Capital Markets Tribunal Keeps High Bar to Establish Improper Defensive Private Placement

March 27, 2024

Written By Kris Hanc, Christopher Doucet and Kruti Sheth

On March 11, 2024, the Ontario Capital Markets Tribunal (Tribunal) released its reasons for dismissing Mithaq Capital Inc.'s (Mithaq) application on December 14, 2023, to cease trade a private placement that Aimia Inc. (Aimia) completed in October 2023. Mithaq asserted that the private placement was conducted as an improper defensive tactic under National Policy 62-202—Take-Over Bids—Defensive Tactics of the Canadian Securities Administrators and was designed to thwart Mithaq’s then-recently launched takeover bid for Aimia. Ultimately, the Tribunal found that the private placement was conducted for a legitimate business purpose to meet Aimia's "serious and immediate" financing needs. Even though it created an unfavorable bid environment for Mithaq, that factor was secondary to the main purpose and did not justify granting a cease trade order, thereby keeping the bar high for establishing an improper “defensive” private placement.

Background

Mithaq owned 30.96 percent of Aimia’s outstanding shares and in the lead up to the takeover bid and private placement, had a number of disputes with Aimia’s board and management.

On September 15, 2023, Aimia asked the Toronto Stock Exchange (TSX) to provide conditional approval for a private placement, which was granted on September 28, 2023. On October 5, before the private placement was announced, Mithaq made an all-cash insider bid for all outstanding common shares of Aimia it did not already own at an offer price of $3.66 per share.

Fully subscribed, the shares issued in the private placement represented an aggregate dilution of 24.89 percent of Aimia’s outstanding shares (at the time), thereby significantly complicating the pathway to a successful insider bid for Mithaq. The private placement was expected to raise $32.5 million in gross proceeds to fund Aimia's operations over the next 12 to 24 months and support its strategic investment plan and other contingencies.

In response to Aimia's announcement, Mithaq brought an application to the Tribunal to cease trade the private placement, asserting it was an improper defensive tactic designed to frustrate its bid, and to set aside the TSX decision to approve the private placement without requiring shareholder approval.

The Decision

Mithaq’s application was not successful as the Tribunal followed the example of previously adjudicated instances of alleged defensive private placements and granted significant business deference to Aimia. The Tribunal concluded that Aimia's private placement was primarily done to finance the company, the unfavorable outcome for Mithaq's takeover bid was therefore secondary and not enough to justify a cease trade order.

In reasoning its decision, the Tribunal applied the legal test from Hecla Mining Company (Re) (Hecla) in 2016 to determine whether the private placement was a defensive tactic. The test established in Re Hecla has two prongs: (1) the Tribunal must assess whether the "the private placement was "clearly not" a defensive tactic designed in whole or in part, to alter the dynamics of the bid process," and if it is not clear in the first stage, then (2) the Tribunal must continue the analysis and balance the corporate objective of a private placement against facilitating shareholder choice.

As a preliminary matter, the Tribunal considered which party has the onus on the first prong of the test in Re Hecla. Ordinarily, Mithaq, the applicant in the case, bears the burden of establishing elements of its case. However, in Re Hecla, the Tribunal held that the onus in the first stage may shift. If Mithaq were to begin by showing that the private placement’s impact on the existing bid environment was material, then it would be Aimia that had the burden of showing that the private placement is clearly not a defensive tactic.

In assessing the materiality of the private placement to the existing bid environment, the Tribunal considered the private placement's impact on: (1) the cost of the bid, (2) the likely success of Mithaq's bid and (3) other potential bids. Applying these factors, the Tribunal found that the private placement had a material impact on the bid environment because of its effect on the likely success of the bid. In particular, the private placement impacted Mithaq’s ability to meet the minimum tender condition and had the potential to discourage other possible bidders for Aimia or discourage Mithaq from improving its bid. Therefore, Mithaq was successful in establishing that there would be a material effect on the bid environment and the onus shifted to Aimia to establish that the private placement was clearly not a defensive tactic.

