Securities Law & Instruments

Headnote

Section 144 -- partial revocation of cease trade order to permit trades of securities in connection with amalgamation and financing.

Ontario Statutes

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 127 and 144.

IN THE MATTER OF

THE SECURITIES ACT,

R.S.O. 1990, c.S.5. AS AMENDED (the "Act")

AND

IN THE MATTER OF

MELANESIAN MINERALS CORPORATION

 

ORDER

(Section 144)

WHEREAS the securities of Melanesian Minerals Corporation ("Melanesian") are subject to a temporary order (the "Temporary Order") of the Director, Corporate Finance made on behalf of the Ontario Securities Commission (the "Commission") pursuant to paragraph 2 of subsection 127(1) and subsection 127(5) of the Act on May 27, 2002, as extended by a further order of the Director, Corporate Finance on June 7, 2002 made on behalf of the Commission pursuant to subsection 127(8) of the Act, that trading in the securities of Melanesian cease (collectively, the "Cease Trade Order");

AND WHEREAS Melanesian has applied to the Commission for a partial revocation of the Cease Trade Order pursuant to section 144 of the Act (the Application);

AND UPON Melanesian having represented to the Commission that:

1. Melanesian was incorporated under the Business Corporations Act (Ontario) on January 31, 1997 as "Solomon Minerals Limited". By articles of amendment dated March 5, 1997, the corporate name was changed to "Melanesian Minerals Corporation".

2. Melanesian is a reporting issuer in Ontario, Alberta and British Columbia, having become such on or about September 29, 1997 upon the filing of a prospectus in each of these jurisdictions.

3. Melanesian's authorized capital consists of an unlimited number of common shares ("Melanesian Shares"), of which 14,170,598 are issued and outstanding as fully paid and non-assessable. To the knowledge of Melanesian, the only entities which own more than ten percent (10%) of any class of securities of Melanesian are:

(a) BM Diamondcorp Inc., a public corporation whose securities are listed and posted for trading on the TSX Venture Exchange, which directly and indirectly owns or controls 1,800,832 Melanesian Shares, representing approximately 12.7 percent of Melanesian's issued and outstanding common shares; and

(b) Sandypoint Limited (a private Irish corporation company that is controlled by Patrick A. Harford, the President, Chief Executive Officer and a director of Melanesian), which owns 2,500,000 Melanesian Shares, representing approximately 17.6% of Melanesian's issued and outstanding common shares (In addition, Mr. Harford is the registered holder of a further 362,500 Melanesian Shares).

4. The Cease Trade Order was issued by reason of the failure of Melanesian to file with the Commission the audited annual financial statements for the year ended December 31, 2001 (the "2001 Annual Financial Statements").

5. Melanesian has not carried on business since December 31, 2001. It owns no material assets or liabilities other than indebtedness owed to its creditors, including the Indebtedness (as defined in paragraph 16 below).

6. On May 29, 2002, the British Columbia Securities Commission (the "BCSC") issued a cease trade order against Melanesian for having failed to file the 2001 Annual Financial Statements. On July 5, 2002, the Alberta Securities Commission (the "ASC") issued a cease trade order against Melanesian for having failed to file the 2001 Annual Financial Statements and its interim unaudited financial statements for the three-month period ended March 31, 2002.

7. Melanesian was unable to file the financial statements referred to above due to financial hardship resulting from adverse conditions in the financial markets, the depreciation in the price of gold in the period preceding the Cease Trade Order and the worsening political environment in the Solomon Islands (being the location of Melanesian's former licensed gold exploration projects).

8. On July 13, 2004, the following financial statements of Melanesian were filed with the Commission, the ASC and the BCSC.

a. audited annual financial statements for the year ended December 31, 2001;

b. audited annual financial statements for the year ended December 31, 2002;

c. audited annual financial statements for the year ended December 31, 2003;

d. interim financial statements for the 3-month period ended March 31, 2003;

e. interim financial statements for the 3-month period ended June 30, 2003;

f. interim financial statements for the 3-month period ended September 30, 2003; and

g. interim financial statements for the 3-month period ended March 31, 2004 (collectively the "Unmailed Statements").

