Hostile takeover? Pick your poison pill

It has been suggested private placements could be used as a new poison pill tactic to ward off hostile takeovers.

There’s a new poison pill on the market in Canada for publicly traded companies trying to fend off the unwanted advances of bigger companies trying to take them over: the private placement.

But to extend the biotech metaphor – it’s still in clinical trials.

It’s not yet clear whether it will be generally approved by securities regulators as a defensive mechanism for all other public companies facing hostile takeovers.

The lawyer involved in using a private placement to ward off a hostile takeover of Dolly Varden Silver Corp. (TSX-V:DV) by Hecla Mining Co. (NYSE:HL) says it’s a strategy that may not always be approved, depending on the circumstances, and depending on the reasons the B.C. and Ontario securities commissions eventually give for allowing Dolly Varden to use it.

Earlier this week, on July 26, Hecla dropped its takeover bid of Dolly Varden, after the Vancouver junior exploration company issued new shares and raised $7 million through a private placement.
It was the first time a private placement was approved by securities regulators while a company was still the target of a takeover, said Fred Pletcher, the lawyer with Borden Ladner Gervais who helped orchestrate the move.

There are new rules in place regarding hostile takeover defenses in Canada, so the Dolly Varden precedent could be an important one.

“This Dolly Varden decision was really the first one that was considered in light of the new rules, so it’s quite precedent setting,” Pletcher said.

Dolly Varden is a small junior exploration company with an historic silver mine property just north of Kitsault.

Silver, like gold, is in a bull market. According to Investing News, silver prices have increased 43% since the beginning of 2016.

Not surprisingly, then, companies like Dolly Varden – small companies short on cash but with promising properties – would become the target of takeovers.

In the past, companies have tried to ward off hostile takeovers through defensive moves like seeking a “white knight” – investors or companies who would make a better, friendlier offer – or poison pills.

One poison pill tactic is one in which special share offerings are made, at a discount, to all but the hostile bidder, diluting shares and making it more expensive for the bidder to acquire the company’s shares.

Earlier this year, securities regulars put new rules in place around those kinds of defensive moves. It extended the period in which companies could launch a defence.

When a company tries to implement a poison pill strategy, the bidder will typically file a complaint with a securities commission, and often a cease trade order is issued.

There was some expectation that when Dolly Varden made a private placement offering, they would be prevented from doing so. Hecla contested the move, but the BC and Ontario securities commissions ended up approving the new share issue. Dolly Varden was able to raise $7 million. Hecla itself acquired $900,000 worth of new shares.

On July 25, Hecla backed off and dropped its bid to take over Dolly Varden.

In Dolly Varden’s case, it needed to raise capital just to pay its debts and keep operating, Pletcher said, and had in fact contemplated the new issue before Hecla made its bid on the company.

Pletcher said it’s far from clear yet whether it will become common practice for companies to use private placements as a defensive measure. He said securities regulators may not allow private placements if it appears to be strictly defensive.

“The rationale for the private placement in this case really wasn’t defensive,” Pletcher said. “They were in genuine need of financing. They were down to less than $184,000 in their bank account.”

Pletcher said the rules around private placements during hostile takeover bids should be clearer once the B.C. and Ontario securities commissions publish their reasons for allowing Dolly Varden's private placement to proceed. That is expected in the coming weeks.

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Read article at Business in Vancouver