Canada: Private Placements As Defensive Tactics In Take-Over Bids

Last Updated: November 24 2016
Article by Mark Wilson and Charlie Malone

The Ontario Securities Commission ("OSC") and British Columbia Securities Commission ("BCSC") recently released their written reasons regarding applications made by Hecla Mining Company ("Hecla") and Dolly Varden Silver Corporation ("DV") in connection with Hecla's hostile cash bid for all of DV's outstanding shares.

This was the first instance after the adoption of changes to the Canadian take-over bid regime, which became effective in May 2016, in which Canadian securities regulators have had to consider whether a private placement, in the midst of a hostile take-over bid, was an inappropriate defensive tactic.

The changes to the take-over bid rules, which are now contained in National Instrument 62-104 – Take-Over Bids and Issuer Bids and National Policy 62-203 – Take-Over Bids and Issuer Bids, require that all take-over bids in Canada: (i) remain open for a minimum period of 105 days unless the target board reduces the bid period (to a minimum of 35 days) or agrees to certain competing transactions (in which case the minimum bid period will automatically be 35 days); (ii) be subject to a minimum tender condition that requires that more than 50% of the total outstanding securities subject to the bid, not under the control of the bidder and its affiliates, be tendered to the bid; and (iii) be extended for at least 10 days after the minimum tender condition is satisfied. These changes did not modify National Policy 62-202 – Take–Over Bids – Defensive Tactics ("NP 62-202") regarding defensive take-over bid tactics.

Background

On June 27, 2016, Hecla announced its intention to make its offer for the DV shares. On that date, Hecla owned DV shares and warrants to acquire additional DV shares representing in aggregate approximately 19.8% of the outstanding DV shares. As a result, Hecla's bid was an "insider bid" under Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions ("MI 61-101").

On July 5, 2016, DV announced a private placement that would, if fully subscribed, cause a dilution of 43% to DV's shareholders, including Hecla. Hecla had a participation right that permitted it to participate in the private placement and thereby avoid the dilution.

Hecla commenced its bid on July 8, 2016. One of the conditions of the bid was that DV's private placement be abandoned.

Hecla filed applications with the BCSC and OSC seeking to cease trade the private placement on the basis that it was an abusive defensive tactic under NP 62-202. DV agreed not to close the private placement, subject to the BCSC ruling on Hecla's application.

DV filed an application with the OSC seeking to cease trade the bid because: (i) Hecla's circular did not contain a formal valuation, as required under MI 61-101; and (ii) an exemption from that requirement to provide a valuation was not available under Section 2.4(1)(a) of MI 61-101. That exemption would have been available if neither Hecla nor any of its affiliates had, since July 8, 2015, any board or management representation in respect of DV or knowledge of any material information concerning DV or DV's shares that had not been generally disclosed. Although the BCSC has not adopted MI 61-101, DV also applied for the same relief from the BCSC under its "public interest" mandate.

The OSC denied Hecla's application and cease traded the bid until it complied with MI 61-101. The BCSC denied the applications of both Hecla and DV. As a result, Hecla withdrew the bid, but participated in the private placement.

Determining Whether a Private Placement is a Defensive Tactic

NP 62-202 provides that a securities issuance can, in certain circumstances, constitute a defensive tactic attracting regulatory scrutiny. When reviewing a private placement in accordance with NP 62-202, Canadian securities administrators need to balance (i) the extent to which the private placement serves bona fide corporate objectives, for which corporate law gives significant deference to a board of directors in exercising its business judgement, with (ii) the securities law principles of facilitating shareholder choice with regard to corporate control transactions and promoting open and even-handed bid environments.

