As discussed in our previous post, the first hostile take-over bid under the new Canadian take-over bid rules was launched by Hecla Mining Company (Hecla) in July 2016 for the purchase of all of the outstanding shares of Dolly Varden Silver Corporation (Dolly), a TSX Venture Exchange listed issuer. Since our initial post, this take-over bid has become of particular interest to capital market participants because applications were made by each of Hecla and Dolly to the Ontario Securities Commission (OSC) and the British Columbia Securities Commission (BCSC) related to the take-over bid and the subsequent private placement announced by Dolly. Many hoped that the OSC and BCSC (collectively, the Commissions) in deciding these applications would bring additional clarity on how regulators would review alleged defensive tactics in light of the new take-over bid rules.
A simultaneous hearing in front of the OSC and the BCSC was held on July 20 and 21, 2016 and while the applicable orders were rendered on July 22, 2016 by each of the Commissions, the highly anticipated joint reasons were not issued until October 24, 2016. In their reasons, the Commissions concluded that the question of whether a private placement is an abusive defensive tactic requiring regulator intervention is a fact-dependent balance between policy considerations and bona fide corporate objectives and outlined a two-step test for regulators to weigh the relevant factors.
Defensive Private Placements
The most anticipated portion of the Commissions’ reasons relates to Hecla’s application to cease-trade the private placement Dolly announced after Hecla announced its take-over bid. In its application, Hecla argued that the private placement should be cease-traded either as an abusive defensive tactic under National Policy 62-202 Take-Over Bids – Defensive Tactics (NP 62-202) or under the Commissions’ broader public interest mandate.
The Commissions acknowledged in their reasons that shareholder rights plans, the most popular defensive tactic, may no longer be relevant since the adoption of the new take-over bid regime and that other tactics such as defensive private placements may become more common and therefore attract more scrutiny from regulators. A typical tactical private placement would have a target company selling shares to a friendly purchaser in response to a take-over bid, making it more difficult for the potential acquirer to take up enough shares to meet the minimum bid condition, which, under the new take-over bid rules, is a minimum of 50% of the outstanding shares, excluding securities of the potential acquirer, and is a condition that can’t be waived.
NP 62-202, which was not amended with the take-over bid rules, expressly states that a securities issuance that takes place immediately before or during a bid may come under the scrutiny of the regulators and regulators may take appropriate action if the result is that shareholders are deprived of the ability to respond to a take-over bid. However, the Commissions also acknowledged in their reasons that, unlike tactical shareholder rights plans which are only put in place to hinder a hostile bid, private placements are more challenging for the regulators to review because there may be multiple corporate objectives for the transaction. Past decisions, which the Commissions agreed with in their reasons, have often concluded that the regulators should typically defer to the business judgement of the directors and only cease-trade a private placement where there is clear abuse.
New Two Step-Test
The Commissions articulated a two step-test for determining if securities regulators should take action with respect to a private placement in the context of a take-over bid under NP 62-202. The first step is to determine if the evidence clearly establishes that the private placement is not a defensive tactic designed in any way to alter the dynamics of the take-over bid. If the private placement is clearly not a defensive tactic, NP 62-202 would not apply and no review under NP 62-202 would be required. The Commissions put the onus on the target board to show that the private placement was not used as a defensive tactic as long as the offeror under the bid is able to establish that the impact of the private placement on the bid environment is material. In considering this first test, the Commissions set out a non-exhaustive list of considerations:
- whether the target has a serious and immediate need for the financing;
- whether there is evidence of a bona fide, non-defensive, business strategy adopted by the target; and
- whether the private placement has been planned or modified in response to, or in anticipation of, a bid.
If the private placement is not clearly shown to not be a defensive tactic, NP 62-202 would apply and regulators would need to consider the second test: if the private placement is or may be a defensive tactic. The Commissions stated that regulators, in determining if there should be intervention, would need to balance the principles of NP 62-202, being generally the protection of the interests of the shareholders of the target and fostering an open and even bid environment, with deference to the business judgement of the directors. The Commissions outlined considerations in addition those considered under the first step relevant to reaching this conclusion:
- 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;
- 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?
- 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?
- 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?