9. As of July 13, 2004, Melanesian had remedied all outstanding deficiencies with respect to the filing and mailing of its annual and interim financial statements, other than as set out under paragraphs 10 and 11 below.

10. Melanesian has not mailed to its security holders the Unmailed Statements. Melanesian will mail to its security holders the Unmailed Statements within 30 days of the granting of this order.

11. Melanesian has not filed interim unaudited financial statements for the first quarter ended March 31, 2002, second quarter ended June 30, 2002 and third quarter ended September 30, 2002 (the "2002 Interim Statements") as required by the Act.

12. The 2002 Interim Statements have not been prepared and are not available to be filed.

13. Melanesian believes that the 2002 Interim Statements would not provide additional useful information concerning the present or future operations or financial circumstances of Melanesian because during the period covered by the 2002 Interim Statements Melanesian was inactive.

14. The Melanesian Shares were listed on the TSX Venture Exchange (the "Exchange") until November 14, 2002, at which time they were delisted due to Melanesian's failure to pay its annual sustaining fee. Melanesian has no other securities listed on any stock exchange or traded over the counter in Canada or elsewhere.

15. With the exception of its obligations with respect to the delivery of financial statements, Melanesian is not, to its knowledge, in default of any requirement of the Act, or the rules and regulations made pursuant thereto. Notwithstanding the foregoing, it is hereby acknowledged that one or more of the following activities of Melanesian, which are described in greater detail in paragraphs 16, 17 and 18, may be argued to have constituted a contravention of the Cease Trade Order:

a. Melanesian has entered into a Letter of Intent pursuant to which it intends to enter into a Proposed Amalgamation (as defined in paragraph 18) that will constitute a reverse take-over transaction;

b. Melanesian has applied to the Exchange for approval of the Proposed Amalgamation as a "Reverse Take-over" (within the meaning of Exchange policies) and the listing of the Amalco Shares (as defined in paragraph 18) on the Exchange; and

c. Melanesian has entered into an engagement letter (the "Sponsorship Engagement Letter") with Northern Securities Inc. ("Northern") pursuant to which Northern has agreed to act as Melanesian's sponsor for the purpose of Exchange requirements in connection with the Proposed Amalgamation (as defined in paragraph 18) in exchange for a fee comprised of cash payments in the aggregate amount of $30,000 and the issuance of $10,000 worth of shares in the capital of the amalgamated entity (the "Sponsor Shares"). The issuance of the Sponsor Shares is conditional upon the full revocation of the Cease Trade Order and will occur at the time of the China Goldfields Financing (as defined in paragraph 18).

16. Melanesian intends to enter into a conditional debt settlement agreement (the "Debt Settlement Agreement") with one of its creditors, BM Diamondcorp Inc. (the "Creditor"). The issuance of Melanesian Shares under the Debt Settlement Agreement is conditional upon, among other things, shareholder and regulatory approval and revocation (or partial revocation) of the Cease Trade Order. Under the Debt Settlement Agreement, the Creditor is expected to agree to settle approximately $416,896 of indebtedness (the "Indebtedness") in exchange for the issuance of Melanesian Shares at a deemed price of $0.05 per Melanesian Share. To the knowledge of Melanesian, all of such Melanesian Shares will be issuable to a corporation that is resident of the Province of Ontario.

17. The Debt Settlement Agreement will be considered a "related party transaction" under Commission Rule 61-501 ("Rule 61-501") due to the ownership of BM Diamondcorp Inc. of greater than 10% of the issued and outstanding Melanesian Shares. Melanesian intends to rely on applicable exemptions from the formal valuation requirements under Rule 61-501 as it applies to the issuance of Melanesian Shares under the Debt Settlement Agreement. Melanesian has published a press release and filed a Material Change Report (see paragraph 22), which discloses Melanesian's intention and its basis for relying on the applicable exemptions from the formal valuation requirements under Rule 61-501.

