSC intervened in that case under its statutory authority to hear and review TSX decisions, rather than by applying NP 62-202.

Zefiro also reinforces a common theme that a genuine and urgent need for financing, coupled with a lack of reasonable alternatives, is likely to weigh heavily in a regulator’s analysis. While other factors – including a board’s broader conduct during a contest for control – will be considered, Zefiro illustrates that the issuer’s bona fide financing needs will often prove decisive. Boards considering a private placement during a proxy contest should therefore create a robust and contemporaneous record of the reasons for pursuing the private placement, its impact on the proxy contest, and all alternatives the board considered and why they were not viable.

Finally, it is notable that the BCSC did not reference the recent decision of the Ontario Capital Markets Tribunal (OCMT) in Riot Platforms, Inc. v. Bitfarms Ltd., in which the OCMT intervened to cease-trade a shareholder rights plan (see our Update, New Guidance for Evaluating Poison Pills in Ontario). In Riot, the OCMT reconsidered the application of its public interest jurisdiction to conduct that does not constitute a securities law violation and declined to apply the “clearly abusive” standard from Hecla. The OCMT instead concluded that intervention in the rights plan context may be warranted where conduct undermines, in a real and substantial way and with public effect, the animating principles of securities law, and left open the possibility that its analysis may apply in other contexts. Zefiro’s continued application of the “clearly abusive” standard highlights an unresolved question as to whether that standard will continue to govern private placements challenged as defensive tactics, particularly in Ontario.