On November 3, 2015, the British Columbia Securities Commission (BCSC) released its reasons in Re Red Eagle, cease-trading a rights plan in the face of a hostile bid. In doing so, the BCSC rejected the target’s submissions that the rights plan should be maintained because the bid did not comply with the policy rationale behind the amended bid regime contemplated by amendments to Multilateral Instrument 62-104 – Take-Over Bids and Issuer Bids proposed by the Canadian Securities Administrators in March 2015 (Proposed Amendments). The BCSC also considered whether or not to unwind a private placement of common shares by the target to a white knight in the face of the hostile take-over bid, requiring the BCSC to weigh the fiduciary duties of the target’s directors and the BCSC’s public interest mandate.
On June 16, 2015, Red Eagle Mining Corporation (Red Eagle) announced that it intended to commence a hostile take-over bid to acquire CB Gold Inc. (CB Gold). Red Eagle’s take-over bid initially contained a 51 per cent minimum tender condition, which was later waived by Red Eagle. In early July, CB Gold and Red Eagle resumed discussions regarding a possible friendly transaction, during which CB Gold indicated that it would require financing of approximately US$550,000 in order to continue as a going concern until a friendly transaction could be completed. These discussions were unsuccessful and the board of directors of CB Gold announced on July 14, 2015 that the Red Eagle bid failed to provide adequate value for the CB Gold shares.
On July 24, 2015, CB Gold and Batero Gold Corp. (Batero) announced that they had entered into a support agreement, pursuant to which Batero would commence a take-over bid to acquire CB Gold’s outstanding common shares and that Batero would acquire common shares of CB Gold for aggregate consideration of C$575,000 (approximately 6.9 per cent of CB Gold’s outstanding share capital at the time) pursuant to a private placement (Private Placement). Later that same day, CB Gold announced that the Private Placement had closed.
Red Eagle applied to the BCSC to, among other things, cease-trade CB Gold’s shareholder rights plan, which had been approved by CB Gold shareholders on January 28, 2015, and to unwind the Private Placement. As of September 10, 2015, the date of the BCSC hearing, 48 per cent of the CB Gold shares had tendered to Red Eagle’s bid. Excluding the CB Gold shares issued to Batero under the Private Placement, 52 per cent of CB Gold shares would have been tendered to Red Eagle’s bid. In connection with its application to the BCSC, Red Eagle indicated that it had waived the 51 per cent minimum tender condition as a result of the Private Placement.
Policy Rationale Behind Proposed Amendments
In arguing that CB Gold’s shareholder rights plan should not be cease-traded, CB Gold noted, among other things, that the absence of a 50 per cent minimum tender condition in Red Eagle’s bid was coercive. CB Gold relied, in part, on the policy rationale described in the Proposed Amendments which, if enacted, would require all take-over bids in Canada to contain a minimum tender condition of more than 50 per cent of the outstanding securities of the class that is subject to the bid, excluding target securities that are owned or controlled by the bidder or by any person acting jointly or in concert with the bidder. The Proposed Amendments note that the purpose of a 50 per cent minimum tender condition is to prevent a bidder from obtaining a significant interest in a target without the support of a majority of the independent securityholders of the target.
The BCSC declined to infer from the Proposed Amendments that the absence of such a minimum tender condition is coercive in all instances. The BCSC noted that the Proposed Amendments were not yet in effect and that the BCSC was consequently not bound by them, holding that whether or not the absence of such a minimum tender condition is coercive is a factual analysis. Citing the Private Placement and certain non-arm’s length relationships among CB Gold and Batero as potential obstacles to Red Eagle’s bid, the BCSC held that the absence of such a minimum tender condition was not coercive and cease-traded the shareholder rights plan.
Consistent with the approach taken in the Proposed Amendments, the BCSC did require Red Eagle to extend its bid for 10 days upon taking up any shares, which would permit shareholders to tender to Red Eagle’s bid if it was clear that Red Eagle was going to obtain a significant interest in CB Gold.
In deciding whether or not to unwind the Private Placement, the BCSC noted the difficulty of considering the competing legal and regulatory issues at play. The Private Placement raised corporate law questions regarding the fiduciary duties of CB Gold’s directors to act in the best interests of the company (and the associated deference of courts and administrative bodies to those actions under the business judgment rule), as well as the views of securities regulators on defensive tactics during a hostile bid.
The BCSC also indicated that a high threshold must be met in order for it to issue an enforcement order in the public interest. While the BCSC concluded that it does have the authority to override the business judgment rule where a private placement “alters the basic dynamics of an M&A transaction”, it also stated that “securities regulators should tread warily in this area and that a private placement should only be blocked by securities regulators where there is clear abuse of the target shareholders and/or the capital markets.” Upon reviewing the facts, the BCSC concluded that the Private Placement did not constitute a clear abuse of CB Gold’s shareholders or capital markets and consequently the BCSC declined to unwind it.
In reaching this conclusion, the BCSC considered whether or not the Private Placement could be characterized as clearly a defensive tactic, in which case enforcement action may be warranted, or alternatively had legitimate business purposes, in which case deference to the CB Gold board of directors was warranted. Citing evidence that CB Gold required financing at the time of the Private Placement to continue as a going concern and that CB Gold had specifically requested a similar financing from Red Eagle, the BCSC determined that the Private Placement was undertaken for legitimate business purposes. This was consistent with prior decisions in which securities regulators have held that the presence of legitimate business purposes is a strong indication that the private placement is not abusive, even if it is potentially prejudicial to the hostile bidder.
The BCSC also noted that the Private Placement did not prevent CB Gold shareholders from having their shares acquired under the Red Eagle bid because Red Eagle had waived the initial 51 per cent minimum tender condition and was consequently prepared to acquire any percentage of shares tendered. This was consistent with prior decisions in which securities regulators have held that actions that do not directly prevent target shareholders from tendering to a hostile bid are less likely to be considered abusive. The BCSC did indicate that if the minimum tender condition was still in place, then its decision would have been “considerably more difficult” because the Private Placement may have acted as a bar to meeting such bid condition, in which case the policy objectives of ensuring target shareholders have an opportunity to tender to bids would have become more directly engaged. This demonstrates the balancing act that securities regulators must engage in when weighing the fiduciary duties of target directors and the public interest.
The BCSC’s approach in Re Red Eagle of not applying the Proposed Amendments is consistent with past decisions of Canadian securities regulators, which generally have resisted applying rules during a comment or review period in order to avoid inconsistencies if changes are subsequently made to the draft rules. That said, presumably if a policy rationale is compelling enough to form the basis for proposed amendments, it should be informative when determining how a discretionary authority should be exercised. The BCSC did consider the policy rationale underlying the 50 per cent minimum tender condition contained in the Proposed Amendments and this appears, to some extent, to have guided its analysis. It remains to be seen if securities regulators in other jurisdictions or considering different aspects of the Proposed Amendments will follow this approach prior to their enactment.
With respect to the Private Placement, while the BCSC was required to interpret what it referred to as a “scramble” of legal and regulatory issues, the BCSC reiterated that the threshold for exercising its public interest jurisdiction in the context of a hostile bid is a high one — the conduct must amount to a clear abuse of target shareholders or capital markets generally. Any target considering issuing securities to a white knight in the face of a hostile bid should, in order to put its best foot forward in relation to any possible future scrutiny by securities regulators, ensure that it can demonstrate a legitimate business purpose for the issuance or risk that the issuance will be viewed solely as a defensive tactic.