Presenters: Janne Duncan and Brian Levett Partners, Toronto office

Calgary Toronto Moscow Almaty/Atyrau Caracas Rio de Janeiro

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

Agenda

• 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

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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 arrangement

Issue Formal take-over bid Plan of arrangementTransaction structure

Take-over bid procedures under securities laws are automatically triggered by an "offer to acquire" 20% or more of the outstanding voting or equity securities of any class automatically triggers; any target securities held by the acquiror and its joint actors are counted towards the 20% threshold

Exemptions from formal take-over bid provisions may be available

A statutory procedure that is governed by the corporate statute under which one of the applicants is organized (check governing statute)

Accommodates amalgamations; acquisitions of all or substantially all of the property of a target; other similar transactions

Accommodates tax planning


Issue Formal take-over bid Plan of arrangementSolicited/ Unsolicited

Take-over bid can be made directly to the shareholders without the participation of the target's board of directors/management

May be friendly (white knight) or hostile

Arrangement is negotiated between acquiror and target and an arrangement agreement is entered into

Transaction may or may or may not be solicited

In the recent BCE transaction, the board decided to conduct an auction in light of press reports that Teachers planned to make an offer


Issue Formal take-over bid Plan of arrangementApprovals Minimum tender condition 66 2/3%

(typical)

Compulsory acquisition – if 90% of the target shares are acquired in the bid, acquiror can acquire the remaining shares under a statutory procedure, shareholders have rights of dissent

Subsequent acquisition – if less than 90% of target shares are acquired in the bid, acquiror can attempt a second transaction such as a second-step going private transaction (involving an amalgamation or some other similar transaction); 66 2/3% vote required to pass the subsequent acquisition under corporate statute; shareholders have rights of dissent

Shareholder approval – 66 2/3%– may require majority shareholder approval of disinterested shareholders– shareholder may have rights to dissent and be paid the fair value of their shares (which could be more than the consideration offered by the acquiror)

Court approval– Court must view the transaction as being "fair" to all classes of affected securities


Issue Formal take-over bid Plan of arrangementMajor Document

Lock-up agreements - with significant shareholders (if possible)

Take-over bid circular

– prepared by acquiror

– is not subject to regulatory review

– may contain conditions precedent (including minimum tender but excluding as to financing)

Support agreements - with significant shareholders (if possible)

Arrangement agreement - between acquiror and target; may contain:

– reps and warranties

– MACs (material adverse change provisions )

– conditions precedent (including pre-closing reorganizations, sales of assets etc. but likely excludes as to financing )

– provisions governing "superior proposals"

– fiduciary outs allowing the target to terminate the transaction if superior proposal made

– break-up fees and reverse break-up fees

Take-over bid vs. plan of arrangement contd

Issue Formal take-over bid Plan of arrangementMajor Document

Directors' circular - recommends whether to accept the bid

– contains fairness opinion

– see ATS Andlauer Income Fund: the trustees of the fund recommended an insider bid that was below the valuation range in light of the market and the fund's short-term prospects

If applicable, Proxy circular to solicit shareholder approval for any second step transaction



Proxy circular - prepared by management of the target (and possibly acquiror if approval required) to solicit shareholder approval




Issue Formal take-over bid Plan of arrangementSolvency issues

Not applicable Canada Business Corporations Act (CBCA) – applicant company cannot be insolvent

Ontario Business Corporations Act (OBCA) – does not contain this requirement

If applicant is organized under the CBCA and is not solvent, possible solutions:

– continue to the OBCA

– reduce stated capital

– change applicants, eg., to the purchaser


Issue Formal take-over bid Plan of arrangementTiming Bid must remain open for minimum

of 35 days

Normally takes 60 days to complete a bid

Regulatory approvals may prolong the process

– Competition Act (Canada), if applicable

– Industry Canada Act, if applicable

Subsequent acquisition transaction - must add time to call and hold a shareholders' meeting (approx 35 days or more but can be reduced to 21)

Uncertain; negotiations of arrangement agreement can be protracted

Must call and hold a shareholders' meeting

Regulatory approvals may prolong the process

– Competition Act (Canada), if applicable

– Industry Canada Act, if applicable


Take-over bidsAdvantages– Timing– Can acquire control without

target board of directors'/management consent

Disadvantages– 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 arrangementAdvantages– 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

Disadvantages– Lose control over timing– Court hearing can give voice to

angry stakeholders – BCE vs. Bondholders

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

• 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 consider

• Post-crisis arrangement agreements –

– More attention to "force majeure"

- More attention to dispute resolution

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

• 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

• 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

• 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, 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

• 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

• 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)

• 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


• 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%


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:

- 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 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

– 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 provisions

– 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


• 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?

• 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

• 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

– 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


• 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


– 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


• 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

• 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

• 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

• 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

• 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

• 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

• 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

• 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

• 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

• 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


– 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


– 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

• 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

• 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

• 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

Calgary, Toronto

Caracas

Rio de Janeiro

Moscow

Almaty, Atyrau

Documents

Presenters: Janne Duncan and Brian Levett Partners, Toronto office