Canaco Resources Inc.

Headnote

MI 11-102, NP 11-203 and MI 61-101 -- business combination -- related party of an issuer has entered into a connected transaction to a business combination -- related party has agreed to terminate agreements with the issuer in order to facilitate the business combination and without any economic enhancements or ancillary benefits to the related party -- MI 61-101 requires that the votes attached to securities of interested parties to the business combination, including related parties that a party to a connected transaction, cannot be included in the minority approval of the business combination -- relief granted allowing the votes attached to the related party's shares to be included as part of the minority.

Applicable Legislative Provisions

Multilateral Instrument 11-102 Passport System.

National Instrument 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions.

Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions, ss. 8.1(2), 9.1(2).

March 27, 2013

IN THE MATTER OF
THE SECURITIES LEGISLATION OF
ONTARIO
(the “Jurisdiction”)

AND

IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF
CANACO RESOURCES INC.
(the “Filer”)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the "Legislation") that the Filer be exempt from the requirement to exclude the votes attached to common shares of the Filer held by (i) SinoTech (Hong Kong) Corporation Limited ("SinoTech"), (ii) its related parties, and (iii) joint actors of (i) and (ii), in determining minority approval of the Spinout (as defined below) pursuant to section 4.5 of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (the "Exemption Sought");

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(a) the Ontario Securities Commission (the "Commission") is the principal regulator for this application, and

(b) the Filer has provided notice that Section 4.7(1) of Multilateral Instrument 11-202 is intended to be relied upon in Québec.

Interpretation

Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.

Representations

This decision is based upon the following facts represented by the Filer:

1. The Filer was incorporated under the Canada Business Corporations Act (the "CBCA") and is a reporting issuer in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Québec and New Brunswick and is not in default of securities legislation in any province of Canada.

2. The authorized share capital of the Filer consists of an unlimited number of common shares (the "Common Shares"), of which approximately 200 million Common Shares are issued and outstanding as at February 26, 2013. The Common Shares are listed and posted for trading on the TSX Venture Exchange under the symbol "CAN".

3. SinoTech is the largest shareholder of the Filer, holding approximately 20% of the outstanding Common Shares. A related party of SinoTech, Beijing Donia Resources Co., Ltd. ("Beijing Donia"), holds 3,508,771 Common Shares. Dr. Jingbin Wang, a director of the Filer, is also a director of SinoTech. Dr. Wang holds 990,000 Common Shares.

4. East Africa Metals Inc. ("East Africa Metals") is a private company incorporated under the CBCA.

5. East Africa Metals is a wholly-owned subsidiary of the Filer. The authorized share capital of East Africa Metals consists of an unlimited number of common shares, of which one common share was issued and outstanding as at February 26, 2013.

6. Shark Minerals Inc. ("Shark") is a private company incorporated under the Business Corporations Act (British Columbia).

7. The authorized share capital of Shark consists of an unlimited number of common shares, of which 43,375,687 common shares were issued and outstanding as at February 22, 2013.

8. On February 27, 2013, the Filer entered into an arrangement agreement (the "Arrangement Agreement") with East Africa Metals whereby it will: (a) transfer all of its Tanzanian assets, approximately $26 million in cash and certain other assets and liabilities to East Africa Metals, and (b) distribute all of the shares of East Africa Metals to the current shareholders of the Filer on the basis of one East Africa Metals common share for every three Common Shares held by the Filer's shareholders as of the effective date (the "Spinout"). The Spinout will be effected by way of a plan of arrangement pursuant to Section 192 of the Canada Business Corporations Act (the "Arrangement"). Completion of the Spinout is subject to, among other things, receipt of shareholder approval.

9. Prior to entering into the Arrangement Agreement, the Filer entered into support agreements with each of the directors and senior officers of the Filer, as well as SinoTech, whereby each party agreed, in accordance with the terms thereof, to vote their respective Common Shares in favour of the resolution approving the Spinout. The parties to these support agreements hold, in the aggregate, approximately 22% of the outstanding Common Shares.

10. The completion of the Spinout is a condition to the Acquisition (as defined below).

11. On December 14, 2012, the Filer, Shark and the shareholders of Shark entered into a share purchase agreement (the "Share Purchase Agreement") whereby the Filer agreed to acquire all of the outstanding common shares of Shark in exchange for Common Shares (the "Acquisition"). Pursuant to the Share Purchase Agreement, the shareholders of Shark will each receive 2.716 Common Shares in exchange for each Shark common share held (such exchange ratio to be revised based on the number of options of the Filer exercised prior to closing). In aggregate, Shark shareholders will receive approximately 118 million Common Shares upon completion of the Acquisition.