- 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 Commissions noted that the regulators must also consider whether there are other capital markets policy considerations that are relevant, such as relevant exchange policies, or public interest considerations.
The Commissions applied this two-step test with respect to the Dolly private placement and concluded under the first step that the private placement was clearly not a defensive tactic. The Commissions found extensive evidence that Dolly, to the knowledge of Hecla, was considering the private placement in advance of the announcement of Hecla’s take-over bid and that the size of the private placement was appropriate when considering Dolly’s capital requirements. This was persuasive in establishing a bona fide corporate objective. There was also a lack of evidence that the private placement was modified in light of the hostile bid announcement. Based on this finding, and the lack of any reason to act under the public interest mandate, the Commissions denied the Hecla application.
While the Commissions acknowledged that NP 62-202 must be interpreted in light of the new take-over bid regime and that the considerations applied by the regulators would evolve, because of the strong evidence of Dolly’s bona fide corporate objective for completing the private placement, the questions of when regulators will interfere with private placements undertaken in a hostile bid setting and if this is more or less likely since the new take-over bid rules have been adopted remain largely unanswered. The Commissions expressly agreed with previous decisions which deferred to the business judgement of the directors and determined that regulators should intervene only if there is obvious abuse of the shareholders and/or the capital markets but also clearly stated that in certain circumstances, NP 62-202 and the commission’s public interest mandate would require the cease-trade of a private placement.
However, the Commissions did set out the new two-step test and various considerations that would be relevant to regulators making such decisions going forward. One effect of the new rules is that the minimum bid condition can no longer be waived by the acquirer. In considering the first step of the Commissions’ new test, this could become relevant as this inability to waive the 50% minimum bid condition could frustrate the hostile bid where there is substantial dilution, meaning the impact of the private placement is likely material and would place the onus on the target to show it is not for a defensive purpose.
The Commissions also released their reasons with respect to Dolly’s application to cease-trade Hecla’s take-over bid on the basis that Hecla failed to include a formal valuation with its take-over bid circular. Multilateral Instrument 61-101 Protection of Minority Shareholders in Special Transactions (MI 61-101), which is in force in Ontario but not in British Columbia, requires offerors to include a formal valuation of the target in its take-over bid circular if the offeror is an insider of the target, subject to various exemptions the offeror may rely on. Hecla was clearly an insider at the time of its hostile bid by virtue of holding over 10% of the outstanding Dolly shares. Therefore, the main issue considered by the OSC was whether Hecla had an available exemption from the formal valuation requirement. In order to rely on the applicable exemption, Hecla had to show that it had neither board nor management representation at Dolly in the 12 months preceding its hostile bid and that it did not have knowledge of material undisclosed information regarding Dolly. The potential “management representation” of Hecla at Dolly was the interim CEO of Dolly, who had been a consultant of Hecla at the time she initially took the interim CEO position at Dolly. While there were questions of whether the interim CEO of Dolly had ceased to be a representative of Hecla, the OSC found that the interim CEO of Dolly was a management representative of Hecla within 12 months of the bid. The exemption was therefore not available to Hecla, resulting in a formal valuation being required. The OSC ordered Hecla to obtain a formal valuation as required by MI 61-101 and to extend the hostile bid until the later of (1) 35 days following delivery of such formal valuation to shareholders, and (2) the expiry time set out in Hecla’s offer and cease-traded the take-over bid until the formal valuation was delivered.
Unlike the OSC, the BCSC denied Dolly’s application. Because MI 61-101 has not been adopted in British Columbia, Dolly’s application to the BCSC was made on the basis that the failure of Hecla to include a formal valuation and certain undisclosed information in its circular was contrary to the public interest, relying on BCSC’s broad public interest power. However, the BCSC took a narrow view of the scope of its public interest mandate and denied Dolly’s application. Of interest, while the BCSC acknowledged that it should consider breaches, if any, of TSX Venture Exchange policies because it is in the public interest to support exchange policies, its reasons held that the TSX Venture Exchange policies, which adopted MI 61-101 with respect to listed issuers, were applicable only to Dolly, the listed issuer, and not to Hecla. Therefore, there was no breach by Hecla as the policies did not apply to Hecla.