On October 24, the British Columbia Securities Commission (“BCSC“) and the Ontario Securities Commission (the “OSC” and together with the BCSC, the “Commissions“) issued joint reasons (the “Reasons“) for their July 22, 2016 decision, In the Matter of Hecla Mining Company and In the Matter of Dolly Varden Silver Corporation (available here). Background and facts pertaining to the case are described in an earlier MLT blog post, Hecla/Dolly Varden – First Major Decision of Canadian Securities Regulators Since Recent Amendments to Canada’s Take-Over Bid Regime (available here).
Under the joint decision, the Commissions denied an application by Hecla Mining Company (“Hecla“) to cease trade a private placement by Dolly Varden Silver Corporation (“Dolly Varden“) on the basis that it was an abusive defensive tactic under National Policy 62-202 – Take-Over Bids – Defensive Tactics (“NP 62-202“), meant to undermine Hecla’s unsolicited take-over bid for all of Dolly Varden’s common shares (the “Hecla Bid“). The OSC further agreed with Dolly Varden that the Hecla Bid should be cease traded (the “Dolly Varden Relief“) until the requirements of Multilateral Instrument 61-101 – Protection of Minority Shareholders in Special Transactions (“MI 61-101“) were satisfied, including the preparation and inclusion of a formal valuation by Hecla. As a result of the joint decision, Hecla withdrew the Hecla Bid.
The joint decision marks the first instance, since the amendments to the Canadian take-over bid rules came into effect in May 2016 (See MLT blog post: Fundamental Changes to Canada’s Take-Over Bid Regime and Enhanced Disclosure Requirements under Early Warning System (available here), in which any Canadian securities regulator has had to consider whether a private placement is an appropriate defensive tactic in response to a hostile take-over bid. The amended take-over bid rules now require that bids:
- remain open for a minimum period of 105 days unless the target board reduces the bid period (to a minimum of 35 days) or agrees to certain competing transactions (in which case the minimum bid period will automatically be 35 days);
- have more than 50% of each class of securities subject to the bid — not including securities held by the bidder or by joint actors — tendered to the bid before the bidder may take up any of the tendered securities (“Required Minimum Condition“); and
- be extended for at least 10 days after the Required Minimum Condition is satisfied.
Unlike other traditional defensive tactics in response to a hostile take-over bid, such as shareholder rights plans, where the objective is only to alter the dynamics of a bid environment, private placements, in contrast, are more challenging for securities regulators to review in that they typically involve corporate objectives that are unrelated to defending against a hostile takeover bid. The Reasons establish a new framework for evaluating private placements implemented during, or in anticipation of, a hostile bid.
The Applicable Test: is a Private Placement a Defensive Tactic?
The Reasons establish a two-prong analysis. First, it must be determined whether or not the principles of NP 62-202 are engaged or, put another way, does the evidence clearly establish that the private placement is not, in fact, a defensive tactic designed, in whole or in part, to alter the dynamics of the bid process? If the private placement has a material impact on the bid (as was the case in Dolly Varden with the potential for 43% dilution), the burden of proving that the placement is not a defensive tactic is on the target. Discharging this burden will typically involve consideration of the following non-exhaustive criteria:
a. Does the target have a serious and immediate need for the financing?
b. Is there evidence of a bona fide, non-defensive, business strategy adopted by the target?
c. Was the private placement planned or modified in response to, or in anticipation of, a bid?
If the target is able to establish that each of the above questions should be answered in the affirmative, then the principles in NP 62-202 will likely not be engaged and it would only be left to consider whether there was some other reason, under the securities regulators’ broader public interest mandate to interfere with the private placement. In this case, the Commissions found no other such reason.
The second part of the analysis is undertaken in circumstances where securities regulators are unable to conclude that the purpose of the private placement was as a defensive tactic, either because there is evidence of multiple purposes or insufficient evidence as to purpose. In that circumstance, the principles of NP 62-202 are engaged and it becomes necessary to establish the appropriate balance between the public policy considerations underlying NP 62-202 and maintaining respect for the board’s business judgment.
If it is found that a private placement is or may be a defensive tactic, securities regulators will consider, in addition to the criteria considered as part of the first prong of the analysis, the following non-exhaustive considerations in determining whether intervention is warranted:
a. 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?
b. 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?
c. Are the investors in the private placement related parties of 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?
d. 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?
e. 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?
In the case of Dolly Varden, the Commissions found that the evidence supported that the private placement was instituted primarily for a non-defensive business purpose. The Commissions relied heavily on the evidence that Dolly Varden was contemplating an equity financing well in advance of Hecla’s announcement of the Hecla Bid and that the size of the private placement was appropriate given Dolly Varden’s immediate financial needs and its board’s business strategy of continuing an exploration program.
The Commissions emphasized that other cases may involve evidence of mixed motivations that will require the balancing of the other factors they identified, and other factors applicable in the prevailing circumstances. The Commissions also acknowledged that a bidder could potentially seek alternative relief from the regulators, such as not including the shares issued in a private placement, for the purpose of determining whether the Required Minimum Condition had been met. Although such relief was not sought by Hecla, the Commissions noted that different considerations would have applied given that such a remedy would have been less drastic.
Was a Formal Valuation Required?
The OSC granted the Dolly Varden Relief on the basis that Hecla did not meet the onus of demonstrating that it qualified for an exemption to the formal valuation requirements of MI 61-101. The onus lies on the insider bidder (who is deemed to possess knowledge of undisclosed material information) to demonstrate that it did not have board or management representation in the preceding 12 months and that it therefore fit into the four corners of the formal valuation exemption. In the case of Hecla, the Commissions determined that it had such representation on the basis that Dolly Varden’s current Interim Chief Executive Officer, and member of the board of directors, had been a consultant of Hecla until January 2016.
The OSC’s reasons in granting the Dolly Varden Relief reinforce a policy of strict compliance with MI 61-101 in 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.
The BCSC declined to apply its public interest discretion to cease trade the Hecla Bid on the basis that Hecla did not possess any information, that was not included in its bid cicular, that could affect the decision of the Dolly Varden shareholders to tender or not in the Hecla Bid.
There has been considerable speculation by market participants whether tactical private placements may become the preferred defensive strategy to hostile take-over bids since the changes to the take-over bid regime that took effect in May 2016 effectively eliminated the utility of the “poison pill” as a defensive tactic. Although the Commissions ruled in favor of Dolly Varden and concluded that the private placement was not an improper defensive tactic, the decision should be confined to the facts of this particular case. A private placement may not be an appropriate defensive tactic in response to a bid where the application of the criteria described herein with respect to the primary motivation for the placement warrants intervention by the Commissions.
As a result, the board of a target company, in considering the use of a private placement as a defensive tactic, needs to balance the extent to which the private placement serves bona fide corporate objectives and the securities law principles of facilitating shareholder choice in the context of a bid.