Since Canada’s new harmonized take-over bid regime (New Bid Regime) came into effect earlier this year, there’s been a lot of talk about whether tactical private placements will become the new poison pills. For more information on the New Bid Regime see our previous article, Canada’s New Take-Over Bid Rules Seek to Level the Playing Field.
A “tactical private placement” occurs when a target company issues securities to a friendly party in response to an unsolicited take-over bid in order to make it more difficult and/or more expensive for the hostile bidder to complete a take-over of the target company. This outcome is particularly important to target companies under the New Bid Regime for two key reasons. First, as a consequence of the New Bid Regime, shareholders rights plans are largely irrelevant in deterring hostile bids because such offers must remain open for at least 105 days (rather than 35 days under the old rules). Second, the New Bid Regime contains a mandatory condition that a minimum of more than 50% of all outstanding target securities owned or held by persons other than the bidder and its joint actors be tendered and not withdrawn before the bidder can take up any securities under the take-over bid.
While the Canadian securities regulators had considered the use of private placements several times in the context of a take-over bid, regulators had not, until the Dolly Varden hearing, had the opportunity to respond to a claim by a bidder operating under the New Bid Regime that a target company had used a private placement as an inappropriate defensive tactic.
On June 27 Idaho-based Hecla Mining Co. announced its intention to acquire an additional 50% of the shares of Dolly Varden Silver Corp., with the formal offer being launched on July 8. A few days later, Dolly Varden communicated to its shareholders that they should take no action with respect to the hostile bid, and that Dolly Varden would be proceeding with a private placement it had previously announced on July 5. According to Dolly Varden, the proceeds of the private placement are to be used to pay off debt and for working capital purposes.
On July 8, Hecla filed an application with the British Columbia Securities Commission (BCSC) seeking a permanent order cease trading the private placement and any securities issued, in connection with the private placement, or in the alternative, an order cease trading the private placement unless and until Dolly Varden obtains shareholder approval of the private placement. On July 11, Hecla filed an application with the Ontario Securities Commission (OSC) seeking substantially the same relief.
About a week after Hecla’s application to the BCSC, Dolly Varden signed an undertaking to the BCSC that it would not conduct a distribution of any securities, under the private placement or otherwise, until the BCSC rendered its decision in the application. This undertaking was presumably intended to preserve the remedies available to the securities commissions if they were to decide in favour of Hecla.
Earlier today, the OSC and the BCSC released their decisions dismissing Hecla’s application, thus allowing Dolly Varden to proceed with the private placement.
We will provide a further update once the commissions release the reasons for their decisions in the Dolly Varden dispute. The reasons will likely provide capital markets participants with important guidance on the future use of private placements as a defensive tactic under the New Bid Regime.
 Before the New Bid Regime, Canadian regulators have considered allegations that the issuance of securities in the context of an ongoing take-over bid was an improper defensive tactic. For instance, see AbitibiBowater inc. (Produits forestiers Résolu) c. Fibrek inc., 2012 QCBDR 17 aff’d 2012 QCCA 569; ARC Equity Management (Fund 4) Ltd. (Re), 2009 LNABASC 315; Inmet Mining Corporation (Re), 2012 BCSECCOM. 409 and Re Red Eagle, 2015 BCSECCOM 401.