Written by Brent Kraus, Linda Misetich Dann, Kelly Ford and Patrick Sullivan
On October 24, 2016, the British Columbia Securities Commission and the Ontario Securities Commission (together, the Commissions) released their much anticipated reasons for their July 22, 2016, order, In the matter of Hecla Mining Company (Hecla), which provide guidance for issuers contemplating whether a private placement would be considered an inappropriate defensive tactic in the context of an unsolicited takeover bid.
The joint panel determined not to cease trade a private placement of common shares launched by Dolly Varden Silver Corporation (Dolly Varden) following the announcement by Hecla Mining Company (Hecla) of its intention to make an unsolicited offer to acquire all of Dolly Varden's outstanding shares (the Hecla Bid). The Ontario Securities Commission also cease traded the Hecla Bid until such time as it obtains and delivers to Dolly Varden’s shareholders a formal valuation pursuant to Multilateral Instrument 61-101 Protection of Minority Shareholders in Special Transactions (MI 61-101). Hecla withdrew and terminated its bid following the announcement of the orders.
Canadian securities regulators have previously considered the use of private placements as defensive tactics in the context of unsolicited takeover bids. The Alberta Securities Commission held in ARC Equity Management (Fund 4) Ltd. (ARC) that a private placement by the target issuer in response to an unsolicited takeover bid is not necessarily abusive of the capital markets or the rights of target shareholders. This decision was subsequently followed by the British Columbia Securities Commission in its decision in Re Red Eagle released last year. The reasons in Hecla are consistent with and build upon this prior jurisprudence.
Implications of the Reasons in Hecla
The reasons issued by the joint panel in Hecla indicate that the Canadian securities regulators will take a nuanced and fact specific approach to assessing private placements instituted by the target of an unsolicited takeover bid. In assessing such a private placement, the Canadian securities regulators will seek to balance the business judgment of the target's board with their mandate of protecting the integrity of the capital markets. As a result, target boards should consider whether they have, and have evidence to support, legitimate business reasons to undertake a private placement in the face of an unsolicited bid, prior to taking such a step.
Background to the Reasons in Hecla
On June 27, 2016, Hecla announced its intention to make a takeover bid for all the outstanding shares of Dolly Varden. The Hecla Bid was an insider bid under MI 61-101 as Hecla held shares and convertible securities representing in aggregate 19.8 percent of the issued and outstanding Dolly Varden shares on the date that the Hecla Bid was announced.
On July 5, Dolly Varden announced its intention to raise up to $6 million in a private placement of common shares, which, if fully-subscribed, would result in the dilution of existing shareholders by approximately 43 percent upon closing.
On July 8, Hecla formally launched the Hecla Bid and filed an application with the British Columbia Securities Commission to cease trade any shares to be issued under the private placement, on the basis that it was an abusive defensive tactic under National Policy 62-202 Take-Over Bids - Defensive Tactics (NP 62-202). The same application was filed by Hecla with the Ontario Securities Commission on July 16.
On July 16, Dolly Varden filed an application with the Commissions for an order cease trading the Hecla Bid on the basis that Hecla's takeover bid circular was deficient, as it did not include a formal valuation as required by MI 61-101.
On July 22, the Ontario Securities Commission issued its order dismissing the Hecla application and cease trading the Hecla Bid until the requirements of MI 61-101 were satisfied. On the same date, the British Columbia Securities Commission dismissed both the Hecla and Dolly Varden applications. Hecla withdrew and terminated its bid following the announcement of the orders.
Joint Ruling on the Hecla Application
The Commissions concluded that private placements, unlike shareholder rights plans, serve a variety of corporate purposes and must be assessed in a manner that promotes certainty in corporate decision making but nevertheless prevents target boards from entering into abusive transactions.
The Commissions agreed with the general approach taken by the British Columbia Securities Commission in Re Red Eagle and the Alberta Securities Commission in ARC:
We agree with the policy perspective in ARC, that securities regulators should tread warily in this area and that 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.
However, they expanded upon this approach by providing a two part test for determining the appropriate analysis of a private placement in the takeover bid context. The first part considers whether the corporate decision is properly reviewable under NP 62-202. This determination is to be made based on whether the evidence clearly establishes that the private placement was designed to alter the bid process as a defensive tactic. The relevant considerations in answering this question are: (i) whether the target has a serious and immediate need for the financing; (ii) whether there is evidence of a bona fide, non-defensive, business strategy adopted by the target; and (iii) whether the private placement has been planned or modified in response to, or in anticipation of, a bid.
The second part of the test applies where the regulator is unable to clearly find that the private placement is a defensive tactic reviewable under NP 62-202. In these circumstances, the regulator will seek to balance the application of the principles in NP 62-202 with the exercise of the board's business judgment. The Commissions enumerated a non-exhaustive list of factors to be considered in deciding whether or not to intervene in these circumstances.
The Commissions also noted that where the private placement has a material effect on an existing bid, as was the case in Hecla (it resulted in 43-percent dilution for the existing Dolly Varden shareholders), the onus rests with the target to establish that the private placement was not a defensive tactic.
The Commissions found that the Dolly Varden private placement was instituted for non-defensive bona fide business purposes and the principles in NP 62-202 were therefore inapplicable. They found that Dolly Varden was contemplating an equity financing months in advance of the Hecla Bid as part of its goal of debt reduction. The amount to be raised met Dolly Varden's cash requirements to pay off its current term loan and fund its 2016-2017 exploration program. In the circumstances, the Commissions concluded that it was not appropriate to question the board's business judgment and Hecla's applications were dismissed.
Ontario Securities Commission Ruling on the Dolly Varden Application
The Ontario Securities Commission and British Columbia Securities Commission provided separate reasons for their order on the Dolly Varden application to cease trade the Hecla Bid as deficient under MI 61-101.
The Ontario Securities Commission stated that a formal valuation requirement under MI 61-101 was essential in the context of an insider bid. Hecla claimed it had an exemption available from the requirement under MI 61-101, which exemption would be available if Hecla had no target board or management representation within the last 12 months and had no knowledge of any material information concerning the target that had not been generally disclosed.
Here, Dolly Varden's CEO, Rosalie Moore, was previously an employee of Hecla and had been a paid consultant to Hecla through to January 2016. Her previous positions as a director and president/CEO of Dolly Varden had been facilitated by Hecla and had been described as a "secondment" to Dolly Varden. The Ontario Securities Commission determined that Hecla had Dolly Varden board representation through Ms. Moore and that this was "not a close call". In light of this determination, the Ontario Securities Commission stated that it was unnecessary to consider whether Hecla possessed material information concerning Dolly Varden that had not been generally disclosed.
The Ontario Securities Commission found the Hecla Bid to be non-compliant with MI 61-101 and cease traded the Hecla Bid until a formal valuation was obtained and sent to Dolly Varden shareholders as an addendum to Hecla's takeover bid circular.
Hecla is the first instance in which any defensive tactics have been considered since the adoption of the new takeover bid regime on May 9, 2016, which regime largely obviated the utility of shareholder rights plans, the defensive tactic most commonly-considered by Canadian securities regulators prior to such date. Private placements, unlike shareholder rights plans, serve a variety of corporate purposes and, accordingly, the Commissions reasoned that they must be assessed in a manner that promotes certainty in corporate decision making but nevertheless prevents target boards from entering into abusive transactions.