Decision goes in favour of the target in latest regulatory challenge to a private placement as an alleged take-over defence

On July 22, 2016, following a joint hearing of the British Columbia and Ontario securities commissions, the regulators decided not to block a proposed private placement of common shares of Dolly Varden Silver Corporation (Dolly Varden). Hecla Mining Company (Hecla) had challenged the private placement as an alleged defensive tactic against Hecla’s take-over bid for Dolly Varden and had applied for regulatory orders cease trading the private placement either outright or unless approval of the private placement by the Dolly Varden shareholders would be obtained. Hecla’s take-over bid circular disclosed that the number of shares potentially issuable in the private placement, combined with the shares that could be issued as finder’s fees, represented 43 percent of the number of Dolly Varden common shares that were outstanding on a fully diluted basis before giving effect to the transaction. The Ontario Securities Commission also ordered that Hecla must obtain a formal valuation in order to continue with its take-over bid, pursuant to Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions. The announcements of the regulators’ decisions were not accompanied by reasons, which will be released at a later date.

Private placements were the most common alleged take-over defence in Canada until the mid-1980s. Over the following 25 years, adversarial proceedings around take-over bids were largely focused on shareholder rights plans, or poison pills, but private placements have recently begun to re-emerge as an issue in the mergers and acquisitions context. It is possible that private placements will become more of a factor in the area of hostile bids in light of last May’s change to the take-over bid rules. Under National Instrument 62-104 Take-over Bids and Issuer Bids, take-over bids that are made to the general body of shareholders and not supported by the target’s board of directors must now be open for a minimum of 105 days (with exceptions), up from the previous minimum of 35 days. This change may reduce the prominence of the shareholder rights plan as a defensive tactic (although its use was already restricted by the securities regulators’ bidder-friendly application of National Policy 62-202 Take-over Bids – Defensive Tactics). This, in turn, could cause bid targets to give greater consideration to alternative defensive measures, such as a private placement.

Below are links to articles that provide background to the subject of private placements by acquisition targets, and how they have been addressed by Canadian regulators and courts in recent years. As can be seen, there are areas of inconsistency in the approaches taken by the decision-makers. The formal reasons in the Dolly Varden/Hecla case may provide some helpful degree of clarity, at least with respect to the two regulators involved.