The first half of 2009 saw continued popularity of private investment in public equity (PIPE) transactions. The momentum has been driven primarily by producers and developers needing access to capital, by customers seeking to secure a strategic source of mineral resources and by strategic players interested in obtaining controlling interests in resource firms at attractive prices. We expect the popularity of PIPE transactions to continue, particularly for mining companies needing to repair their balance sheets in the wake of the global financial crisis and lower commodity prices and for those with significant current and unfunded short-term project development obligations.
Torys recently acted for China Investment Corp. (CIC) on its US$1.5 billion PIPE investment in Teck Resources, a company listed on both the Toronto Stock Exchange (TSX) and the New York Stock Exchange. The transaction, which is the largest completed Chinese investment in Canada to date, gives CIC an approximate 17.5% equity and 7% voting interest in Teck. The investment allowed Teck to further strengthen its balance sheet by paying down part of the remaining debt from its acquisition of Fording Coal last year; the investment also provides a strategic connection to China, which is the world’s largest consumer of Teck’s principal products.
Generally, a PIPE transaction offers increased speed, flexibility and certainty as well as lower costs compared with a public offering of securities, given the targeted process with fewer investors and the fact that securities regulatory authorities do not review the offering documentation. A PIPE transaction may involve the issuance of common shares, preferred shares or debt securities, and may include conversion features or warrants. PIPE transactions involving the issuance of less than a 20% voting equity interest can typically be completed without Canadian regulatory approvals, other than stock exchange acceptance.
As a private placement, a PIPE transaction is subject to Canada’s provincial securities laws as well as stock exchange rules. An issuance of securities in a PIPE transaction will be completed under an exemption from the prospectus and registration requirements of applicable provincial securities laws. As a result, investors will generally be subject to a four-month restriction on resale, after which the securities would generally become freely tradable in Canada. Under TSX rules, shareholder approval may be required if the structure of the PIPE transaction would result in significant dilution to existing shareholders or pricing below permitted discounts.
Strategic PIPE investors may also look for additional terms and conditions, such as restrictive covenants and board representation. In the mining space, these equity investments have often been accompanied by ongoing preferential access to production (such as off-take agreements) and/or the acquisition of direct interests in underlying assets. In some cases, PIPE issuers may seek restrictions on significant PIPE investors – for example, standstill provisions restricting the acquisition of additional securities of the PIPE issuer and special hold periods and other restrictions on the ability to sell the PIPE securities.
TSX Financial Hardship Exemption
PIPE transactions involving an investor’s acquisition of a control position generally require shareholder approval under TSX rules. However, in the current credit and capital market environment a number of issuers have been able to take advantage of an exemption from shareholder approval in cases involving “serious financial difficulty.” An issuer may access this exemption if (i) the company is in serious financial difficulty; (ii) the proposed transaction has been designed to improve the financial position of the corporation; and (iii) the transaction is reasonable in the circumstances. The TSX recently provided guidance to issuers on the financial hardship exemption. The guidance increases the amount of information that an issuer must provide about the transaction and that the TSX must review; the guidance also signals that a higher standard of review will be applied by the TSX. Recent acquisitions of control in PIPE transactions include Pallinghurst Resources’ acquisition of a controlling interest in Platmin and OAO Severstal’s acquisition of a controlling interest in High River Gold. Torys acted for Pallinghurst and Severstal in those transactions.