Canada: Private Placements As A Defence To Take-Over Bids

The Ontario Securities Commission (OSC) and British Columbia Securities Commission (BCSC) recently released a noteworthy decision marking the first instance since changes to the regime governing take-over bids became effective in May 2016 in which Canadian securities regulators considered whether a contemplated private placement is an inappropriate defensive tactic.

The decision In the Matter of Hecla Mining also includes useful guidance concerning the application of the OSC and BCSC's (collectively, the Commissions) public interest jurisdiction in these circumstances.


Background to the dispute

Dolly Varden Silver Corporation is a junior mineral exploration company whose shares are listed on the TSX-V. It is a reporting issuer in BC, Ontario and Alberta.

Hecla Mining Company is a US silver producer that is a reporting issuer in all Canadian provinces and territories. Through a wholly owned subsidiary, Hecla beneficially owned and controlled more than 10% of the issued and outstanding securities of Dolly Varden.

In June 2016, Hecla announced its intention to make an "insider offer" as defined in Multilateral Instrument 61-101: Protection of Minority Security Holders in Special Transactions to purchase all outstanding common shares of Dolly Varden.

Shortly thereafter, Dolly Varden announced it would pursue a private placement financing due to its precarious financial state. Hecla's formal offer, commenced on July 8, was conditional on the private placement not proceeding.

At the same time, Hecla applied to the BCSC to cease trade the private placement as an abusive defensive tactic under National Policy 62-202 – Take-Over Bids – Defensive Tactics (NP 62-202).

One week later, Dolly Varden applied to the OSC seeking relief under sections 104 and 127 of the Ontario Securities Act, to cease trade the offer on the basis that Hecla's take-over bid circular did not include a formal valuation as required by MI 61-101. Although the BCSC had not adopted MI 61-101, Dolly Varden's application was also filed with the BCSC seeking the same relief.

The BCSC and OSC held simultaneous hearings on the Hecla and Dolly Varden applications, on the basis that it was in the public interest for them to strive to achieve consistency in decision making due to the matters involved, and in the interests of efficiency. Each hearing panel was separately constituted and rendered its own decision.

The Commissions' decisions

Both Commissions denied the Hecla application.

The Commissions observed that a securities issuance may, in some circumstances, constitute a defensive tactic attracting regulatory scrutiny because it may frustrate the ability of shareholders to respond to a bid.

Applying a list of non-exhaustive factors relevant to that inquiry, both regulators determined that Dolly Varden's private placement had been instituted for non-defensive business purposes and accordingly the principles in NP 62-202 were not engaged. Dolly Varden had been contemplating equity financing in advance of Hecla's bid and the size of the private placement was commensurate with its capital requirements.

The Commissions also chose not to interfere under their broader public interest mandate, making note of the market reality that listed junior mining companies may often engage in dilutive equity transactions for bona fide business purposes. The Commissions showed deference to the business judgement of Dolly Varden's board in deciding to pursue to a private placement in light of the company's circumstances, observing that public confidence in the capital markets required them to "consider the responsibilities of boards of directors in implementing corporate actions."

The Commissions further acknowledged it is not the role of securities regulators to offer redress for actions that may fall short of corporate law standards or to duplicate civil remedies, such as for oppression. Private placements should be blocked by securities regulators only where there is "clear abuse of the target shareholders and/or the capital markets."

Commissions' divergence

However, the Commissions diverged in their disposition of the Dolly Varden application.

The OSC granted Dolly Varden's application under s. 127 of the Ontario Securities Act to cease trade the Hecla offer until the offer satisfied the requirements of 61-101, including the preparation of a formal valuation of the offeree securities and inclusion of the valuation as an addendum to the offer.

Subsection 2.3(1) of MI 61-101 requires, among other things, that the offeror in an insider bid obtain a formal valuation at its own expense, supervised by an independent committee of the target. The purpose of the requirement is to address any asymmetry of information between the insider and other shareholders, and allow non-insider shareholders to make an informed decision about whether to tender to the insider bid. Hecla's bid was non-compliant, and it failed to demonstrate that it qualified for an exemption. The need for a formal valuation was not a "close call."

The BCSC declined to make such an order. MI 61-101 had not been adopted by the BCSC. The BCSC observed that while that instrument did apply to issuers listed on the TSX-V and it is in the public interest to support compliance with exchange policies, the exchange's policy applied only to Dolly Varden as the issuer and not to Hecla.

The BCSC also was not inclined to exercise its general public interest jurisdiction to cease trade the Hecla offer until a valuation could be prepared. Such an order could delay the offer and potentially result in its termination. The potentially significant impact on Dolly Varden shareholders advocated for a "narrow application of the public interest jurisdiction," which would require a finding that the impugned conduct constitutes an abuse of the capital markets or investors. In light of the valuation exercise undertaken by Dolly Varden's board of directors resulting in its pricing of the private placement at a price lower than the price of the offer, the BCSC concluded that a formal valuation by Hecla would not offer better insight into the valuation of the Dolly Varden shares.

The author would like to thank articling student Brian Peebles for his assistance in preparing this legal update.

About Norton Rose Fulbright Canada LLP

Norton Rose Fulbright is a global law firm. We provide the world's preeminent corporations and financial institutions with a full business law service. We have 3800 lawyers and other legal staff based in more than 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia.

Recognized for our industry focus, we are strong across all the key industry sectors: financial institutions; energy; infrastructure, mining and commodities; transport; technology and innovation; and life sciences and healthcare.

Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our offices and to maintain that level of quality at every point of contact.

For more information about Norton Rose Fulbright, see nortonrosefulbright.com/legal-notices.

Law around the world
nortonrosefulbright.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
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).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions