We sat down in Vancouver with Fred Pletcher, chair of the National Mining Group at legal firm Borden Ladner Gervais, to discuss Canada’s new hostile takeover rules and a securities case involving junior Dolly Varden Silver (TSXV: DV; US-OTC: DOLLF) and a hostile takeover bid from U.S.-based Hecla Mining (NYSE: HL) launched on July 8.
Pletcher served as lead lawyer representing Dolly Varden, which was defending its right to complete a private placement despite the unsolicited bid from Hecla Mining. Hecla ultimately dropped its offer in late July after regulators ruled the junior could move ahead with the financing.
Hecla’s failed bid has led to speculation that private placements may replace shareholder rights plans, or “poison pills,” as the preferred method for defeating hostile takeovers after rule changes under National Instrument 62-104, but Pletcher cautions that may not be the case.
The Northern Miner: Let’s dig into the actual change to the letter of the law in terms of the regulatory initiatives outlined in NI 62-104 in May. What does it actually mean?
Fred Pletcher: The change tried to give a board of directors more time to respond to hostile manoeuvres, and allow shareholders the opportunity not to be coerced by bids.
The rules did a couple of things. First, bids are now required to be outstanding for 105 days instead of 35 days, which allows a target board to canvass the market and see if they can find a “white knight” to present an alternative transaction to shareholders.
Second, there is now a minimum tender condition wherein 50% of the shares must not be held by parties who did not launch a hostile bid. In other words, a majority of the minority of shareholders would have to tender to the bid to proceed. That prevents a small minority of shareholders from pushing a company into a sale.
TNM: What sort of background discussions and debates led to the regulatory changes?
FP: This had actually been in the works for quite a long time. There had been a consensus emerging among securities regulators, legal practitioners and the federal government that Canadian takeover bid legislation and policies were too favourable to hostile bidders.
That created a slanted playing field, and one of the federal competition reviews actually talked about the lack of productivity in Canada, and an inability to create corporate “champions.”
The message was that part of the problem was that our leading companies may have been too easy to take over. Also, people attempted to do privately what policy wouldn’t allow, which led to shareholder rights plans (poison pills). These developed to give boards more time to respond to hostile bids. The thought behind the legislation is to get security commissions out of the game by establishing a longer time frame to consider bids.
TNM: How did these regulatory changes play out during Hecla Mining’s recent hostile bid for junior Dolly Varden silver?
FP: This case involved private placements, and there was broad commentary in the industry over whether private placements would become the defensive tactic to thwart hostile takeovers. There were several cases before the rule changes that addressed using private placements in this manner, and the rulings had gone both ways.
I’d caution not to assume the Dolly Varden case would create a free-for-all to stop hostile bids with private placements … facts in this circumstance wouldn’t necessarily be there in other instances. This was a company that needed financing and worked on the private placement before the bid. Hecla also had a right to participate in the financing, so they weren’t being diluted here. Therefore you could say there was no prejudice in this private placement.
TNM: You’ve also worked with proxy battles recently, including the Taseko Mines (TSX: TKO; NYSE-MKT: TGB) case involving dissident shareholders at Raging River Capital. What impact might the rules have in this case?
FP: One of the questions during a proxy fight is: “What happens if the target does a private placement before the record date of the meeting?” In this case it was one of the threats the dissident group raised, though I’d point out that Taseko didn’t consider this move at all.
But I could easily see a circumstance in a tightly fought proxy challenge where the same arguments would be raised as to whether a private placement would be approved by the regulators. In terms of that situation, however, it tends to occur when markets have been in a state of decline and dissidents can point to share performance. In a rising market like we see now it’s harder to make this case, so we see less activity.
TNM: Regarding the difficulty Canada has in creating what you called champion companies, do you have suggestions that might alter the landscape? Is what has been done enough?
FP: Our firm has supported the changes to the takeover rules. There was an alternative put forward by the Quebec Autorité des marchés financiers that probably would have gone further. This focused more on fiduciary duties and would have left it to the courts to determine these matters from the perspective of corporate and common law in Canada.
There were interesting elements in this proposal, but the plan we now have balances the playing field. It’s easier for the targets of a hostile bid to find an alternative transaction to provide shareholders with more value.
TNM: We’ve talked a lot about hostile bid scenarios. But could the rules impact friendly deals between companies?
FP: There has always been an uncomfortable relationship between so-called “friendly” and “hostile” transactions. You can push back against a friendly transaction to negotiate better terms, but you’re always worried in the back of your mind that the situation could go hostile. The threat of this situation tends to grease the wheels in terms of motivating companies to close friendly deals.
Because of the legislation, we’ll see less hostile bids in Canada, which may change the dynamic for friendly transactions.
TNM: Would the legislation impact situations with multiple bidders?
FP: Things are now much easier for white knights, simply because they have more time to complete due diligence. Companies in the resource space can have many layers of assets, so it can become complicated. This makes it hard for a third party to come in cold and get comfortable enough to place a substantial bid. This dynamic gives potential bidders time to understand an asset, and possibly raise financing for the transaction.
In Canada, two-thirds of hostile bids generate a white knight or alternative transaction. These numbers will probably shift even further, and the hostile companies would have a lower success rate. But the intention is not to eliminate hostile corporate manoeuvres, because they help the marketplace police entrenched, recalcitrant management.
TNM: How does the 105-day timeline for bids and a multiple-bidder situation work?
FP: A nuance to the rule is that the 105-day period shortens to a 35-day period once you’re in a competitive auction. So when a white knight appears, the time frames compress because it’s now a jump ball. There’s also an option for a target to put the process on the shorter, 35-day period willingly.
The question that may arise in the multiple-bid scenarios concerns private placements. We’ve seen instances in Canada where white knights have offered to take private placements in targets that need the money. The grey area comes when the hostile party says: “Wait a minute, now you’re making it more difficult for us.” This is a situation — unlike Dolly Varden — where the regulators would look a lot closer at the private placement.