One Case, Two Commissions, Several Novel Securities Issues

by Anita Anand

This week, the Ontario Securities Commission and British Columbia Securities Commission simultaneously heard a case relating to the hostile takeover bid that Idaho’s Hecla Mining Co. has launched for Dolly Varden Silver Corp., a junior issuer based in British Columbia. Hecla seeks to acquire all of the Varden shares it does not already own (it owns just less than 20 per cent).

To begin, it is important that two provincial securities commissions are co-ordinating to hear this case, undeterred by the fragmented system of regulating capital markets in this country.

A key point of law at issue is whether Varden’s planned private placement totalling $6-million in issued securities is a dilutive defensive tactic designed to thwart Hecla’s bid. In this case, securities regulators must go where they have historically feared to tread: Should exempt market distributions in the face of a takeover bid be regulated and possibly prevented?

Securities regulators have been usefully studying and making necessary amendments to the regime governing takeover bids, most recently in Multilateral Instrument 62-104, which sought to standardize rules that had historically been applied in an inconsistent fashion by securities tribunals. Takeover bids now have an irrevocable 50-per-cent minimum tender condition and must remain open for a minimum of 105 days. But, importantly, the instrument says nothing about the use of defensive tactics other than a shareholder rights plan or “poison pill.”

Securities regulators certainly have jurisdiction to hear the Hecla-Varden case under their public-interest power, a broad, undefined power that allows them to intervene in transactions in which they foresee the public interest being violated. They also have the ability to make rules relating to defensive tactics should they determine that longstanding National Policy 62-202 is insufficient to guide issuers in these matters.

On the point of target private placements in the face of a hostile bid, securities regulators should be reticent to exercise their public-interest power to prevent them. The Varden board is bound by its (corporate law) fiduciary duty to act in the best interests of the corporation, including a corporation that is in dire financial straits. It also has the clear legal right under current securities law – at least at present – to issue securities via a private placement. Securities regulators should therefore not prevent the distribution from occurring, especially in the absence of clear evidence that the private placement was initiated in response to the bid rather than as part of a long-term strategy for Varden.

The familiar argument regarding whether boards can “just say no” to a hostile offer will be raised, since a private placement may actually thwart a bid as opposed to simply buying more time for the target board (as in the case of poison pills). This is a legitimate issue, but it is not one to be sorted out by use of the public-interest power in a single case.

Rather, securities regulators need to turn to the broader issue of defensive tactics and address this point through the rule-making process with input from all stakeholders. Corporate law and securities regulation intersect here, and the overlap in the law must also be explicitly addressed.

Finally, note that regardless of the outcome, this case is not precedent-setting. Although this transaction raises novel regulatory issues, decisions by securities tribunals – as administrative bodies – do not create legal precedents or form common law. Even after the case, market participants will still need to hear from securities regulators in the form of a policy statement or rule regarding the state of the law on defensive tactics. The time to update the rules relating to defensive tactics has arrived.