The first half of 2009 saw continued popularity of private
investment in public equity (PIPE) transactions. The momentum has
been driven primarily by producers and developers needing access to
capital, by customers seeking to secure a strategic source of
mineral resources and by strategic players interested in obtaining
controlling interests in resource firms at attractive prices. We
expect the popularity of PIPE transactions to continue,
particularly for mining companies needing to repair their balance
sheets in the wake of the global financial crisis and lower
commodity prices and for those with significant current and
unfunded short-term project development obligations.
Torys recently acted for China Investment Corp. (CIC) on its
US$1.5 billion PIPE investment in Teck Resources, a company listed
on both the Toronto Stock Exchange (TSX) and the New York Stock
Exchange. The transaction, which is the largest completed Chinese
investment in Canada to date, gives CIC an approximate 17.5% equity
and 7% voting interest in Teck. The investment allowed Teck to
further strengthen its balance sheet by paying down part of the
remaining debt from its acquisition of Fording Coal last year; the
investment also provides a strategic connection to China, which is
the world's largest consumer of Teck's principal
Generally, a PIPE transaction offers increased speed,
flexibility and certainty as well as lower costs compared with a
public offering of securities, given the targeted process with
fewer investors and the fact that securities regulatory authorities
do not review the offering documentation. A PIPE transaction may
involve the issuance of common shares, preferred shares or debt
securities, and may include conversion features or warrants. PIPE
transactions involving the issuance of less than a 20% voting
equity interest can typically be completed without Canadian
regulatory approvals, other than stock exchange acceptance.
As a private placement, a PIPE transaction is subject to
Canada's provincial securities laws as well as stock exchange
rules. An issuance of securities in a PIPE transaction will be
completed under an exemption from the prospectus and registration
requirements of applicable provincial securities laws. As a result,
investors will generally be subject to a four-month restriction on
resale, after which the securities would generally become freely
tradable in Canada. Under TSX rules, shareholder approval may be
required if the structure of the PIPE transaction would result in
significant dilution to existing shareholders or pricing below
Strategic PIPE investors may also look for additional terms and
conditions, such as restrictive covenants and board representation.
In the mining space, these equity investments have often been
accompanied by ongoing preferential access to production (such as
off-take agreements) and/or the acquisition of direct interests in
underlying assets. In some cases, PIPE issuers may seek
restrictions on significant PIPE investors – for example,
standstill provisions restricting the acquisition of additional
securities of the PIPE issuer and special hold periods and other
restrictions on the ability to sell the PIPE securities.
TSX Financial Hardship Exemption
PIPE transactions involving an investor's acquisition of a
control position generally require shareholder approval under TSX
rules. However, in the current credit and capital market
environment a number of issuers have been able to take advantage of
an exemption from shareholder approval in cases involving
"serious financial difficulty." An issuer may access this
exemption if (i) the company is in serious financial difficulty;
(ii) the proposed transaction has been designed to improve the
financial position of the corporation; and (iii) the transaction is
reasonable in the circumstances. The TSX recently provided guidance
to issuers on the financial hardship exemption. The guidance
increases the amount of information that an issuer must provide
about the transaction and that the TSX must review; the guidance
also signals that a higher standard of review will be applied by
the TSX. Recent acquisitions of control in PIPE transactions
include Pallinghurst Resources' acquisition of a controlling
interest in Platmin and OAO Severstal's acquisition of a
controlling interest in High River Gold. Torys acted for
Pallinghurst and Severstal in those transactions.
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.
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