On October 24, 2016 the OSC released its reasons for decision with respect to the simultaneous hearing, held before the British Columbia Securities Commission and Ontario Securities Commission this summer. The decisions concerned a hostile bid by a senior mining company, Hecla, for a junior exploration company, Dolly Varden, as well as Dolly Varden's attempt to raise capital through a private placement.
The background of the decision can be found in our previous posting located here.
The Commissions were considering the following issues:
- Hecla's application to cease a private placement issued by Dolly Varden, which Hecla alleged was an improper defensive tactic; and
- Dolly Varden's application to compel Hecla to prepare a Formal Valuation pursuant to section 2.3 of MI 61-101 in conjunction with its hostile bid, on the basis Hecla was an insider of Dolly Varden (Hecla held 19% of Dolly Varden's shares and had management representation).
In respect of the private placement issue, the Commissions noted that this was the first instance in which they had to consider whether a contemplated private placement is an inappropriate defensive tactic after the adoption of the changes to the Canadian take-over bid regime which became effective in May 2016. Commissions reasoned that there is a balance between upholding public confidence in the capital markets by considering the responsibilities of boards or directors in implementing corporate actions and taking into account that corporate law has its own remedies, available through courts, for actions that fall short of corporate law standard (i.e., the oppression remedy). Relying on the BCSC's decision in Re Red Eagle, the Commission held that securities regulators should tread carefully and "that a private placement should only be blocked by securities regulators where there is a clear abuse of the target shareholders and/or the capital markets". The Commissions ultimately found that the Dolly Varden private placement was instituted for non-defensive business purposes.
In respect of the formal valuation issue, the Commissions held that Hecla was required to obtain a formal valuation for the bid. They decided this on the basis that disclosure of information provided through a formal valuation serves to address the asymmetry of information between the insider and other shareholders and that a formal valuation is necessary to provide all shareholders with sufficient information to permit them to make an informed decision about whether or not to tender to the insider bid. Hecla had a formal nominee on Dolly Varden's board previously, and within the twelve months preceding the bid, Hecla had seconded one of its contractors to serve as Dolly Varden's CEO. Given these circumstances, the Commissions found that Hecla did not qualify for any of the exemptions to the requirement that insider bids be accompanied by a formal valuation.