Take-over targets can complete private placements where they
have a genuine need for financing, said the British Columbia
Securities Commission in its recent decision (Re Red
Eagle, 2015 BCSECCOM 401). On November 3, 2015, the BCSC
released reasons for the Red Eagle decision and
specifically addressed under what circumstances a securities
regulator should cease trade a private placement.
Red Eagle Facts
In Red Eagle, CB Gold Inc. was subject to two competing
take-over bids, one hostile and the other friendly. During the
course of the take-over bid process, CB Gold engaged in a private
placement of shares to the friendly bidder, Batero Gold Corp. Red
Eagle Mining Corporation, the hostile bidder, brought an
application to the BCSC requesting that the shares issued under the
private placement be cease traded and that all steps be taken to
reverse the private placement. Red Eagle's application was
based on the premise that the private placement was a defensive
What Can Securities Commissions Do?
In considering Red Eagle's application, the BCSC first
considered if it had the jurisdiction to make an order to cease
trade a private placement. While the BCSC concluded that it did, it
also intimated that securities regulators should only make such an
order where there is a "clear abuse of the target shareholders
and/or the capital markets."
When Will a Private Placement Amount to Abuse?
In considering whether the facts in Red Eagle amounted
to a level of abusive conduct, the BCSC considered whether the
private placement was a defensive tactic. The BCSC found the
Private Placement was not a defensive tactic on the grounds that CB
Gold had asked Red Eagle to provide financing in a similar amount
to that of the private placement and there was no evidence
rebutting the fact that CB Gold required the proceeds of the
private placement to meet its liabilities.
To further determine if the Private Placement amounted to abuse
of the target shareholders, the BCSC considered whether the private
placement limited the CB Gold shareholders from accepting the Red
Eagle offer. The original Red Eagle offer had included a condition
that 50% of the CB Gold shares would have to be tendered to the Red
Eagle offer for the take-over bid to proceed. After the private
placement was announced (diminishing the likelihood that the
condition would be met), Red Eagle removed the condition. This was
a significant tactical error: the BCSC found that since the
condition had been removed, the CB Gold shareholders were not
limited from accepting the Red Eagle offer. The BCSC specifically
commented that without the condition being removed, the decision
would have been much more difficult to decide.
While the BCSC confirmed that it had the jurisdiction to cease
trade a private placement, it also noted that from a practical
perspective it may be very difficult to actually reverse a
completed private placement. This issue is further complicated
where the proceeds from a private placement have already been
Issuers subject to take-over bids may conduct a private
placement where they have a genuine need for financing.
Securities regulators have the power to intervene where the
private placement amounts to abuse of target shareholders and/or
the capital markets.
Depending on the facts, there may be no practical remedy to
reverse an abusive private placement.
Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).