In its recent decision, Re Red Eagle, 2015 BCSECCOM 401 (Re Red Eagle), the British Columbia Securities Commission (BCSC) addresses the tension that arises between corporate law and securities regulatory goals when private placements are undertaken in the M&A context.
Red Eagle Mining Corporation (Red Eagle) sought to complete a hostile take-over of CB Gold Inc. (CB Gold). The bid was initially subject to a 50% minimum tender condition that was later waived. Red Eagle and CB Gold had initially engaged in friendly transaction discussions during the course of which CB Gold disclosed that it required financing of approximately US$550,000 in order to meet its ongoing obligations and remain a going concern. After the break-down of negotiations and the implementation of other defensive tactics, CB Gold entered into a support agreement with Batero Gold Corp. (Batero) pursuant to which Batero would make an offer to acquire all of the outstanding shares of CB Gold. Concurrent with the announcement of the Batero bid, CB Gold announced that Batero would provide it with $575,000 in financing by way of a private placement. Red Eagle took issue with, among other things, the private placement.
In its decision, the BCSC noted that private placements made in the M&A context involve a number of different legal and regulatory issues that often "scramble" together; they raise "corporate law questions regarding the issuing board's fiduciary duties (and associated deference to a board under the business judgment rule) and securities regulators' views on defensive tactics under [National Policy 62-202 –Takeover Bids – Defensive Tactics]."
The BCSC declined to exercise its public interest jurisdiction to cease trade the securities issued pursuant to the Batero private placement but made it clear that securities regulators could "override the business judgement rule and cease trade a private placement that inappropriately alters the basic dynamics of an M&A transaction". The BCSC noted that the public interest jurisdiction afforded to securities regulators in the private placement context should only be used where there is a clear abuse of target shareholders and/or the capital markets.
The purpose of the private placement was of upmost importance in the BCSC's decision. CB Gold's demonstrable need for financing held sway with the BCSC and they found that there was no clear evidence that the private placement was done primarily as a defensive tactic. As was the case in Re Red Eagle, past decisions have shown that regulators are less likely to interfere with a private placement in the M&A context if there is a legitimate need for financing.
Also of importance in Re Red Eagle was Red Eagle's waiver of its minimum tender condition. Past regulatory decisions have shown that regulators take issue with private placements that limit shareholder choice. The BCSC stated that, had Red Eagle not waived the minimum tender condition, its decision on the matter would have been more difficult as the shares issued under the private placement would effectively bar Red Eagle from meeting a 50% tender.
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