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MineAfrica Surviving the Global Financial Crisis in the Mining Sector Understanding the Key Legal and Regulatory Issues in the Current Environment. Presenters: Janne Duncan and Brian Levett Partners, Toronto office February 28, 2009. Agenda. mergers and acquisitions

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Presenters janne duncan and brian levett partners toronto office february 28 2009

MineAfricaSurviving the Global Financial Crisis in the Mining SectorUnderstanding the Key Legal and Regulatory Issues in the Current Environment

Presenters: Janne Duncan and Brian Levett

Partners, Toronto office

February 28, 2009


  • mergers and acquisitions

    • take-over bid or plan of arrangement?

    • special considerations re share consideration

    • defense strategies (poison pills)

    • going private transactions

  • non-traditional financing strategies in the secondary markets

    • private placements under the financial hardship exemption

    • public high yield debt financing

    • flow-through shares


Agenda contd
Agenda contd

  • financing from production

    - metal purchase agreements

    - off-take agreements

    - royalty agreements

  • change of control provisions in employment contracts – golden parachutes

  • under-water stock options – motivating and retaining key employees

Take over bid vs plan of arrangement6

Take-over bids



Can acquire control without target board of directors'/management consent


Less flexible

May have less access to financial information about target

Second-step transaction may be required if get less than 90%

Take-over bid rules may be onerous eg., collateral benefits, identical consideration etc.

Plans of arrangement


Accommodates complex structures eg., different consideration for classes, tax planning, pre-closing asset sales or reorganizations

Can be assured of 100% if successful with only 66 2/3% approval

May have better access to information about the target

Avoid certain rules on take-over bids eg., collateral benefits


Lose control over timing

Court hearing can give voice to angry stakeholders – BCE vs. Bondholders

Take-over bid vs. plan of arrangement

Special considerations for share exchanges
Special considerations for share exchanges

  • For both a take-over bid and a plan of arrangement, consideration can be cash, cash and/or shares or just shares

  • Prospectus level disclosure if share consideration of acquiror is offered

    – Financial statements of acquiror or merged company

    – Fairness opinion

  • Valuation issues

    • Hostile share bid where the acquiror offers a notional premium based on depressed market price

      - If payment is in acquiror's stock how do you value the stock in this market?

    • Target argues that in substance acquiror is not bringing value

      • See Gold Reserve Inc. (2009) (hostile bid enjoined)

      • See also Sulliden Exploration Ltd. (2008) (bid failed)

Issues to consider
Issues to consider

  • Pre-crisis arrangement agreements

    • Higher level of deal completion certainty

    • Allocation of risk in the event of a superior proposal (negotiation of termination provisions; break-up fees; reverse break-up fees; fiduciary outs)

    • MAC provisions – allocation of most risk to the buyer (only MACs applicable to seller gave rights of termination)

Issues to consider1
Issues to consider

  • Post-crisis arrangement agreements –

    – More attention to "force majeure"

  • More attention to dispute resolution

Recent case law
Recent Case Law

Hexion Specialty Chemicals (October 2008)

  • Delaware court imposed a heavy burden on the buyer to prove that a material adverse change had occurred (the MAC clause would have allowed the buyer to terminate the transaction without paying a termination fee)

  • Buyer had to prove MAC is consequential to a target's long-term earnings power over a "commercially reasonable period" of "years, not months"

  • Now, MAC provisions may include financial tests or other qualitative standards to determine whether a MAC has occurred (EBITDA) (less ambiguous)

    - Expanded MAC provisions to cover economic conditions

Other matters post crisis
Other matters post-crisis

  • Focus on boards

    • increased pressure on boards to improve internal controls and identify and manage risk

    • disclosure issues

      - premature disclosure could harm the company

      - AiT Advances Information Technologies Corporation (Ontario Securities Commission, October 2007)

      - the question of when disclosure is required is not a bright line test and depends on facts and circumstances

      - in MD & A context there must be sufficient commitment from both parties that transaction will be entered into and completed

      - MD&A - disclosure re operations, capital resources and liquidity risk

Certicom corp v research in motion january 19 2009
Certicom Corp. v. Research in Motion January 19, 2009

