‘Ottawa’ Drew Hasselback: Are Private Placements the New Poison Pills?
The dollar values may be low, but the stakes are huge.
Idaho-based Hecla Mining Co. has launched an unsolicited bid to take control of Vancouver-based junior miner Dolly Varden Silver Corp. According to Bloomberg, the bid has a cash value of only $10 million. But Canadian M&A lawyers are following the deal because it’s sparked a legal battle over the country’s hostile takeover rules.
The B.C. and Ontario Securities commissions are holding simultaneous hearings on Wednesday to decide whether companies can thwart unwanted takeover bids by selling a big chunk of their shares in a private placement.
Hecla, a silver producer, already owns just under 20 per cent of Dolly Varden. Hecla announced on June 27 that it would seek 50 per cent of the Dolly Varden shares it doesn’t already own. A formal offer was filed July 8.
On July 11, Dolly Varden told its shareholders to take no action while it considered the Hecla offer. Meanwhile, Dolly Varden announced plans to issue a $6 million non-brokered private placement to pay off a loan and fund exploration of its silver project.
Hecla has complained to both the B.C. and the Ontario securities commissions that the real purpose of Dolly Varden’s private placement is to thwart its unsolicited bid. Hecla has also asked that if regulators let the private placement proceed, it wants regulatory permission to buy into the private placement so it can preserve its 19.8 per cent equity stake in Dolly Varden.
M&A lawyers across the country are watching the Hecla challenge closely to see if private placements can emerge as an effective defensive tactic, says John Emanoilidis, co-head of the M&A practice at Torys LLP in Toronto.
Since May, Canadian takeover rules have been changed to require that unsolicited bids remain open for at least 105 days, up from a previous minimum of 35 days. The new rule is designed to do away with the need to challenge the validity of so-called “poison pills” before securities commissions — a stalling tactic target companies had been using to buy time to seek alternatives to hostile bids.
“Boards haven’t had to use private placements as a possible defensive tactic because they had poison pills available to them,” Emanoilidis said. “It will be useful to have the commissions articulate a policy on the appropriate use of private placements in the context of a hostile bid.”
With poison pills out of the mix, something is bound to fill the void. A lot of M&A lawyers have taken a fresh look at National Policy 62-202, a pan-Canadian guideline that provincial securities regulators consult before considering defensive tactics in hostile takeover challenges.
Since the defensive tactic policy emerged in 1997, its primary goal has been to restrict the use of poison pills. While regulators this year extended the minimum period for unsolicited bids, they left that 1997 policy on takeover defences intact. That policy specifically mentions that regulators can review any proposed sale of shares or options to buy shares that would involve a “significant” stake of the target company.
To be clear, the policy doesn’t ban target companies from making private placements in the face of a hostile bid. Rather, the policy says regulators may scrutinize such deals that materialize just before a bid is launched, or that are announced during the time a bid is open.
Even then, regulators have been wary to block private placements that emerge after or during an unsolicited takeover. Last November, the B.C. Securities Commission issued a ruling called Red Eagle in which it said that even in the face of a hostile takeover bid, regulators should only block a private placement if it posed a “clear abuse of the target shareholders and/or the capital markets.”
Indeed, Daniel Batista, an M&A lawyer with Fasken Martineau DuMoulin LLP in Toronto, says he expects more target companies to consider private placements as a defensive tactic, so long as boards can demonstrate the share sale has a business purpose other than thwarting the unwanted bid.
“I think the regulators have clearly signaled that they are hesitant to use their public interest power to stop a private placement in this sort of context because they are concerned that they will be fettering the discretion of directors to act in accordance with their business judgment,” he said.
If private placements are already a defensive tactic, what’s so important about Hecla and Dolly Varden?
Wednesday’s hearing represents the first time securities regulators will consider private placements as a defensive tactic since the new Canadian takeover rules took effect in May. With poison pills mostly out of the picture, M&A lawyers are curious to see how easily private placements might fill that void.
“The regulators knew when they reformulated the takeover regime that they would have to clarify their position on defensive tactics,” Emanoilidis said. “They didn’t update the defensive tactics policy at the time they put out the knew rule.”