18. Pursuant to a letter of intent entered into on April 21, 2004, as amended June 23, 2004 (the "Letter of Intent"), between Melanesian and Central China Goldfields Inc. ("China Goldfields"), Melanesian and China Goldfields have agreed to amalgamate to form a new corporation under the laws of the Province of Ontario, which shall be named, "Central China Goldfields Inc." (hereinafter referred to as "Amalco") or such other name as may be agreed to among Melanesian and China Goldfields (the "Proposed Amalgamation"). The Proposed Amalgamation will be subject to a number of conditions, including, but not limited to receipt of all shareholder and regulatory approvals and revocation (or partial revocation) of the Cease Trade Order. Following the approval of the Proposed Amalgamation by Melanesian Shareholders, but prior to the Closing thereof, China Goldfields will complete an equity financing for gross proceeds of up to $2,500,000 but not less than $1,925,000 (the "China Goldfields Financing"). The actual price per security offered pursuant to the China Goldfields Financing and the actual commissions payable in connection therewith will be determined and publicly announced not less than ten (10) days prior to the meeting of Melanesian Shareholders that is held for the purpose of approving the Proposed Amalgamation. Subject to the partial revocation of the Cease Trade Order and the receipt of the conditional approval of the Exchange, the Sponsor Shares will be issued immediately following the China Goldfields Financing but prior to Closing of the Amalgamation. The Letter of Intent contemplates that, upon Closing of the Proposed Amalgamation, holders of Melanesian Shares would be entitled to receive one (1) common share in the capital of Amalco (an "Amalco Share") for every ten (10) Melanesian Shares that they currently hold, while shareholders of China Goldfields would be entitled

19. It is contemplated that existing shareholders of Melanesian would own approximately 13.5% of the voting securities of Amalco upon completion of the Proposed Amalgamation (assuming: (i) the issuance of 8,337,932 Melanesian Shares pursuant to the Debt Settlement Agreement; (ii) the issuance of 333,333 Sponsor Shares pursuant to the Sponsorship Engagement Letter; and (iii) the issuance of 8,333,333 China Goldfields Shares and 4,166,667 China Goldfields Warrants pursuant to the China Goldfields Financing at a price of $0.30 per unit (with each such unit being comprised of one China Goldfields Share and one half of one China Goldfields Warrant) (without giving effect to any exercise of China Goldfields Broker Warrants)) and the holders of China Goldfields Shares will hold approximately 86.5% of the outstanding Amalco Shares upon completion of the Proposed Amalgamation.

20. In order to proceed with the Proposed Amalgamation, partial revocation of the Cease Trade Order will be required and the Proposed Amalgamation will require regulatory and shareholder approval. The Letter of Intent contemplates that the Proposed Amalgamation will be subject to the completion of several conditions, including but not limited to satisfaction of the following items:

a. between $410,000 and $500,000 of liabilities of Melanesian shall be settled for Melanesian Shares at a deemed price of $0.05 per share;

b. prior to Closing, the China Goldfields Financing shall have been completed, pursuant to which China Goldfields shall have received aggregate gross proceeds of not less than $1,925,000;

c. China Goldfields would have net assets valued at no less than $2,075,000 upon Closing;

d. Amalco would have a minimum of $2,040,000 in pro forma combined net working capital upon Closing, with its interest in and to the Snow Mountain Gold Property in good standing;

e. prior to Closing, a minimum of $100,000 in exploration and development costs shall have been spent on the Snow Mountain Gold Property, or the Exchange shall have accepted the Snow Mountain Gold Property as a "Tier 1 Property" (as such term is defined in Policy 1.1 of the Exchange Corporate Finance Manual);

f. the board of directors of Amalco would initially consist of 4 members, of which 2 would be nominees of China Goldfields and 2 would be nominees of Melanesian; and

g. conditional approval from the Exchange for the listing of the Amalco Shares shall have been obtained prior to Closing.

21. The terms of the Proposed Amalgamation as negotiated between Melanesian and China Goldfields and contemplated in the Letter of Intent will be set out in a formal written agreement between Melanesian and China Goldfields (the "Proposed Amalgamation Agreement").

