The recent refusal of Canadian securities commissions to cease-trade a private placement may indicate that regulators’ approach to defensive tactics under the country’s new hostile takeover bid regime may not depart significantly from their approach in the past.
Hecla Mining Co.’s hostile takeover bid for Dolly Varden Silver Corp. in early July was the first contested transaction since the new regime came into force on May 9, 2016. The regime provides for a 105-day “permitted bid” regime, replacing the old standard of 35 days.
From Dolly Varden’s perspective, a poison pill was no longer a viable option. “The new regime makes poison pills redundant, because it effectively codifies the provisions that these measures contained,” says John Emanoilidis of Torys LLP in Toronto.
But about a week after Hecla made its intentions public — and three days before the take-over bid was launched — Dolly Varden announced that it would be seeking a private placement funding. Hecla sought cease-trade orders from both the Ontario Securities Commission and the British Columbia Securities Commission.
Because the new regime did not address defensive measures other than poison pills, the relatively small transaction involving some $12 million drew national attention.
“The principal reason for the wide interest is that the transaction appeared to raise squarely the question of whether private placement could serve a more prominent tactical purpose as a defensive tactic under the new regime,” says Douglas Bryce of Osler, Hoskin & Harcourt LLP in Toronto.
On July 25, following a joint hearing, the OSC and the BCSC released separate orders dismissing the application for a cease trade. Reasons were to follow at an unspecified date in the future.
“What we can expect in the reasons is the articulation of a framework and the identification of a list of factors that need to be considered in deciding whether to issue a cease-trade order against a private placement,” Emanoilidis says, noting that his firm had a representative attend the hearing.
But Bryce believes that the reasons, while providing some guidance under the new regime, are unlikely to set out broad general principles. “My guess is that the reasons will be quite narrow, because that’s how the regulators operate,” he says. “We’re more likely to see a one-off than the making of something with a more significant import.”
In either case, the refusal to issue cease-trade orders in Dolly Varden may indicate that regulators are unlikely to treat private placements much differently than they have in the past. “Previous decisions in this area have tended to be highly dependent on their facts,” Bryce says.
For example, the BCSC’s Re Red Eagle decision in 2015 and the Alberta Securities Commission’s 2009 decision in Re ARC Equity Management, which allowed private placements to proceed in the context of contested bids, stand in contrast to the 2012 rulings in Re Fibrek from Québec and Re Inmet Mining Corp. from BC, where the private placements were in fact cease-traded.
“An important common thread in the decisions where private placements have been allowed to proceed is that each appeared to feature persuasive evidence as to the target’s legitimate short-term need for financing,” Bryce says. “In other words, the regulators appeared to be more reluctant to intervene to cease-trade private placements where there appeared to be a legitimate business purpose to the financing, even where the tactical nature of the placements may have also been evident.”
Emanoilidis notes that Dolly Varden did need financing: “The evidence was that there was talk about financing in advance of the bid, so you have to ask yourself whether you’re going to prevent issuers in need of financing from accessing private placements just because a hostile bid has intervened.”
However that may be, Emanoilidis notes that the new regime includes a mandatory minimum tender condition of over 50 per cent of outstanding shares. “The 50-per-cent requirement elevates the risk that private placements will be used as defensive tactics going forward, because they make it more difficult for the bidder to acquire the threshold,” he says. “It’s of some interest that the first hostile bid under the new regime came with this twist.”