In determining whether Aimia could establish that the private placement was clearly not a defensive tactic, the Tribunal applied three factors from Re Hecla: (1) whether the private placement was designed to respond to Aimia's serious and immediate need for financing, (2) whether the private placement was planned or modified in response to, or in anticipation of, a takeover bid; and (3) whether the private placement was part of a good faith, non-defensive, business strategy. As the bearer of the burden of proof, Aimia successfully demonstrated that it had a serious and immediate need for financing by showing an evidentiary record of the company’s cash position, management’s attempts to obtain debt financing dating back to November 2022 and evidence relating to advice the company’s special committee received from its financial advisor concerning its capital requirements. Mithaq contested this argument, but the Tribunal did not find it was sufficient to disapprove that Aimia had a serious and immediate need for financing. Here, the Tribunal usefully clarified one aspect of the test by confirming that an immediate need does not necessarily imply urgency but does imply that the need currently exists, as opposed to being speculative.

The Tribunal found, as a question of fact, that the private placement was not planned in anticipation of a takeover bid. The Tribunal concluded that Mithaq’s disclosure of its share ownership of Aimia, required after crossing the 10 percent early warning reporting threshold under applicable securities laws, was not by itself a demonstration of an imminent takeover bid.

The Tribunal, in assessing the final factor, found that: (1) the private placement responded to a direct need for financing and (2) the private placement supported Aimia’s pre-existing strategy of strengthening its board of directors. Despite the deference to Aimia’s capital raising strategy, since the private placement took on a defensive ‘character’ after Mithaq’s bid was announced, the Tribunal could nonetheless not conclude that the private placement was "clearly not" a defensive tactic.

Since Aimia was not successful in establishing that the private placement was clearly not a defensive tactic, the principles of NP 62-202 were engaged to assess whether there was a "clear abuse" of Aimia shareholders or the capital markets. To make the assessment, the Tribunal considered:

"(1) whether the private placement would benefit Aimia’s shareholders; (2) the extent to which the private placement alters the pre-existing bid dynamics; (3) whether the private placement investors are related to Aimia, or to each other, in such a way as to enable Aimia’s board to summarily reject Mithaq’s bid or a competing bid; (4) whether the views of other Aimia shareholders should influence our decision; and (5) whether Aimia’s board appropriately considered the interplay between the private placement and Mithaq’s bid." All of these factors were considered in the context of "balancing corporate objective served by the private placement against the facilitation of shareholder choice."

The Tribunal primarily focused on three of the five factors and found that: (1) the private placement benefitted Aimia's shareholders, (2) the private placement altered the pre-existing bidding dynamics and (3) there were deficiencies in Aimia's board consideration of the interplay between the private placement and Mithaq's bid. The Tribunal concluded that while the private placement did have an impact on the bid environment, this was outweighed by the benefit to Aimia shareholders.

Mithaq was unsuccessful in establishing that the private placement was abusive, let alone clearly abusive, the standard set out in Re Hecla in respect to takeover bids. Mithaq was also unsuccessful in demonstrating their other assertion, that the TSX had erred in allowing the private placement to proceed. The Tribunal found that the TSX’s decision was sound, had no error in principle and Mithaq did not bring forward any new and compelling evidence that was not before the TSX.

Key Takeaways

This case provides helpful guidance for all parties involved in a takeover bid. The Tribunal confirmed the principles and tests from Re Hecla case and signaled to issuers facing the dual challenges of capital raising difficulties and a hostile bidder the high bar for successfully casting a private placement as an improper defensive tactic under applicable securities laws. In this case, the Tribunal placed the greatest emphasis on the serious and immediate need for financing. Even though it created a less favourable environment for Mithaq's bid, in balancing the interests of shareholders, the Tribunal put a greater weight on the need for financing over creating the easiest path for a bidder to complete a successful takeover bid. 

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