In acknowledging the relevance of the interplay of corporate and securities laws to the analysis of the appropriateness of a private placement in the midst of a hostile take-over bid, the OSC and BCSC made the following observations:

"Public confidence in the capital markets requires us to consider the responsibilities of boards of directors in implementing corporate actions, including the duties owed by directors to the corporation, the standard of care imposed on directors, and the deference afforded to the business judgment of properly informed directors following appropriate governance processes. We must consider these corporate law principles when our discretion is sought to be invoked to prevent shareholder abuse of the kind that NP 62-202 is intended to address. We must also take into account that corporate law has its own remedies, available through the courts, for actions that fall short of corporate law standards, including, in appropriate cases, the oppression remedy found in many Canadian corporate law statutes. Contract law may also afford remedies in particular cases as between corporations and their shareholders. It is not the role of securities regulators to offer redress on these grounds or duplicate these remedies."

The OSC and BCSC cited the BCSC's decision in Re Red Eagle and the decision of the Alberta Securities Commission in Re ARC Equity Management (Fund 4) Ltd. for the principles that securities regulators should "tread warily" in examining the appropriateness of private placements, and that a private placement should only be blocked where there is a clear abuse of the target shareholders and/or the capital markets.

The OSC and BCSC articulated the following process of analysis to determine whether a private placement should be prohibited in the midst of a hostile take-over bid:

  • The first question to answer is whether the evidence clearly establishes that the private placement is not a defensive tactic. A non-exhaustive list of considerations that would be relevant to answering this question would include: (i) whether the target has a serious and immediate need for the financing; (ii) whether there is evidence of a bona fide, non-defensive, business strategy adopted by the target; and (iii) whether the private placement has been planned or modified in response to, or in anticipation of, a bid.
  • If the private placement is not a defensive tactic, then NP 62-202 does not apply. The remaining question then to answer is whether securities regulators should interfere with the private placement in exercising their public interest mandate.
  • Where an applicant is able to establish that the impact of a private placement is material to a bid, the target board will have the onus of establishing that the private placement is not a defensive tactic.
  • Where securities regulators are unable to clearly find that the private placement was not used as a defensive tactic, either because there appear to be multiple purposes or there is insufficient evidence as to purpose, then the principles set out in NP 62-202 are engaged. In this circumstance, it will be necessary to find the appropriate balance between those principles and respecting a board's business judgment.
  • If a private placement is or may be a defensive tactic, the following is a non-exhaustive list of considerations that are relevant to whether a private placement should be interfered with: (i) would the private placement otherwise be to the benefit of shareholders by, for example, allowing the target to continue its operations through the term of the bid or in allowing the board to engage in an auction process without unduly impairing the bid; (ii) to what extent does the private placement alter the pre-existing bid dynamics, for example by depriving shareholders of the ability to tender to the bid; (iii) are the investors in the private placement related parties to the target or is there other evidence that some or all of them will act in such a way as to enable the target's board to "just say no" to the bid or a competing bid; (iv) is there any information available that indicates the views of the target shareholders with respect to the take-over bid and/or the private placement; and (v) where a bid is underway as the private placement is being implemented, did the target's board appropriately consider the interplay between the private placement and the bid, including the effect of the resulting dilution on the bid and the need for financing.

The OSC and BCSC also commented that in considering remedies to be granted in these circumstances, an applicant could potentially seek alternative relief, such as not including the shares issued in a private placement with a tactical motivation in the number of outstanding shares for the purpose of the satisfaction of the 50% tender condition required under the revised take-over bid rules.

Was the DV Private Placement a Defensive Tactic?

On examining the evidence related to the DV private placement, including minutes of DV board meetings at which the private placement was discussed, the OSC and BCSC found that the private placement was instituted for non-defensive business purposes. The OSC and BCSC specifically found that: (i) the evidence established that DV was contemplating an equity financing for some time before Hecla's announcement of the bid; (ii) the size of the private placement was not inappropriate given DV's current liabilities and business plans; and (iii) there was evidence that DV had considered a larger financing and decided not to pursue that opportunity. The OSC and BCSC also concluded that DV was pursuing through the private placement a bona fide corporate objective of increasing its flexibility by seeking to terminate the restrictive covenants in its senior loan facility and seeking equity capital in order to repay indebtedness and implement an exploration program. In doing so, DV was adjusting its strategy based on changes in commodity prices and market conditions and was seeking to develop shareholder value as an independent company. Having found that there was no evidence that the private placement was a defensive tactic, the OSC and BCSC determined that there was no further basis to review the appropriateness of the private placement, including under their public interest mandates.