  • Two non-disclosure agreements

    • Non-disclosure and 12 month standstill

    • Non-disclosure and no standstill

    • RIM launched bid after expiration of 12 month standstill

    • Court held that RIM used confidential information in making the hostile bid, in contravention of its non-disclosure obligations, notwithstanding that the separate standstill had expired

Hudbay minerals inc proposed acquisition of lundin mining corporation january 23 2009
Hudbay Minerals Inc. Proposed Acquisition of Lundin Mining Corporation January 23, 2009

  • TSX rules

    • shareholder approval is required for transactions involving the issuance of 25% or more securities

    • this does not apply if the company is acquiring another public company, so long as the transaction does not “materially affect control”

    • discretion to require a shareholder vote, “taking into account the effect that the transaction may have on the marketplace”

Hudbay minerals inc proposed acquisition of lundin mining corporation january 23 20091
Hudbay Minerals Inc. Proposed Acquisition of Lundin Mining Corporation January 23, 2009

  • Ontario Securities Commission

    • “quality of marketplace” would be significantly undermined if Hudbay was permitted to issue shares under the plan of arrangement without shareholder approval

    • Relevant factors included:

      • 40% decline in Hudbay share price following announcement

      • 100% dilution

      • “merger of equals” not true acquisition

Gold reserve inc vs rusoro mining ltd and endeavour financial international corp february 10 2009
Gold Reserve Inc. vs. Rusoro Mining Ltd. And Endeavour Financial International Corp., February 10, 2009

  • Endeavour acted as financial advisor to both Gold Reserve and Rusoro

  • Confidentiality agreement between Gold Reserve and Endeavour

    • negative covenant: Endeavour restricted from disclosing confidential information about GR without its consent, and from using information for its own purposes

    • boilerplate provision left in the CA: GR acknowledged Endeavour was not restricted for other similar businesses, so long as interests of clients did not come into conflict with GR

    • Injunction granted prohibiting Rusoro from making hostile bid

Lessons learned
Lessons learned Financial International Corp., February 10, 2009

  • Confidentiality Agreements should be careful about how information can be used

  • Conflicts of interest and process

  • Beware of boilerplate; inconsistent provisions not carefully thought out can lead to expensive litigation

Take over bid defenses shareholder rights plans or poison pills
Take-over bid defenses (shareholder rights plans, or poison pills)

  • A Rights Plan can be implemented in one of two ways:

    • with shareholder ratification (a "Pre-approved Plan"), or

    • by the board of directors without shareholder ratification in the face of a take-over bid (a "Tactical Plan")

  • The TSX Policy on Shareholder Rights Plans requires a Rights Plan adopted by a board of directors to be ratified by shareholders within six months and to be renewed every three years

Take over bid defenses shareholder rights plans or poison pills1
Take-over bid defenses (shareholder rights plans, or poison pills)

  • How a Rights Plan works

    • acquisition of the specified percentage (usually 20%) of shares by an acquiring person, in a formal take-over bid or otherwise, other than by way of a “permitted bid”, causes a “flip-in event”

    • "flip-in event" entitles the holders of the rights (excluding the acquiring person and its allies) to purchase additional shares from the target at half the exercise price

    • TSX has recently indicated it wants a "thorough rationale and explanation" as to why any Rights Plan might have a trigger of less than 20%

Take over bid defenses shareholder rights plans or poison pills2
Take-over bid defenses (shareholder rights plans, or poison pills)

  • Purpose - encourages potential acquirers to make a "Permitted Bid", in Pre-approved Plans a "Permitted Bid" is a take-over bid that is:

    • made by way of a take-over bid circular to all shareholders (partial bids are allowed)

    • open for at least 60 days (take-over bid laws require 35 days), and

    • accepted by more than 50% of the independent shareholders

Tactical plans have become increasingly popular
Tactical Plans have become increasingly popular: pills)

  • Board of directors has time to implement a tactical plan in the face of a hostile formal take-over bid

    • with certain exceptions, most take-over bids in Canada take only 60 to 90 days to complete

    • both a Tactical Plan and a Pre-approved plan generally only survive up to 60 days, if challenged by the acquiror in a cease-trade order proceeding in front of a securities regulator

Tactical plans contd
Tactical Plans contd pills)

