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 tactic.
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 spent.
- 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.