In the aftermath of the 2016 amendments to the Canadian takeover bid rules, legal practitioners and regulators alike predicted that the new 105-day minimum bid period heralded the end of the defensive tactic of choice in recent decades—the shareholder rights plan. Specifically, it was thought that the pro-target board increase in the minimum bid period would be counterbalanced by regulators refusing to let poison pills remain in place beyond the new 105-day minimum bid period. With poison pills rendered obsolete, many expected target boards to turn to other defensive measures, and forecast an increase in the defensive use of private placements.
Private placements, of course, are typically not used as defensive measures. Instead, private placements are used by companies to issue securities to a select group of investors without having to satisfy the usual reporting requirements. Given the longstanding—and entirely legitimate—use of private placements to raise money, it was unclear how Securities Commissions would approach the anticipated increase in the defensive use of these devices.
Two-part test: private placements are an improper defensive tactic
The Ontario and British Columbia Securities Commissions (the Commissions) provided clarification in their decision concerning the attempted takeover bid by Hecla Mining Co. of Dolly Varden Silver Corp (Dolly Varden). Together, the Commissions established a two-part test for determining whether a private placement is an improper defensive tactic. At the first stage of this test, the Commissions ask whether the private placement is being used as a defensive tactic that is designed to alter the dynamics of the bid process. To that end, the Commissions will consider questions such as:
- whether the target has a serious and immediate need for financing;
- whether there is evidence of the private placement being part of a non-defensive business strategy pursued by the target; and
- whether the private placement was planned or modified in response to a bid.
If it is determined that a private placement has been designed as a defensive measure, the Commissions move to the second stage of the analysis. Here, the Commissions balance between the broader policy principles underlying their public interest jurisdiction and the need to pay deference to the board’s business judgment. In doing so, they will consider factors including:
- the extent to which the private placement is of benefit to the target’s shareholders;
- the degree to which the private placement alters the pre/existing bid dynamics;
- whether the investors participating in the private placement are related to the target or whether there is any other evidence that suggests that the investors will simply approve of the target board’s decisions;
- the views of the target’s shareholders regarding the takeover bid and/or the private placement; and
- general public interest and capital markets policy considerations.
While the Commissions resolved the matter without engaging in a granular analysis of the facts at hand, the case does provide valuable insight into how private placements will be assessed from now on. Further, it confirms that Commissions will use their jurisdiction to cease trade the share issuance of private placements where deemed necessary. Perhaps the most important takeaway of Dolly Varden is that going forward, target boards must meticulously document their decision-making process from the start, particularly as to their motivations and needs in making use of a private placement.
The author would like to thank Felix Moser-Boehm, Summer Student, for his assistance in preparing this legal update.
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