The Bid's Compliance with Applicable Securities Laws

DV applied to cease trade the bid because it did not contain a formal valuation, as required by MI 61-101. The OSC identified the issues raised in DV's application as follows

  • Did Hecla, an insider of DV because of the size of its holding of DV shares, qualify for an exemption to the formal valuation requirement under MI 61-101? Specifically, was Hecla exempt because it had neither (i) board nor management representation at DV in the 12 months preceding the bid, nor (ii) knowledge of material information concerning DV or its securities that had not been generally disclosed?
  • Was the bid deficient due to the omission of material undisclosed information in Hecla's possession that would reasonably be expected to affect the decision of DV shareholders to accept or reject the bid?

In its analysis, the OSC cited a passage from one of its previous decisions, Re Western Wind Energy Corp, in identifying the policy rationale for the requirement under MI 61-101 for an insider bid to contain a formal valuation:

"The policy rationale for the formal valuation requirement is that insiders may have access to more or better information about an issuer than other shareholders, including undisclosed material information. That may give the bidder an unfair advantage in valuing the securities of the target. The purpose of the formal valuation requirement is to ensure that all target shareholders are able to make an informed decision whether or not to tender to the bid and that shareholders have the benefit of an independent assessment of the fair market value of an issuer when assessing an insider bid for the issuer. This rationale is consistent with the overall policy objectives of the take-over bid regime, which include, in particular, protecting the interests of target shareholders. In our view, the failure to provide a formal valuation when one is required is a serious allegation."

On the facts, the OSC found that Hecla had board representation at DV, via DV's CEO (a former consultant for Hecla and nominee of Hecla on DV's board), within the 12 months preceding its bid. As a result, Hecla did not meet the onus of demonstrating that it qualified for the exemption from the formal valuation requirement set out in Section 2.4(1)(a) of MI 61-101. The OSC concluded that the bid was not in compliance with MI 61-101, and that it was not even "a close call" that Hecla could not rely upon an exemption from the requirement to provide a formal valuation under MI 61-101.

The OSC also made these cautionary remarks concerning the process followed by Hecla in making its bid without a valuation:

"Insider bids that do not contain a formal valuation are non-compliant bids, unless an exemption is available, as discussed below. Bids that fail to meet this fundamental requirement harm the integrity of the market. Bidders should carefully consider whether they can reasonably satisfy their burden of proof that an exemption from this requirement is available and should engage with Staff as appropriate. If, instead, the bidder proceeds with its bid without a valuation and without firm grounds for the availability of an exemption under MI 61-101, and waits for the outcome of a hearing before the OSC, the issue of the valuation may well become intermixed with other issues involving the public interest, as in this case. Bidders may then have the incentive to "roll the dice" and, if any material matter goes against them, to have the option of walking away from their bid. This could, in some cases, promote the initiation of tactical bids to interfere with corporate objectives of a target company, while avoiding the significant time, effort and expense involved in producing a formal valuation. We discourage potential bidders and their counsel from taking this approach." The OSC cease traded the bid until a formal valuation was obtained and included as an addendum to the amended offer, and Hecla otherwise complied with the requirements of Section 2.3 of MI 61-101. The BCSC declined to give a similar order under its public interest mandate.

Conclusion

There is now detailed guidance as to the analysis certain Canadian securities regulators will follow in determining whether a private placement in the midst of a hostile take-over bid will be prohibited as an unlawful defensive tactic to thwart the bid. Securities regulators have also cautioned market participants as to the manner in which they proceed with transactions in order to comply with applicable securities laws.

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
Similar Articles
Relevancy Powered by MondaqAI
Norton Rose Fulbright Canada LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Norton Rose Fulbright Canada LLP
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