Securities commissions in Ontario and British Columbia have provided guidance on the circumstances in which they will cease trade a private placement by a target as an inappropriate bid defensive tactic. Marking the first time securities regulators have considered Canada's defensive tactics policy in the context of the new takeover bid rules, the guidance establishes the circumstances in which regulators will decide whether a target board's decision to issue shares amounts to an inappropriate defensive measure under Canada's securities laws.
What You Need To Know
- Background. Details of the new framework have been set out in the reasons for the securities commissions' decision not to cease trade Dolly Varden Silver Corporation's private placement in the context of Hecla Mining Company's unsolicited takeover bid.
- A nuanced and balanced approach. Faced with a private placement concurrent with a hostile takeover bid, the commissions will consider whether the private placement serves a bona fide corporate objective, for which directors will be afforded significant deference in exercising their business judgment, as well as the securities law principle of facilitating shareholder choice with respect to a change of control transaction.
- Threshold question: is the private placement tactical? The commissions provide a non-exhaustive list of considerations to decide the threshold question of whether Canada's defensive tactics policy (NP 62-202) has been engaged by the target board's actions. These considerations include whether: (i) the target has a serious and immediate need for the financing; (ii) there is evidence of a bona fide, non-defensive business strategy adopted by the target; and (iii) the private placement has been planned or modified in response to, or in anticipation of, a bid.
- Should the regulator interfere with a tactical private placement? Even though the private placement may be a defensive tactic, regulators will nonetheless seek a balance between enforcing the principles of NP 62-202 and respecting a board's business judgment. In deciding whether or not to intervene, the commissions enumerate a non-exhaustive list of factors.
- Implications for target boards. While the commissions agree that from a policy perspective the regulators should tread with caution in this area and that a private placement should only be blocked where there is a clear abuse of the target shareholders and/or the capital markets, target boards will struggle to defend the legitimacy of a private placement undertaken in the context of a bid unless it clearly serves an actual financing need. Even if the private placement does have a legitimate corporate purpose, the regulators may nonetheless intervene if its effect ultimately frustrates the takeover bid process.
When is a Private Placement an Improper Defensive Tactic?
In July 2016, Hecla launched an unsolicited takeover offer for Dolly Varden, the first hostile bid made under Canada's new takeover bid regime. Just prior to the bid launch, Dolly Varden announced its intention to undertake a private placement and to use the proceeds to repay an existing loan and to finance exploration and working capital costs. The private placement contemplated a dilution of existing Dolly Varden shareholders of approximately 43%. Hecla applied to the British Columbia Securities Commission and Ontario Securities Commission to have the private placement cease traded as an improper defensive tactic. The commissions upheld the private placement and Hecla ultimately withdrew and terminated its bid.1
The new takeover bid rules extend the minimum deposit period for takeover bids to at least 105 days and have introduced a mandatory minimum tender condition of over 50% of the target's outstanding shares. The new rules do not modify Canada's defensive tactics policy (NP 62-202).2 Under that policy, a defensive tactic will attract regulatory scrutiny if it will likely result in shareholders being deprived of the ability to respond to a bid or competing bid.
In their reasons in this case, the commissions acknowledged a distinction between a poison pill, which has the limited purpose of delaying or defeating a bid, and a private placement that may serve valid corporate objectives or may be a defensive tactic. Faced with a private placement concurrent with a hostile takeover bid, the commissions have to consider whether the private placement serves a bona fide corporate objective, for which directors will be afforded significant deference in exercising their business judgment, as well as the securities law principle of facilitating shareholder choice with respect to a change of control transaction.
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Threshold question: is the private placement tactical? The commissions provide a non-exhaustive list of considerations to decide the threshold question of whether NP 62-202 has been engaged by the target board's actions. These considerations include whether: (i) the target has a serious and immediate need for the financing; (ii) there is evidence of a bona fide, non-defensive business strategy adopted by the target; and (iii) the private placement has been planned or modified in response to, or in anticipation of, a bid.
Where the impact of the private placement on the bid is material (as in this case, given the potential 43% dilution of Dolly Varden shareholders), the onus will be on the target board to prove that the private placement was not a defensive tactic. -
Should the regulator interfere with a tactical private placement? Even though the private placement may be a defensive tactic, regulators will nonetheless seek a balance between enforcing the principles of NP 62-202 and respecting a board's business judgment. In deciding whether or not to intervene, the commissions enumerate the following non-exhaustive list of factors, in addition to the considerations listed above:
- Would the private placement otherwise benefit 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?
- To what extent does the private placement alter pre-existing bid dynamics, for example by depriving shareholders of the ability to tender to the bid?
- Are the investors in the private placement related parties to 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?
- 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?
- Is there any information available to indicate the views of the target shareholders with respect to the takeover bid and/or the private placement?
In respect of this last consideration, Dolly Varden's private placement was not subject to shareholder approval under applicable rules of the TSX Venture Exchange. However, under TSX rules a shareholder vote would have been required if the listed company issued more than 25% of its outstanding shares on a non-diluted basis where the price per share was less than the market price (or the transaction materially affected control of the issuer).
Implications for Target Boards
While the commissions agree that from a policy perspective, securities regulators should tread with caution in this area and that a private placement should only be blocked where there is clear abuse of the target shareholders and/or the capital markets, target boards will struggle to defend the legitimacy of a private placement undertaken in the context of a bid unless it clearly serves an actual financing need. Even if the private placement does have a legitimate corporate purpose, the regulators may nonetheless intervene if its effect ultimately frustrates the takeover bid process.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
