The Ontario Securities Commission (OSC) and the British Columbia Securities Commission (BCSC) have released joint reasons for their decisions in the Dolly Varden dispute. As expected, these reasons provide capital markets participants with guidance (including a framework) for assessing the future use of private placements as a defensive tactic (i.e. so-called "tactical" private placements) under Canada's new harmonized take-over bid regime (New Bid Regime) that came into effect on May 9, 2016.
For more information about the New Bid Regime, see our previous article, Canada's New Take-Over Bid Rules Seek to Level the Playing Field.
What is a Tactical Private Placement?
A tactical private placement occurs when a target company issues securities in response to an unsolicited take-over bid in order to make it more difficult and/or more expensive for the hostile bidder to complete a take-over of the target company. This outcome is particularly important to target companies under the New Bid Regime for two key reasons. First, as a consequence of the New Bid Regime, shareholders rights plans (i.e. poison pills) are largely irrelevant in deterring hostile bids because such offers must remain open for at least 105 days (rather than 35 days under the old rules). Second, the New Bid Regime contains a mandatory condition that a minimum of more than 50% of all outstanding target securities owned or held by persons other than the bidder and its joint actors be tendered and not withdrawn before the bidder can take up any securities under the take-over bid (the Minimum Tender Condition). The Minimum Tender Condition cannot be waived by a bidder.
The Dolly Varden Dispute
The Dolly Varden dispute is noteworthy because it's the first time since the adoption of the New Bid Regime that Canadian securities regulators have considered whether a contemplated private placement is an inappropriate defensive tactic.
The basic facts of the Dolly Varden dispute are as follows:
Hecla Mining Company, made an all-cash offer for all of the outstanding common shares of Dolly Varden Silver Corporation.
Hecla first announced its intention to proceed with the offer on June 27 and formally commenced the offer on July 8.
A few days later, Dolly Varden communicated to its shareholders that they should take no action with respect to the hostile bid, and that Dolly Varden would be proceeding with a private placement it had previously announced on July 5.
Hecla's offer was subject to a number of conditions, including that the private placement announced on July 5 would be abandoned by Dolly Varden.
On July 8 and July 12, Hecla filed applications with the BCSC and the OSC respectively, seeking to cease trade the private placement on the basis that it was an abusive defensive tactic in contravention of Canadian securities laws. At the time of these applications, Dolly Varden had not received approval from the stock exchange for the private placement, nor had the private placement closed. As such, Dolly Varden agreed not to close the private placement until Hecla's applications had been resolved.
On July 25, the commissions released their decisions dismissing Hecla's application, thus allowing Dolly Varden to proceed with the private placement.
In their joint reasons, the commissions explained that they had determined that the private placement had been instituted for non-defensive business purposes because: (i) Dolly Varden was contemplating an equity financing considerably in advance of Hecla's announcement of the offer (and therefore it was not implemented for the tactical purpose of circumventing the bid); (ii) the private placement had not been modified in response to the bid so as to become defensive in character; (iii) the size of the private placement and the decision to proceed with the private placement was reasonable in light of Dolly Varden's liabilities and planned activities (including the fact that Dolly Varden needed cash); and (iv) given the history between the parties, Hecla could reasonably have expected that Dolly Varden would seek to raise money through an equity financing.
Guidance for Assessing Tactical Private Placements
General
The joint reasons provide capital markets participants with important guidance on the future use of private placements as a defensive tactic under the New Bid Regime, including the following considerations:
- private placements may serve multiple corporate objectives and, as such, are more challenging for securities regulators to review than cases involving poison pills, especially with respect to determining whether the corporate objective of the private placement was only to alter the dynamics of a bid environment;
- when reviewing the appropriateness of a private placement in the take-over bid context, securities regulators need to balance the extent to which the private placement serves bona fide corporate objectives, for which corporate law gives significant deference to a board of directors in exercising its business judgement, with the securities law principles of facilitating shareholder choice with regard to corporate control transactions and promoting open and even-handed bid environments; and
- 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.
Conducting the Analysis
The joint reasons also outline the following framework for conducting the analysis of a private placement in the take-over bid context:
Is the private placement clearly not a defensive tactic?
The starting point is to consider whether the evidence clearly establishes 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.
In terms of the evidentiary burden, where a bidder is able to establish that the impact of a private placement on an existing bid environment is material, then the target board has the onus of establishing that the private placement was not used as a defensive tactic.
In determining whether the private placement is clearly not a defensive tactic, the following non-exhaustive list of considerations is relevant.
- whether the target has a serious and immediate need for financing;
- whether there is clear evidence of a bona fide, non-defensive, business strategy adopted by the target; and
- whether the private placement has been planned or modified in response to, or in anticipation of, a bid.
Should the securities regulators intervene?
If a transaction fails the first branch of the test, and is or may be a defensive tactic, the analysis does not stop there. The securities regulators will still need to determine whether or not it is appropriate to intervene.
In determining whether to intervene in a tactical private placement, the following non-exhaustive list of considerations is relevant:
- whether the private placement would otherwise benefit the target company's shareholders;
- the extent to which the private placement alters the pre-existing bid dynamics;
- whether the investors in the private placement are related parties to the target or whether there is some 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;
- whether there is any information available about the views of the target company's shareholders with respect to the take-over bid and/or the private placement; and
- where a bid is underway as the private placement is being implemented, whether the target's board appropriately considered the interplay between the private placement and the bid, including the effect of the resulting dilution on the bid and the need for financing.
Of course even where these considerations are not engaged, regulators retain broad jurisdiction to intervene to protect the capital markets.
Until Next Time...
Remedies
The fact that Dolly Varden had agreed with the commissions not to close the private placement until Hecla's application had been resolved, taken together with the fact that the commissions decided against Hecla, was critical to the analysis. This fact left open (presumably, for another day...) a full discussion of what remedies might be available to a successful applicant in the context of a private placement that's already closed.
On the subject of remedies, the commissions did make two importance observations.
The first is that, once completed, unwinding a completed financing transaction will involve potentially difficult issues denying the target and its shareholders and the investors in the private placement of the benefits of the contractual commitments that have been made.
The second is that, if the private placement has the effect of preventing a bidder from satisfying the Minimum Tender Condition, a bidder could potentially seek relief from securities regulators to exclude the shares issued in a private placement, for the purpose of determining whether the Minimum Tender Condition has been satisfied. Given the objective of most bids is to acquire 100% ownership of a target company, this remedy will likely only be satisfactory to a bidder where it could still reasonably acquire enough securities in order to be able to complete a second step takeout transaction for the minority position post-bid.
Forum
The other issue that didn't get addressed in the joint reasons is the issue of forum. That is, when is it appropriate for securities regulators, as opposed to stock exchanges or courts to consider the appropriateness of a private placement in the take-over bid context? In the Dolly Varden dispute, the courts were not involved, and the stock exchange had not yet approved the private placement at the time of the hearings, and so the issue of forum did not arise.
Issues concerning forum are related to remedies given different remedies are available in different forums.
Conclusion
While any private placement will need to be examined in light of its own unique factual background, the joint reasons of the OSC and the BCSC in the Dolly Varden dispute provide capital markets participants with guidance (including a framework) for assessing the future use of tactical private placements under the New Bid Regime. The guidance and framework provided appears to be a culmination of the decisions of the securities regulators that pre-date the New Bid Regime, together with careful consideration of defensive tactics policies in light of the changes imposed by the New Bid Regime.
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