As small and mid-size mining companies struggle to raise money in volatile market conditions, many find themselves vulnerable to hostile takeovers.
Truly hostile takeovers are still relatively rare, though many deals begin as an unsolicited offer.
Some recent examples of acquisitions involving B.C. mining companies include:
•Poland-based KGHM’s US$2.87-billion buyout of Quadra FNX Mining Ltd.;
•The bidding war following Rio Tinto’s play for Hathor Exploration; and
•Barker Minerals’ decision to buy the Spanish Creek Gold Property in B.C.’s Cariboo gold district.
Hostile bids progress quickly and time is always of the essence.
There are a number of things that a company should consider in order to prepare itself for a hostile bid.
First, companies should consider adopting a shareholder rights plan and having it ratified by shareholders as soon as possible.
Recent decisions by Canadian securities regulators have allowed tactical plans (plans adopted as a result of a bid) to remain in place. But shareholder approval may be a significant factor as to whether a plan holds water (and there can be no assurance time will permit such approval in the face of a bid).
Second, maintaining close contact with key shareholders and maintaining an internal data site of key agreements and company is always prudent.
Third, mining issuers in particular should be mindful of the currency of their technical report.
Issuers may be limited in the disclosure they are permitted to make if they haven’t updated their technical reports, which is a time-consuming process.
In the event of an unsolicited offer, a company will need to mobilize its resources quickly to ensure the best possible outcome for its shareholders.
A takeover bid is only required to remain open for 35 days.
Upon receipt of an offer in any form, the target company’s board and management must take the following steps quickly:
•contact and engage legal counsel and a financial adviser with experience in hostile takeover bids, and consider the appointment of a special committee of independent directors to assess the merits of the offer;
•consider whether the proposed transaction involves an insider or other related party to the issuer;
•determine the role of management, the board and the special committee in response to the offer, and ensure that the mandate of the special committee properly reflects its intended role. It is preferable that the special committee has a meaningful role in the response;
•gather materials and begin to populate a data room to allow potential competing bidders access;
•consider the adoption of a shareholder rights plan, if none currently exists;
•review the company’s directors and officer liability insurance policy for applicable exclusions;
•prepare a non-disclosure agreement for access to the data room and consider whether a standstill provision is appropriate;
•examine how the offer might impact contracts with key employees and consider whether retention agreements would be appropriate and beneficial to retain them during what may be an uncertain time;
•prepare and circulate a memorandum reminding directors and senior officers of their fiduciary duties, including restrictions on the trading of the company’s securities;
•review the company’s stock option plan to determine the consequences of a change of control on outstanding options and whether the board is required or permitted to take any action in that regard;
•identify actions that can be taken in the short term to enhance shareholder value, such as completing and announcing the results of high-potential drilling; and
•ensure that all meetings of the board and special committee are properly documented.
Overall, the board must make a rigorous assessment of the financial and strategic merits of the offer, and it is imperative that a proper process be followed.
Generally speaking, it is primarily the process, not the result, that is ultimately fodder for the courts.
Directors and senior management have a responsibility to be aware of the considerations listed above, and should be prepared if approached with an offer, albeit unwelcome. •