  • Tactical Plans are NOT an effective defense against "creeping" bids made through private agreement purchases until the Rights Plan is adopted (although there are applicable disclosure requirements, including for shareholders at or above the 10% level)

    • Creeping take-over bid = purchases made from five or less sellers where the value of the consideration, including brokerage fees or commissions, does not exceed 115% (excluding brokerage fees and commissions) of the market price of the securities at the date of the bid

Tactical plans specific provisions
Tactical Plans – specific provisions pills)

  • A Tactical Plan adopted by the target in the face of a take-over bid can be drafted to deal with a specific hostile take-over bid:

    • might not exempt shares subject to permitted lock-up agreements in determining 20% trigger threshold

    • might not include partial bids in the "Permitted Bid" definition (Falconbridge/Xstrata)

    • might allow the board of directors of the target to amend or rescind any provisions of the Rights Plan or the Rights without shareholder or rights-holder approval

Tactical plans specific provisions1
Tactical Plans – specific provisions pills)

  • Acquiror will try to cease-trade the Rights Plan in proceedings before the securities regulatory authority

  • Target must be ready to try to defend its tactical provisions in any proceedings before securities regulators

Take over bid defenses shareholder rights plans or poison pills3
Take-over bid defenses (shareholder rights plans, or poison pills)

  • Historically, Rights Plans, whether approved by shareholders or not, have not been allowed to survive indefinitely in order to prevent a take-over bid

  • The question has been when the Rights Plan "must go"

    • the time that may be afforded to a target, if the pill of that target is challenged, will very much depend on the facts and circumstances of each case

Changing policy
Changing policy? pills)

  • Ontario Securities Commission - upheld and extended Falconbridge Limited’s tactical rights plan implemented to defend against a hostile take-over bid by Xstrata (June 6, 2006)

  • Alberta Securities Commission - Re Pulse Data Inc. (November 2007) - the first case where a Canadian securities commission decided not to cease trade the Rights Plan, even though the target company acknowledged that the Rights Plan was not directed at gaining time to seek out alternative bidders and to conduct an auction

Going private transactions
Going Private Transactions pills)

  • a transaction or series of transactions which has the effect of eliminating the public shareholders

  • why?

    • management may consider going private before the Company becomes a possible take over target (as a result of lower stock prices)

    • depressed share prices create an opportunity to implement these transactions at reduced rates (although the transaction will often be at a premium to market)

Going private transactions contd
Going Private Transactions contd pills)

  • increased regulation have increased the costs of being public

  • a thinly traded stock will have more limited access to the public markets to raise capital

  • management will be less distracted from long term goals with the elimination of quarterly reporting requirements

Going private transactions contd1
Going Private Transactions contd pills)

  • disadvantages of becoming private

    • complex and time consuming involving corporate and securities laws ie typically six months to complete unless accomplished by way of takeover bid

    • may trigger competitive bids ie uncertainty in outcome

    • potential risk of litigation from disgruntled shareholders

    • majority (and majority of the minority) shareholder approval requirements

    • dissent rights and availability of oppression rights

Going private transactions contd2
Going Private Transactions contd pills)

  • loss of access to public markets

  • loss of one avenue of liquidity for remaining shareholders

  • diminished ability to use equity as currency for acquisitions and for management plans

Going private transactions contd3
Going Private Transactions contd pills)

  • common transaction forms for going private transactions

    • amalgamation of target with the party initiating the transaction

    • takeover bid followed by acquisition of shares where a holder does not accept the bid

    • plan of arrangement involving an interim court order which will set out the procedure to be followed and a final court order where the court will consider the fairness of the transaction. This transaction is often utilized where there are US resident shareholders

Non traditional financing strategies in the secondary markets
Non-Traditional Financing Strategies in the Secondary Markets

  • TSX Policy – shareholder approval is not required for distressed companies to increase their float by more than 25%

    • Katanga Minerals Ltd. – announced plans on December 24 to issue shares that could give control to Glencore International AG

    • NovaGold Resources – raised $60M in early January by issuing units at a discount under the exemption

    • Must show “serious financial difficulty” and get TSX approval for exemption from shareholder vote

Public high yield debt financing
Public High Yield Debt Financing Markets

  • Short form prospectus offerings of convertible high yield debt

    • convertible vs. non-convertible

    • listed (adds liquidity) vs. unlisted

      • Must comply with TSX listing requirements

      • TSX may review debt terms (repayment obligations; events of default)

      • Whether debt will be secured

        • mine assets?

