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March 6, 2017

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Law Times • march 6, 2017 Page 11 www.lawtimesnews.com Is private placement allowed during hostile takeover attempt? Regulators' decision gives clarity to bidders, targets BY SHANNON KARI For Law Times T he first decision of se- curities regulators in interpreting new provi- sions for the takeover bid regime in Canada has pro- vided some clarity for both bid- ders and targets in any proposed transactions going forward, say lawyers in this field. The Ontario and British Co- lumbia Securities Commissions issued rare collective reasons last fall in a dispute between the Hecla Mining Company and the Dolly Varden Silver Corpo- ration. The commissions were asked to decide when a private place- ment 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 Var- den that a private placement aimed at raising funds to repay an existing loan was "instituted for non-defensive business pur- poses" and was an appropriate action. Beyond the specific facts of this dispute, though, the deci- sion 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 regu- lators will consider. Patricia Olasker, a senior partner at Davies Ward Phillips & Vineberg LLP, says that while there have not been any con- tested hearings since this deci- sion, the principles outlined in the Dolly Varden case are likely going to be followed in future cases. "This is part of the new real- ity. There is a bit of a road map here for both sides," says Olas- ker, 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 guid- ance to target boards that may be considering other measures in response to hostile bids, sug- gests 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 regula- tors 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 an- nounced a private placement. The financing would po- tentially 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 simulta- neous hearings on the matter. As a result, the Ontario Secu- rities Commission cease-traded the Hecla offer as being non- compliant with the provincial Securities Act. Collective rea- sons, 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 in- terfere with a bid," she explains. "While the board can seek out a better offer, it cannot sim- ply 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 place- ment 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 de- fensive tactic," the commissions wrote. Dolly Varden is a junior min- ing company and it is not un- usual 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 devel- ops the juniors. We have a long history of that," says Di Paolo, regional chairman of the securi- ties litigation group at his firm. The commissions found that the Dolly Varden private place- ment 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 legiti- mate 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 offer- ing are related parties to the target; and is there any informa- tion 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 neces- sary," says Di Paolo. In terms of whether the tar- get 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, Olas- ker suggests. "Even more senior issuers that can demonstrate an ongo- ing de-leverage of the balance sheet" may be able to use financ- ing to counter a hostile bid, she explains. The question, Olasker says, will be whether the target com- pany can show it has been plan- ning to reduce debt. LT FOCUS Patricia Olasker says that, in Ontario, the regulatory scheme is not in favour of the use of defensive tactics by a board to thwart a hostile bid. HOSTED IN PARTNERSHIP WITH BRONZE SPONSOR PLATINUM SPONSOR SILVER SPONSOR NOMINATE AN INDIVIDUAL OR TEAM IN THE FOLLOWING CATEGORIES: Accepting nominations from large, small and public sector/non-profit legal departments. Nomination forms and more information can be found at: www.innovatio-awards.com We are looking for Canada's most innovative in-house counsel JOIN US TUESDAY SEPTEMBER 19, 2017 AT THE ARCADIAN COURT • Law department management • Diversity • Best practices in compliance systems • In-house M&A Dealmakers • Working with external counsel • Litigation management • Risk management • Tomorrow's leader in innovation • Law department leadership NOMINATIONS OPEN UNTIL MARCH 15, 2017 Untitled-3 1 2017-02-28 3:17 PM New takeover bid regime A new scheme came into effect in May 2016 following efforts by the Canadian Securities Administrators to update rules related to takeover bids in Canada. The goal was to balance the interests of targets and target boards, as well as target shareholders and prospective bidders. Three of the key provisions of the new bid regime are: • an extension of the minimum bid period to 105 days; • the irrevocable minimum tender condition of more than 50 per cent; • the requirement to extend the bid period by at least 10 days once the minimum tender condition has been met and all oth- er terms and conditions of the bid have been complied with or waived. LT It is in the public interest to have a public market that develops the juniors. We have a long history of that. David Di Paolo

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