Skip to main content

AuRico Gold Inc. has a prized asset to bring to a merger with Alamos Gold Inc.: the Young-Davidson mine in Northern Ontario.

A private financing embedded in Canada's latest gold merger has thrust a grey area of corporate takeover law back into the spotlight.

On Monday, Alamos Gold Inc. and AuRico Gold Inc. announced plans to join forces in a $1.5-billion (U.S.) merger, creating a miner expected to produce 700,000 ounces of gold annually.

The tie-up caught Bay Street's attention for several reasons. Not only is it the largest bullion deal in a year, but neither company's shareholders will be paid a premium to market prices. Instead, the owners will simply swap shares to control a bigger miner.

On a conference call Monday, analysts asked several questions about the merger's concurrent share offering. Alamos has agreed to buy $83-million worth of new AuRico shares through a private placement, giving the miner a 9.9-per-cent stake in its potential partner. AuRico chief executive officer Scott Perry referred to this offering as an "essential part of the deal."

The financing is a thorny issue because it could arguably scare away rival bidders who would otherwise consider disrupting the current deal. Because Alamos will control roughly 10 per cent of AuRico's shares, the gold miner has power in any shareholder vote.

Anyone upset by this arrangement has no idea whether it can be reversed. This type of private placement is rare in a corporate merger, but it isn't unheard of – yet Canadian regulators still haven't decided how they feel about them. Corporate lawyers say two recent mergers are often cited as reference points when discussing the merits of these types of offerings.

In 2008, HudBay Minerals Inc. proposed buying Lundin Mining Corp., and the deal included a private placement through which HudBay would acquire 19.9 per cent of Lundin. Regulators weren't asked to rule on the legitimacy of the share offering, but former Ontario Securities Commission vice-chair Jim Turner weighed in, personally arguing that HudBay shouldn't be allowed to vote its shares.

"In our view, having very recently acquired those shares as part of a private placement … HudBay should not, as a matter of principle, be permitted to vote them in favour of the [plan of arrangement]," he wrote. Although it wasn't a formal ruling, the comments suggested regulators would be wary of these arrangements in the future.

A few months later, the Alberta Securities Commission was asked to rule on the same issue after a shareholder argued that Paramount Energy Trust should not be allowed to vote the private placement shares it obtained as part of its proposed merger with Profound Energy Inc. Despite considering the OSC's argument, the ASC took a different stance arguing that Paramount had a right to vote its shares.

Because there is so much ambiguity, lawyers often counsel their clients that such a private placement is acceptable so long as there is proof that the funds raised by issuing the shares are needed. So it wasn't a surprise when AuRico's CEO used this exact argument on the conference call.

"In this environment, raising $100-million [Canadian] in a very cost-effective way was deemed as a net positive," Mr. Perry said. "Obviously, there's not the typical discount to market [in a bought deal], no banking fees, no legal fees, so there's definitely a positive from that regard." He added that it's tough for most miners to sell new shares to public investors in this depressed mining market.

However, there was no argument given as to why a demand loan couldn't have been issued instead of shares. Had this type of loan been used, Alamos could simply have stipulated that its funds must be paid back if another bidder emerges.

John McCluskey, Alamos Gold's CEO, also went so far as to say that the financing wasn't the only reason these shares were issued. "Clearly the objective of the private placement is to assist in helping the transaction close," he said adding that "the biggest threat to the transaction not closing is an interloper coming in."