Private Placements in Connection with a Takeover Bid Not Necessarily Abusive

Earlier this year, the Ontario Securities Commission released its decision in Re HudBay Minerals, making certain comments that caught some M&A practitioners by surprise. These comments were judicially considered for the first time by a panel of the Alberta Securities Commission in a decision released on August 10, 2009, in Re: Arc Equity Management (Fund 4) Ltd. In Arc Equity, the ASC panel dismissed an application by a shareholder of a public company who sought orders under section 198 of the Securities Act (Alberta) to bar the voting of certain private placement shares in connection with a proposed amalgamation for purposes of reaching the 66 percent voting threshold. In so doing, the panel concluded that a private placement of shares to the bidder in connection with a takeover bid is not necessarily abusive of the capital markets or abusive of the rights of shareholders. While inviting a thorough policy review of the role of private placements in connection with proposed acquisitions conducted prospectively, the panel confirmed that its public interest jurisdiction must be exercised with care and avoid becoming a means of retrospective policy making. The panel was very clear that its public interest jurisdiction may only be invoked where the applicant has clearly demonstrated that the transaction in question is abusive of investors, of the integrity of the capital market, or both. Evidence of unfairness that is not abusive does not fulfill the applicant's burden of proof or trigger the ASC's public interest jurisdiction.