Focus: Regulators’ decision gives clarity to bidders, targets

The first decision of securities regulators in interpreting new provisions for the takeover bid regime in Canada has provided some clarity for both bidders and targets in any proposed transactions going forward, say lawyers in this field.

The Ontario and British Columbia Securities Commissions issued rare collective reasons last fall in a dispute between the Hecla Mining Company and the Dolly Varden Silver Corporation.

The commissions were asked to decide when a private placement is permitted in the midst of a hostile takeover bid, in the context of the new takeover bid scheme that took effect across the country last May.

The regulators determined in Hecla Mining v. Dolly Varden that a private placement aimed at raising funds to repay an existing loan was “instituted for non-defensive business purposes” and was an appropriate action.

Beyond the specific facts of this dispute, though, the decision attempts to explain when private placements in the face of hostile takeover bids will be approved and also some of the public interest issues that regulators will consider.

Patricia Olasker, a senior partner at Davies Ward Phillips & Vineberg LLP, says that while there have not been any contested hearings since this decision, the principles outlined in the Dolly Varden case are likely going to be followed in future cases.

“This is part of the new reality. There is a bit of a road map here for both sides,” says Olasker, who practises in the firm’s corporate/commercial, M&A, capital markets and mining groups.

While the decision is specific to private placements, the legal analysis provides some guidance to target boards that may be considering other measures in response to hostile bids, suggests David Di Paolo, a partner at Borden Ladner Gervais LLP in Toronto and one of the lead counsel for Dolly Varden in the securities commission hearing.

The case before the regulators involved an all-cash offer by a subsidiary of Hecla for all of the outstanding common shares of Dolly Varden.

The two companies had an ongoing business relationship and the bid was classified as an “insider offer” under securities provisions.

About a week after the bid was made public, but a few days before it was formally commenced, Dolly Varden announced a private placement.

The financing would potentially result in a dilution of existing shareholders by about 43 per cent. Both companies filed applications last July with the B.C. and Ontario securities commissions, challenging each other’s actions.

The regulators had simultaneous hearings on the matter.

As a result, the Ontario Securities Commission cease-traded the Hecla offer as being non-compliant with the provincial Securities Act. Collective reasons, outlining broader policy issues, were issued Oct. 24, 2016 by both commissions.

In Ontario, the regulatory scheme is not in favour of the use of defensive tactics by a board to thwart a hostile bid, says Olasker.

“Ontario firmly believes that management should never interfere with a bid,” she explains.

“While the board can seek out a better offer, it cannot simply say no.”

The commissions, in their collective ruling, set out the starting point for analyzing a private placement.

“The first question is does the evidence clearly establish that the private placement is not, in fact, a defensive tactic designed, in whole or in part, to alter the dynamics of the bid process,” the ruling stated.

If an applicant, though, is able to establish that the placement has a “material” impact on the bid environment, then “it would seem appropriate for the target board to have the onus of establishing that the private placement was not used as a defensive tactic,” the commissions wrote.

Dolly Varden is a junior mining company and it is not unusual that it would need regular financing, says Di Paolo, noting that under the new takeover provisions, a bid must remain open for at least 105 days.

“It is in the public interest to have a public market that develops the juniors. We have a long history of that,” says Di Paolo, regional chairman of the securities litigation group at his firm.

The commissions found that the Dolly Varden private placement was not a defensive tactic because it was contemplated well in advance of the takeover offer.

As well, the size of the offer was appropriate, given the debt obligations of the company.

The ruling also provides guidance for companies in terms of the steps that must be taken to satisfy a regulator that a private placement is for legitimate business purposes, says Olasker.

“There are clues as to what you must show. If it is to deprive shareholders, though, those are facts where a commission is likely to intervene,” she says.

While it did not come up in the Dolly Varden case because the private placement was for legitimate business purposes, the ruling stated that even if it is considered a defensive tactic, it could still be permitted if it is in the public interest.

“Some of the considerations include whether the private placement would otherwise be for the benefit of shareholders; whether investors in the offering are related parties to the target; and is there any information available that indicates the views of the target shareholders with respect to the take-over bid and/or the private placement,” the commissions wrote.

“If you dilute the value of shareholders, you have to make sure that is reasonably necessary,” says Di Paolo.

In terms of whether the target board acted in the public interest, it is not always an easy concept to define, he says.

Both lawyers agree that the findings and the principles set out in the decision will have more application to junior companies that are publicly traded.

There may be some impact, though, on larger companies subject to a takeover bid, Olasker suggests.

“Even more senior issuers that can demonstrate an ongoing de-leverage of the balance sheet” may be able to use financing to counter a hostile bid, she explains.

The question, Olasker says, will be whether the target company can show it has been planning to reduce debt.

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