The rising tide of metal prices is driving junior mining companies to shore up their defences against hostile takeover bids.
In less than a month, at least five Vancouver-based junior companies have adopted shareholder rights plans to protect themselves in the event of a takeover.
The “poison pill strategies” allow existing shareholders to buy rights to massive amounts of new securities for rock-bottom prices.
The holders can then convert them into common shares if anyone launches a bid for the company’s stock, effectively diluting the bidder’s holdings or poisoning the takeover attempt.
Although poison pill strategies were popular in the 1980s, they’re quickly resurfacing in the post-recession world as commodity prices soar amid worldwide resource demand.
For Vancouver’s Sandstorm Gold (TSX-V:SSL), the shareholder rights plan is more about buying time than blocking a takeover.
“There’s a lot of companies out there, especially the larger ones, that feel like they have the currency, in terms of higher share prices, to go out and make acquisitions,” explained Nolan Watson, Sandstorm’s president and CEO.
“But those valuations haven’t necessarily filtered down to the lower companies, so there’s a lot of smaller companies that feel undervalued and don’t want to sell.”
Sandstorm and it’s sister company, Sandstorm Metals & Energy (TSX-V:SND), adopted rights plans last month as gold, silver, copper and coal prices continued north.
In the event of a takeover, the plan gives a company’s management team extra time to evaluate the hostile bid or seek a better deal.
Baja Mining (TSX:BAJ), which is building a copper-cobalt mine in Mexico, adopted its rights plan April 22.
Baja president John Greenslade called it a “delay tactic” for junior companies that are fast approaching production or sitting on a valuable piece of real estate.
“I don’t know that there’s many target companies that don’t have a rights plan in place,” Greenslade said.
“It’s just considered good governance these days.”
Len Boggio, a senior partner with PwC’s mining group, said junior companies with good properties are becoming takeover targets earlier than they used to be.
“Everybody has always been a target, and I think it’s just now that there’s a realization,” Boggio said.
Roger Taplin, a partner with McCarthy Tetrault’s business law group in Vancouver, said poison pill strategies are most effective when adopted before a hostile bid is launched.
“First of all, [there’s] no real downside to adopting a plan,” Taplin said. “Having one in place is always a good, defensive, preparatory measure and they’re cheap to adopt.”
He said the average plan costs approximately $10,000.
“Secondly, should you receive an unsolicited proposal you’ll be glad that you did it because adopting one in the face of a proposal … is not a great option.”
The problem with adopting a pill in the face of a hostile takeover is that the securities commission could immediately put a stop to it.
A reactive plan could also damage the business relationship between the bidder and the target company.
On the other hand, the demand for metals these days has meant that not every takeover deal is friendly.
“One thing you’re seeing right now is acquisitions that look friendly, [but] behind the scenes aren’t all that friendly … had those companies had shareholder rights plans it would have given them more flexibility,” Watson said.
If nothing else, a pill forces the bidder to play by the rules, freeing up time for the takeover target to seek a fair deal.
But make no mistake, Taplin said, poison pill strategies rarely allow a company to block a hostile takeover.
In fact, he likened poison pills to fox hunting, saying they generally have the same outcome, despite the added rules.
“When you go fox hunting there’s all these arcane rules … but when all is said and done the fox always dies,” Taplin said.
“Takeover rules are a little bit like that; there’s a whole lot of rules to make sure you have a fair process, but almost always the company gets taken over; the fox dies.”