Recent Developments in the Regulation of Defensive Tactics in Canadian Take-over Bids – Part II


This is the second instalment of a three part article. In the first part, we discussed the basic concepts and guiding principles applied by Canadian securities regulators when they are asked to cease trade an effort to defend against a take-over bid. In this second part, we will discuss the British Columbia Securities Commission’s decision in Re Red Eagle, 2015 BCSECCOM 401, in which these guiding principles were applied. If you missed the first instalment and you would like to read it now, here is a link to Part I.

Red Eagle

CB Gold Inc. (“CB”), a Vancouver-based mineral resource exploration company, owned property in Colombia and was in need of capital. Red Eagle Mining Corporation (“Red Eagle”), another Vancouver-based mineral resource company with property in Colombia, proposed a friendly merger with CB during the first half of 2014 but no agreement was reached. On August 27, 2014 and January 28, 2015, respectively, the CB Board and shareholders adopted a rights plan.

In May, 2015, CB agreed to sell its Colombian property to OM.L Trading Inc. (“OML”), subject to shareholder approval. On June 16, 2015, Red Eagle announced that it would make a takeover bid for the shares of CB if the OML sale was not approved by the CB shareholders. By the proxy deadline for the CB shareholder meeting it was obvious that the CB shareholders had rejected the OML sale and Red Eagle’s take-over bid formally commenced on June 29, 2015, subject to the condition that a minimum of 50% of the CB shareholders tender to the bid (this condition was subsequently waived). On July 14, 2015, CB announced that the Red Eagle bid failed to provide adequate value for its shareholders.

On July 24, 2015, CB announced an agreement with Batero Gold Corp. (“Batero”) pursuant to which Batero would (i) invest $575,000 by way of a private placement (the “Batero Placement”) and (ii) make a bid for all of the CB shares. The Batero agreement, which was supported by management, included a “no shop” clause prohibiting CB from seeking alternative offers. CB completed the Batero Placement later that same day (July 24, 2015).

Red Eagle brought an application to cease trade (i) the CB rights plan (ii) the Batero Placement and (iii) the Batero bid.

Red Eagle claimed that the CB rights plan had served its purpose by giving CB the opportunity to generate an alternative proposal and that, especially in light of the “no shop” clause in the Batero agreement, the only purpose the CB rights plan served at the hearing date was to prevent shareholders from tendering to the Red Eagle bid. It also claimed that the Batero Placement was an inappropriate defensive tactic and that the Commission had the authority to force Batero and CB to unwind the Batero Placement and cease trade the Batero bid.

CB cited the Proposed Amendment and claimed that the Red Eagle offer was coercive because Red Eagle had waived the 50% minimum tender condition. CB also asserted that the Batero Placement was a legitimate private placement carried out for legitimate business purposes by a company in need of capital, that it had already spent a significant amount of the proceeds, and that it was not feasible to unwind the Batero Placement.

Batero asserted that the Batero Placement could not be unwound “from a legal or a practical perspective” and that the Batero Placement had not harmed the CB shareholders or the public markets.

BCSC staff submitted that BCSC should exercise its public interest jurisdiction to interfere with a private placement in the context of a take-over bid “… only where there is compelling evidence that a failure to intervene would be abusive of shareholders in particular and the capital markets in general” and that the Batero Placement did not present any such compelling evidence. Staff also expressed concern that BCSC might not have the authority to unwind the Batero Placement and suggested that a court might be a more appropriate forum in which to seek such a remedy.

BCSC agreed with Red Eagle and cease traded the CB rights plan. In doing so, it noted that the Proposed Amendment had not been adopted and acknowledged that there might be circumstances where a bid without a minimum tender condition is not coercive but stated that in the absence of such a condition it is critical that there be a secondary 10 day offering period. BCSC also reiterated the status quo ante – the question is “when”, not “if”, a rights plan must go and it listed the factors to be considered in making that decision. Because these factors are discussed at greater length by the ASC in the Suncor decision, I have deferred listing those factors to the Suncor discussion, below.

BCSC refused to cease trade the Batero Placement, noting that this request would scramble different legal and regulatory issues, including corporate law questions going to management’s fiduciary duties and the ‘business judgment rule’, as well as securities regulatory issues including the question of permissible defensive tactics under NP 62-202. BCSC also expressed reluctance to engage in duplicative oversight, noting that TSX Venture had conditionally approved the Batero Placement and deferring to its mandate and expertise. Although BCSC acknowledged that it had jurisdiction to cease trade a private placement, it held that a private placement should only be blocked by a securities regulator where there is clear abuse of the target shareholders and/or the capital markets and there was no evidence that the Batero Placement constituted any such abuse. Finally, BCSC acknowledged that it might not have the ability to unwind a completed private placement of an issuer in financial distress that has already spent the proceeds.

If you have questions about this three-part article, contact any member of Clark Wilson’s Corporate Finance & Securities Group.