TORONTO — Junior miner and hostile takeover target Dolly Varden Silver Corp. insists it had a valid business reason to seek a private placement that would dilute the company’s market value in the face of a hostile takeover bid launched by Hecla Mining.
At securities commission hearings simultaneously held in Vancouver and Toronto on Wednesday, a lawyer for Dolly Varden said the company is so short of funds that without the private placement it would slip into an inactive “hibernation” phase.
Robert Deane said Dolly Varden’s board was therefore exercising its business judgment and fulfilling its duty to act in the best interests of the company when it announced a $6 million private placement that was equal to about 43 per cent of the tiny company’s market value.
Deane said Dolly Varden had only $184,000 in the bank, but needed millions to proceed with its annual exploration program. Equity financing was the company’s only option.
“There is a pressing financial need for the financing to be obtained through this private placement,” Deane told the Vancouver hearing room. The proceedings, linked by video, were being heard before regulatory panels in Toronto and Vancouver.
Hecla has complained to securities commissions in British Columbia and Ontario that the private placement is an improper defensive tactic designed solely to thwart an unsolicited $10-million bid for the Vancouver-based junior. Hecla wants the provincial regulators to “cease trade” the private placement as a abusive and improper attempt to prevent Dolly Varden shareholders from tendering to the takeover offer.
The issue is important because Canadian regulators have recently changed takeover rules in ways that reduce the impact of poison-pill litigation, which had been the key defensive tactic to hostile takeover bids. M&A lawyers want to know whether private placements could fill the void as defensive tactics.
Deane told the hearing panels that Hecla is trying to ask that securities commissions get into the board room and second guess what Dolly Varden’s directors thought best for the company.
“That’s precisely the wrong approach to take when an application is brought to cease trade a private placement,” Deane said. “Private placements should only be blocked by commissions if there is clear abuse of the target’s shareholders and the capital markets, and there is no valid business purpose for the impugned financing.”
Yet Hecla maintains Dolly Varden’s private placement is an abuse on the market that is denying Dolly Varden shareholders their right to decide for themselves whether they like the offer.
“This was a highly dilutive private placement, announced by Dolly Varden one week after Hecla’s offer to acquire all of Dolly Varden’s shares, which will prevent shareholders from deciding the fate of that offer,” said Wendy Berman, counsel for Hecla.
She said Dolly Varden had sufficient cash resources to fund the company’s cash needs into 2017, then proceed with an agreed plan of “hibernation.”
Hecla, which owns just under 20 per cent of Dolly Varden’s shares, had offered to extend the mining junior a loan, Berman said.
“There was no need for $6 million to address dire financial conditions. The lights were not going to go off at Dolly Varden if they didn’t get $6 million,” Berman said
The hearing, scheduled for two days, ends Thursday.
Financial Post
