How to spot a poison pill in a hostile takeover

Credit: Flickr user Laura Redburn

Lawyer Scott Marescaux explains how B.C. junior miner Dolly Varden fought off Idaho’s Hecla Mining thanks to new rules for takeover bids

Disputes over control of companies can sometimes involve “poison pills.” The term describes a variety of mechanisms that a targeted company may use to try to thwart a takeover. For example, the company may adopt a resolution requiring an acquirer buy the stock of other shareholders at a premium. Other poison pills dilute the acquirer’s holdings after the transaction is complete.

Public companies are legally limited in the defensive mechanisms they may employ in such circumstances. These laws address the fact that in takeover bids the rights and interests of shareholders can come into conflict with the rights and interests of management of the target company. The goals of the rules that apply to takeover bids include the “protection of the bona fide interests of the shareholders of the target company” and the provision of “a regulatory framework within which takeover bids may proceed in an open and even-handed environment.”

Tactics that allow the target company’s board of directors a reasonable opportunity to seek other bidders could result in a price for the company that is more reflective of the true market value. But where the tactic is designed to, for example, deny the shareholders the ability to make a decision whether or not to tender their shares, securities regulators may take steps to prevent the abuse.

New rules regarding takeover bids came into effect in May 2016. Recent decisions by the British Columbia and Ontario Securities Commissions in Hecla Mining Company and Dolly Varden Silver Corporation were the first by any Canadian securities commission since the new rules took effect. The commissions’ collective reasons for the decisions show how regulators are likely to apply those rules in the context of the changed rules for takeover bids.

Facts

On June 27, 2016, Hecla Mining Company (“Hecla”) announced its intention to make an offer for all of the outstanding common shares of Dolly Varden Corporation (“Dolly Varden”). At the time, Hecla held 19.8 per cent of Dolly Varden’s shares.

On July 5, 2016, Dolly Varden announced a private placement to raise up to $6 million. The placement would cause a dilution of 43 per cent to Dolly Varden’s shareholders, including Hecla.

Hecla formally commenced its takeover bid on July 8, 2016. One of the conditions of the bid was that Dolly Varden’s private placement be abandoned. On the same date, Hecla brought an application to the B.C. Securities Commission to cease trading the private placement, alleging that it was an improper defensive tactic against the bid. Hecla brought the same application in Ontario shortly after.

Decision

The commissions, in a joint ruling, cautioned regulators to “tread warily in this area and that a private placement should be blocked…where there is a clear abuse of the target shareholders and/or the capital markets.” They provided factors to consider in determining whether a private placement is a permitted mechanism:

1. Whether the target company has a serious and immediate need for financing;
2. Whether there is evidence of bona fide, non-defensive business strategy adopted by the target company; and
3. Whether the private placement has been planned or modified in response to, or in anticipation of, a bid.

The commissions concluded that Dolly Varden’s private placement was not an inappropriate defensive tactic as it was instituted for non-defensive business purposes, including seeking financing to repay indebtedness and implement an exploration program. This objective was conceived before Hecla’s bid was made, not in response to it. The commissions held that Dolly Varden was contemplating equity financing before Hecla announced its bid; that the $6 million placement was not inappropriate given Dolly Varden’s liabilities and plans for business operations; and Dolly Varden considered a larger financing and decided not to pursue the opportunity.

Where a private placement has clear non-defensive business objectives, and the timing of the placement supports those objectives, the commissions’ decision in this case shows that the placement will not be interfered with. However, where a takeover bid is countered with a defensive tactic such as a poison pill, implemented specifically to fend-off a takeover bid, this decision suggests that regulators may intervene.

Scott Marescaux is a lawyer at Hakemi Ridgedale LLP. He represents corporate and individual clients in a variety of commercial litigation matters, including contractual disputes, commercial real estate, defamation, expropriation and construction.