In an earlier MLT blog post (Fundamental Changes to Canada’s Take-Over Bid Regime and Enhanced Disclosure Requirements under Early Warning System dated February 26, 2016), we highlighted the significant changes recently enacted to Canada’s rules governing take-over bids, including a minimum tender condition of 50% and an extension of the period within which a bid must remain open to a minimum of 105 days, effectively ending the use of poison pills as the traditional defensive tactic in response to a hostile bid.
The joint decision of the British Columbia Securities Commission (“BCSC”) and Ontario Securities Commission (“OSC” and together with the BCSC, the “Commissions”) with respect to Hecla Mining Co. (“Hecla”) and Dolly Varden Silver Corp. (“Dolly Varden”) marks the first time since the amendments to the take-over bid rules went into effect on May 9, 2016 that Canadian regulators have had to consider the question of whether, and in what circumstances, a private placement might be an acceptable defensive tactic in response to a hostile take-over bid.
Hecla is Dolly Varden’s largest shareholder, holding a 19.9% interest it acquired in 2012. At the time that Hecla acquired this interest, Hecla and Dolly Varden entered into an ancillary rights agreement giving Hecla the right to nominate one individual to Dolly Varden’s board of directors (which nominee later became and remains the current Dolly Varden interim CEO and President) and a pre-emptive right to maintain its 19.9% equity interest if Dolly Varden issued additional equity.
In September 2015, Hecla and another shareholder provided Dolly Varden with a loan facility of $1.5 million, which was later increased to $2.0 million in February 2016. This loan facility prohibited additional equity issuances by Dolly Varden (other than pursuant to existing entitlements) but was repayable at any time.
On July 4, 2016, Dolly Varden repaid the $2.0 million loan with the proceeds of a new $2.5 million loan sourced from a third party lender. It was then Dolly Varden’s intention to repay the new loan with proceeds from a proposed $6 million placement of common shares, with the balance of proceeds from the placement to be allocated to exploration and general working capital. If the placement were to be completed on the announced terms, dilution to existing shareholders would be greater than 40%.
On July 8, 2016, Hecla announced its unsolicited bid for the Dolly Varden common shares it did not already own, subject to, among other items, the condition that the Dolly Varden private placement not be completed.
Concurrent with the announcement of the hostile bid, Hecla applied to the BCSC (the OSC was added later to the application) to have the private placement cease traded on the basis that the financing was designed to frustrate the take-over bid by making the 50% minimum tender requirement harder to achieve because of its dilutive effect and would thereby remove the ability of willing Dolly Varden shareholders to tender their shares to the bid (which incidentally represented a 55% premium to the last trading price of Dolly Varden shares before Hecla announced its intention to pursue a take-over bid).
Subsequent to Hecla’s application, Dolly Varden initiated its own application to the Commissions to require Hecla to obtain a formal valuation of the shares subject to the take-over bid under applicable securities laws dealing with related parties on the basis that Hecla should be considered an insider of Dolly Varden by virtue of the connection of Dolly Varden’s interim CEO and President to Hecla.
The Commissions ordered that the Hecla application to cease trade the private placement be dismissed and, if the Hecla take-over bid was to continue, Hecla was required, at its expense, to obtain a formal valuation of the subject Dolly Varden shares. As a result of these decisions, Hecla withdrew its take-over bid.
The Commissions have not yet released written reasons for their orders and therefore the analysis and weight that the Commissions put on the each party’s submissions remains unknown.
It appears that the ability of a target company to use a private placement as a defensive tactic in the face of a hostile bid will be a fact and circumstance determination going forward. What will be of interest once reasons are released is the weight that regulators place on the following (and sometimes competitive) interests:
- a target’s financial need;
- the timing of target’s proposed private placement in relation to the hostile bid. Sub-factors to be considered is evidence of target’s prior intentions to pursue a private placement as demonstrated in public disclosure record or in board decisions; and
- general public policy of allowing shareholders to evaluate and decide whether or not to tender to a take-over bid.
With respect to the requirement for a formal valuation, the OSC’s decision reinforces a policy of strict compliance with securities laws dealing with related party matters, notwithstanding the questionable benefit of such valuation when the take-over bid is priced at a premium to the announced private placement offer price.