Further to our post on the Dolly Varden Silver Corp. (Dolly Varden) and Hecla Mining Co. (Hecla) decision, the Ontario and British Columbia Securities Commissions (the Commissions) recently released their reasons for their decision in July, 2016 (the Reasons) allowing Dolly Varden to proceed with a proposed private placement announced shortly after Hecla launched a hostile bid for Dolly Varden.  Following the decision, Hecla promptly withdrew its bid.

The Dolly Varden bid has been closely watched because it is the first decision to consider the use of a private placement by a target since the introduction of Canada’s new take-over bid regime in May, 2016

National Policy 62-202 –Take-over Bids – Defensive Tactics (NP 62-202) states that a securities issuance, i.e. a private placement, could, in certain circumstances constitute a defensive tactic attracting regulatory scrutiny on the basis that it may frustrate the ability of shareholders to respond to a bid or a competing bid. The Reasons note that prior to the introduction of the new bid regime, regulatory scrutiny in the context of defensive tactics was focused on shareholder rights plans. The new focus on private placements is a more difficult balance to strike, as unlike shareholder rights plans whose purpose is to thwart an unwanted bid, private placements may serve a variety of corporate objectives, not related to the bid. The Reasons provide that when considering whether a private placement is purely a defensive tactic, the extent to which the private placement serves a bona fide corporate objective must be balanced against the takeover bid principle of ensuring shareholder choice to tender to a bid and promoting a transparent and even-handed bid process.

The Reasons emphasize that regulators must consider the responsibilities of boards of directors in implementing corporate actions, including considering the directors’ standard of care and the business judgment of boards. The Commissions cited with approval the British Columbia Securities’ Commission’s decision in Re Red Eagle, 2015 BCSECCOM 401, 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”.

Considering the business judgment rule, the Reasons layout the test to determine whether a private placement is a defensive tactic. First, if the evidence clearly establishes 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. In considering this, the Commissions set forth the following non-exhaustive list of considerations: (a) whether the target has a serious and immediate need for financing; (b) whether there is evidence of a bona fide, non-defensive, business strategy adopted by the target; and (c) whether the private placement has been planned or modified in response to, or in anticipation of, a bid.

If, after this analysis, it cannot be clearly established that the private placement is not a defensive tactic, then the principles set out in NP 62-202 are engaged. In addition to the foregoing list of considerations, the regulators will also consider the following additional non-exhaustive questions: (a) would the private placement 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?; (b) to what extent does the private placement alter the pre-existing bid dynamics, for example by depriving shareholders of the ability to tender to the bid?; (c) are the investors in the private placement related parties to the target or is there 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?; (d) is there any information available that indicates the views of the target shareholders with respect to the takeover bid and/or the private placement?; and (e) where a bid is underway as the private placement is being implemented, did the target’s board 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? Regulators will also need to consider whether there are any public interest considerations that are relevant to the case.

The Commissions, in applying the first portion of the test, found that the Dolly Varden private placement was instituted for non-defensive purposes. Dolly Varden successfully established that: (a) they were contemplating an equity financing prior to the announcement of the Hecla bid; (b) the size of the private placement was not inappropriate in light of their liabilities and what would be required to carry out their exploration work at their silver property; and (c) they considered a larger financing and decided not to pursue that opportunity. Ultimately, the Commissions found that Dolly Varden was pursuing a bona fide corporate objective of seeking capital to repay indebtedness and to pursue its exploration program. Therefore, they did not need to go to the second step of the analysis.

The Reasons reinforce the deference to the business judgment of the target board. Where there is evidence of bona fide corporate reasons for a private placement, regulators will be hesitant to interfere.  It also appears that the timing of the board’s consideration of the private placement was a significant factor in the Reasons. Issuers should note that where evidence cannot be shown that the target board was considering a financing opportunity prior to an announcement of bid, or where there is evidence of mixed motivations, the target may have a tougher time establishing the requisite bona fide corporate objectives.

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