22. On April 22, 2004, Melanesian published a press release and filed a material change report (the "Material Change Report") with the Commission, the ASC and the BCSC announcing the entering into of the Letter of Intent and describing the material terms of the Proposed Amalgamation.

23. Melanesian intends to hold a meeting (the "Meeting") of its shareholders for the purposes of obtaining the necessary shareholder approvals under applicable corporate and securities laws for the matters described in paragraphs 16, 17, 18 and 21 above. In preparation for the Meeting, Melanesian proposes to send to all of its shareholders of record a management information circular and proxy statement (the "Information Circular") that will contain prospectus-level disclosure concerning Melanesian, China Goldfields and the proposed business of Amalco.

24. Melanesian has applied for a partial revocation of the Cease Trade Order permitting:

a. Melanesian to enter into the Proposed Amalgamation Agreement;

b. Melanesian to enter into the Debt Settlement Agreement;

c. Amalco to perform and complete all contractual obligations undertaken by China Goldfields in connection with the China Goldfields Financing; and

d. upon receipt of Melanesian Shareholder approval:

i. the issuance of approximately 8,337,932 Melanesian Shares in accordance with the Debt Settlement Agreement;

ii. the issuance of the Sponsor Shares in accordance with the Sponsorship Engagement Letter; and

iii. the issuance by Amalco of: (A) Amalco Shares pursuant to the Proposed Amalgamation to holders of Melanesian Shares and/or China Goldfields Shares (including China Goldfields Shares that are issued pursuant to the China Goldfields Financing) that are resident in the Province of Ontario; (B) Amalco Warrants pursuant to the Proposed Amalgamation to holders of China Goldfields Warrants that are resident in the Province of Ontario; and (C) Amalco Broker Warrants pursuant to the Proposed Amalgamation to holders of China Goldfields Broker Warrants that are resident in the Province of Ontario.

25. Melanesian has also requested that, following completion of the Proposed Amalgamation, the Cease Trade Order be revoked in full so as to permit trading of Melanesian securities generally.

26. Melanesian has made applications to the ASC and the BCSC to have partially revoked the cease trade orders issued by them.

AND UPON considering the Application and the recommendation of the staff of the Commission;

AND UPON the Director being satisfied that to do so would not be prejudicial to the public interest;

IT IS ORDERED, pursuant to section 144 of the Act, that the Cease Trade Order be, and that it is hereby, partially revoked permitting:

a. Melanesian to enter into the Proposed Amalgamation Agreement;

b. Melanesian to enter into the Debt Settlement Agreement;

c. Amalco to perform and complete all contractual obligations undertaken by China Goldfields in connection with the China Goldfields Financing; and

d. upon receipt of Melanesian Shareholder approval:

i. the issuance of approximately 8,337,932 Melanesian Shares in accordance with the Debt Settlement Agreement;

ii. the issuance of the Sponsor Shares in accordance with the Sponsorship Engagement Letter; and

iii. the issuance by Amalco of: (A) Amalco Shares pursuant to the Proposed Amalgamation to holders of Melanesian Shares and/or China Goldfields Shares (including China Goldfields Shares that are issued pursuant to the China Goldfields Financing) that are resident in the Province of Ontario; (B) Amalco Warrants pursuant to the Proposed Amalgamation to holders of China Goldfields Warrants that are resident in the Province of Ontario; and (C) Amalco Broker Warrants pursuant to the Proposed Amalgamation to holders of China Goldfields Broker Warrants that are resident in the Province of Ontario

PROVIDED HOWEVER that:

(a) Amalco provides to each of the aforementioned recipients of Amalco Shares, Amalco Warrants and/or Amalco Broker Warrants, as the case may be, a copy of the Cease Trade Order, a copy of this partial revocation order, a copy of any final revocation order that revokes the Cease Trade Order in full and a written notice advising that all securities described in this partial revocation order will remain subject to the Cease Trade Order until such time that a full revocation order is issued by the Commission; and

(b) all of the items permitted in accordance with parts (a) through (d) of the foregoing paragraph occur on or after the date of this Order.

July 15, 2004.

"Erez Blumberger"