Jeremy Fraiberg, Alex Gorka, Robert M. Yalden
Nov 9, 2015
On November 3, 2015, the British Columbia Securities Commission (BCSC) released the reasons for its decision in Red Eagle, affirming that private placements can be made by target companies to a white knight in the context of a hostile bid where there is a legitimate need for the financing and where the purpose of the private placement is not to serve as a defensive tactic to thwart the competing bid.
The reasons are noteworthy in their acknowledgment of long-standing tensions between corporate law questions regarding fiduciary duties and securities regulators’ views on defensive tactics. These tensions have previously been highlighted by the Autorité des marchés financiers of Québec (AMF) in its March 14, 2013, Consultation Paper, in which the AMF noted that the decision of the Bureau de décision et révision to cease trade a private placement by Fibrek to a white knight had led some to suggest that it was time to re-evaluate the approach securities regulators were taking to defensive tactics. However, defensive tactics were notably not addressed in the significant amendments to the Canadian take-over bid regime that the Canadian Securities Administrators (CSA) proposed earlier this year.
On June 16, 2015, Red Eagle Mining Corporation made a hostile share exchange take-over bid for CB Gold Inc. CB Gold then announced a $3.5 million private placement that it subsequently withdrew as a result of Red Eagle’s regulatory challenges.
On July 24, 2015, CB Gold and Batero Gold Corp. entered into a support agreement whereby Batero agreed to make a combined cash and share take-over bid for CB Gold. At the same time, Batero agreed to provide $575,000 to CB Gold pursuant to a private placement at a price of $0.05 per share, which was the implied value of the Batero offer. The TSX Venture Exchange conditionally approved the private placement, which later closed on July 24, 2015.
Red Eagle subsequently challenged the private placement before the BCSC, as well as CB Gold’s rights plan, which CB Gold had kept in place to equalize timing between the Batero and Red Eagle offers. As part of this challenge, Red Eagle argued that the private placement should be cease traded because it was an inappropriate defensive tactic that violated securities laws and was also contrary to the public interest.
In rejecting Red Eagle’s arguments, the BCSC noted the following challenges securities regulators face when reviewing the legitimacy of private placements in the context of hostile take-over bids:
- These cases “scramble” different legal and regulatory issues together and raise tensions between corporate law questions regarding the issuing board’s fiduciary duties (and associated deference to a board under the business judgment rule) and securities regulators’ views on defensive tactics.
- Since private placements involve approval by the issuer’s stock exchange, there is a possibility of regulatory arbitrage, since an application to cease trade or reverse the private placement could proceed as a review of the exchange’s decision or as a de novo hearing, which have different standards of review.
- Completed private placements raise the question of what remedies are available to a securities commission (as opposed to a court), which may be complicated by any financial difficulty that the issuer is experiencing or if the issuer has already spent the proceeds of the financing.
The BCSC found that there was evidence that CB Gold needed the private placement for its ongoing financing and that the private placement was not a defensive tactic. It also found that the private placement did not have the effect of limiting CB Gold shareholders from tendering to the Red Eagle offer, distinguishing the BCSC’s prior decision in Inmet Mining and Petaquilla Minerals Ltd., where the BCSC cease traded a proposed Petaquilla private placement that could have had the effect of denying Petaquilla shareholders the opportunity to tender to the Inmet offer.
With respect to its public interest jurisdiction, the BCSC noted that it may be exercised “to override the business judgment rule and cease trade a private placement that inappropriately alters the basic dynamics of an M&A transaction.” Following the Alberta Securities Commission’s decision in ARC Equity Management (Fund 4) Ltd. involving a contested private placement in an M&A context, the BCSC noted that “securities regulators should tread warily in this area and that a private placement should only be blocked by securities regulators where there is clear abuse of the target shareholders and/or the capital markets” – which was not the case here.
The decision in Red Eagle is an important and welcome affirmation that private placements can be completed for legitimate financing purposes in an M&A context and provides a thoughtful assessment of the challenges securities tribunals face in balancing the different legal and regulatory issues raised by such cases. It remains to be seen whether the CSA will also engage with these issues as part of a broader review of defensive tactics.