New Law on Defensive Tactics: Balancing Business Judgment and Shareholder Choice
October 27, 2016
On October 24, 2016, the Securities Commissions of British Columbia (BCSC) and Ontario (OSC, together with the BCSC, the Commissions) released the reasons for their decision in Re Hecla Mining. The Commissions had previously dismissed the application by Hecla Mining Company (Hecla) to cease trade a private placement of Dolly Varden Silver Corporation (Dolly Varden) launched in the face of a takeover bid by Hecla.
NEW TAKE-OVER BID REGIME AND THE DISPUTE
The decision is significant as it is the first time in which the Commissions had to consider whether a contemplated private placement was an inappropriate defensive tactic after the adoption of changes to the Canadian take-over bid regime became effective in May 2016.
The changes to the existing takeover bid regime are discussed in the following:
- April 2015 Blakes Bulletin: Fundamental Changes to Take-over Bid Regime One Step Closer With Release of Draft Amendments
- February 2016 Blakes Bulletin: Finish Line in Sight: New Take-Over Bid Rules are Coming
In June 2016, Hecla announced an intention to acquire all of the outstanding shares of Dolly Varden through a subsidiary by way of an insider bid under Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (MI 61-101).
About one week after the announcement of the Hecla bid, Dolly Varden announced an intention to undertake a private placement financing to raise gross proceeds of up to C$6-million (Private Placement). The Private Placement had an anticipated closing date 10 days later.
Dolly Varden presented evidence to the Commissions that, given its financial circumstances, it required the funds from the Private Placement, for reasons including canvassing the market and creating an auction for the company.
Hecla applied to both the BCSC and OSC to cease trade the Private Placement and any securities issued thereunder on the basis that it was an abusive defensive tactic under National Policy 62-202 – Take-Over Bids – Defensive Tactics (NP 62-202). As alternative relief, Hecla sought an order cease trading the Private Placement until a vote of Dolly Varden shareholders. Dolly Varden applied to the OSC to cease trade Hecla’s offer on the basis that Hecla’s circular did not include a formal valuation under MI 61-101.
The Commissions both found that the Private Placement was instituted for non-defensive business purposes.
The decision notes that the overall objective of NP 62-202 is “protection of the bona fide interests of the shareholders of the target company.” The balance to be struck in assessing private placements, according to the decision, is (1) the extent to which the private placement serves bona fide corporate objectives (citing deference to the business judgment of the target board); and (2) the securities law principles of facilitating shareholder choice with regard to corporate control transactions and promoting open and even-handed bid environments.
In order to assess a private placement, the Commissions undertook a two-pronged analysis. The first question being whether the evidence clearly established that the private placement was a defensive tactic designed in whole or in part to alter the dynamics of the bid process. A non-exhaustive list of considerations relevant to that analysis was provided by the Commissions, namely:
- Whether the target has a serious and immediate need for the financing
- Whether there is evidence of a bona fide, non-defensive, business strategy adopted by the target
- Whether the private placement has been planned or modified in response to, or in anticipation of, a bid
If unable to find that the private placement was not used as a defensive tactic (due to multiple purposes or insufficient evidence as to purpose), then the principles set out in NP 62-202 are engaged and the following non-exhaustive considerations must be assessed:
- Whether the private placement would 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
- To what extent the private placement alters the pre-existing bid dynamics, for example by depriving shareholders of the ability to tender to the bid
- Whether the investors in the private placement are related parties to the target or whether there is 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
- Whether there is any information available that indicates the views of the target shareholders with respect to the take-over bid and/or the private placement
- Where a bid is underway as the private placement is being implemented, whether the target’s board did 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
The Commission noted that the application of NP 62-202 as “relatively straightforward given the extensive evidence supporting a non-defensive purpose for the Private Placement.” The Commissions also declined to interfere with the Private Placement under their public interest mandates. However, the analysis will be of interest to any company considering similar action.
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