        • pledge of shares of subsidiaries?

Flow through shares
Flow-Through Shares Markets

  • a Company may only use flow through shares for Canadian properties

  • please contact Macleod Dixon LLP for a copy of a detailed client presentation on flow through shares

Financing from production
Financing From Production Markets

  • there are a number of ways to finance from future production including:

    • metal purchase agreement

    • off-take agreement

    • royalty agreement

  • terms are limited only by commercial needs/ requirements

  • there are companies in the business of providing financing upon the execution of these agreements

Metal purchase agreement
Metal Purchase Agreement Markets

  • the purchaser agrees to purchase production for an upfront payment of

    • cash,

    • plus a payment per ounce tied to the then prevailing market price per ounce

Off take agreements
Off-Take Agreements Markets

  • the purchaser commits to take the company's production under a long term purchase contract

  • the stream of cash flow is typically given as collateral to credit providers

  • reliance on the off-take agreement will depend on the creditworthiness of the purchaser

Off take agreements contd
Off-Take Agreements contd Markets

  • terms and other matters to consider

    • pricing will typically involve a formula which is capable of coping with market changes over the life of the agreement at sustainable (profitable) prices

    • take or pay provisions ie with payments required even where production is not taken

    • timing of transfer of risk

    • choice of shipper and payment

Royalty agreements
Royalty Agreements Markets

  • paid by property owner (typically prior to production to avoid dilution)

    • in return for capital

    • as part payment for property interest

    • to convert an equity or other participating interest

  • take two forms

    • percentage of the value of minerals produced such as net smelter royalty, based on proceeds paid by smelter (NSR)

    • percentage of the profits generated from the mineral project (NPI) generally paid after payback of operating and capital costs and environmental liabilities. May be used as payment for property

Royalty agreements contd
Royalty Agreements contd Markets

  • terms and other matters to consider

    • applicable time period within mineral production cycle

    • relevance of price fluctuations of minerals and metals

    • right to inspect records and to audit rights

    • applicability to tailings

    • due diligence including on title, renewability of leases

Royalty agreements contd1
Royalty Agreements contd Markets

  • taking security by holder. Canadian courts have historically shown a reluctance to recognize mineral royalties as an interest in land

  • assignability of the royalty (including right to pledge) and rights of first refusal

  • clarity of the defined terms used to calculate the royalty including

    • for an NSR, gross value, permitted expenses, net value and permitted deductions

    • for an NPI, revenue, net profits, operating expenses, interest charges. In particular, consider deductibility of head office overhead expenses

Royalty agreements contd2
Royalty Agreements contd Markets

  • right to buy out or buy down

  • inclusion (or exclusion) of hedging transactions

  • exclusion of any implied covenants, for example, to develop the property

  • cap

  • ability of holder to share in upside

Change of control provisions in employment contracts golden parachutes
Change of Control Provisions in Employment Contracts – Golden Parachutes

  • Designed to protect executives against not-for-cause termination

  • Institutional investors prefer "double trigger" (i.e. executive terminated within a reasonable time after a change of control) not "single trigger" (change of control)

  • Not a deterrent to a take-over

  • Need to clearly define change of control

Retaining key employees
Retaining key employees Golden Parachutes

  • Possible consequences of financial crisis

    - incorporate risk into performance measures

    - change to longer-term performance measures

    - reduce or eliminate options

    - reduce equity component and more deferral requirements

    - repricing/repurchase and cancellation of options requires shareholder approval; exchange ratio?

    - focus on succession planning

Executive compensation issues
Executive compensation issues Golden Parachutes

  • Greater focus on executive compensation overall

    • Motivation of risky behavior and short term prospects

    • New executive compensation disclosure rules in effect for proxy circulars being prepared for financial years ended December 31, 2008

  • Institutional investors focusing on pay and performance

Macleod dixon s offices
Macleod Dixon’s Offices Golden Parachutes

Calgary, Toronto



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