12. On completion of the Acquisition, the Filer will have approximately 318 million Common Shares issued and outstanding, of which former shareholders of Shark and current shareholders of the Filer will own approximately 37% and 63%, respectively.

13. Prior to entering into the Share Purchase Agreement, the Filer and Shark entered into support agreements with each of the directors and senior officers of the Filer, as well as SinoTech, whereby each party agreed, in accordance with the terms thereof, to vote their respective Common Shares in favour of the resolution approving the Acquisition. The parties to the support agreements hold approximately 22% of the outstanding common shares of the Filer.

14. In connection with the proposed Spinout and Acquisition, the Filer and Sinotech have entered into a termination agreement (the "Termination Agreement"). The Termination Agreement provides for, among other things:

a. the termination of a unit purchase agreement dated March 27, 2009 (the "Unit Purchase Agreement") pursuant to which SinoTech agreed to acquire units of the Filer and was granted a pre-emptive right in respect of future financings and director nomination rights to nominate two directors to the Filer's board of directors (the "Investor Rights"); and

b. the termination of a consulting agreement dated July 1, 2012 for the engagement of Lingling Yang to serve as Director of Corporate Communications of the Filer and Chaoxian Xhou to serve as Deputy General Manager of the Filer (the "Management Participation Rights").

15. The Unit Purchase Agreement does not have minimum ownership thresholds for the exercise of the Investor Rights or the Management Participation Rights and so would continue to exist regardless of how small SinoTech's beneficial ownership becomes, including as a result of the Spinout and Acquisition.

16. As part of the negotiation of the Spinout and Acquisition, SinoTech agreed that it would be inappropriate for the Investor Rights to continue given that SinoTech's ownership post-closing would be reduced from 20% to below 13%. Likewise, as the current assets of the Filer are to be spun off, the Management Participation Rights were also determined to be unnecessary and inappropriate.

17. The Termination Agreement extinguishes the Investor Rights and the Management Participation Rights in order to facilitate the Filer's post-closing change of focus and to recognize the reduced shareholdings of SinoTech. SinoTech was offered nothing in exchange for its agreement.

18. Under Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions ("MI 61-101"), the Spinout constitutes a "business combination" because it is an arrangement, being effected by way of a plan of arrangement, the effect of which is to terminate the interests of the shareholders of the Filer in the Common Shares.

19. Section 4.5 of MI 61-101 will require minority approval of the Spinout as a business combination, and none of the exemptions in section 4.6 appear to be available. For the purposes of this "minority" shareholder approval for the Spinout, the "minority" shareholders of the Filer would be all shareholders of the Filer other than (i) the Filer, (ii) any interested party for the purposes of the Spinout within the meaning of MI 61-101, (iii) any related party to such interested party within the meaning of MI 61-101 (subject to the exceptions set out therein), and (iv) any person that is a joint actor with a person referred to in the foregoing clauses (ii) or (iii) for the purposes of MI 61-101.

20. Under MI 61-101, the Termination Agreement could reasonably be determined to constitute a "connected transaction" to the Spinout as it has at least one party in common (the Filer) and was negotiated at approximately the same time as the Spinout. If SinoTech, as a related party to the Filer, is considered to be a party to a connected transaction to the Spinout, SinoTech would be an interested party under MI 61-101. As a consequence none of SinoTech, Beijing Donia or Dr. Jingbin Wang could vote its Common Shares as part of the "minority".

21. The Filer has determined that the Termination Agreement does not provide SinoTech with any benefit or additional incentive to vote in favour of the Spinout as the benefit of the Termination Agreement flows to the Filer and its shareholders other than SinoTech following completion of the proposed transactions. SinoTech in fact suffers a detriment in that its pre-emptive right to finance the Filer and its ability to nominate directors to the board of directors of the Filer have each been terminated.

22. In the absence of the relief sought, subsection 8.1(2) of MI 61-101 would require the Filer to exclude the votes attached to Common Shares held by (i) SinoTech, (ii) its related parties, and (iii) joint actors of (i) and (ii), in determining minority approval of the Spinout pursuant to section 4.5 of MI 61-101.

23. The Filer will hold a special meeting of its shareholders (the "Meeting") on March 28, 2013 for the purpose of obtaining shareholder approval of the Spinout and Acquisition. The Filer has delivered a management information circular (the "Circular") to its shareholders in connection with the Meeting. The Circular discloses that approval of the Spinout is subject to the minority approval requirements of MI 61-101 and that the Filer has applied to the Commission for the Exemption Sought.

Decision

The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.

The decision of the principal regulator under the Legislation is that the Exemption Sought is granted.

"Naizam Kanji"

Deputy Director, Corporate Finance

Ontario Securities Commission