The next example of this trend is set to be played out in Calgary next week. On June 28, shareholders of Devlan Exploration Inc. (TSX: DXI) will gather to vote on a plan of arrangement involving Devlan, Cyries Energy and Dual Exploration. If approved, a Devlan shareholder will receive 0.25 of a Cyries share and 0.50 of a Dual share for each Devlan share.

What's got the troops really excited is a $5-million private placement of Dual common shares and warrants to "directors, officers, employees and other service providers of Dual." As is the norm, the names of the people participating -- and the amount they are investing -- in the private placement are not disclosed in the 207-page circular mailed to Devlan shareholders.

It's not clear who are the "other service providers of Dual." Normally it's just the real insiders who get to load up on the cheap stock -- and it is cheap given that the private placement is being issued at net asset value and that most oil companies trade at a multiple to book value.

So what do the insiders plus certain "other service providers of Dual" get for their $5-million?

As a group they will buy 4.672 units -- which converts to 4.762 million shares and 3.571 million share purchase warrants. Each Dual share has been determined to have a NAV of $1.05. The warrants have a strike price of $1.25. Those who have put their hand up for the cheap stock face hold periods. Restrictions apply on the warrant holders' ability to cash out. The warrants run for five years.

It is worth noting that Cyries Energy was created one year back in a similar way to what is planned for Dual Exploration. Last July, Cyries was spun out of Cequel Energy. Cyries also did a private placement -- consisting of a share and a warrant -- at NAV which was $1.63. A couple of days later, Cyries did a $22-million bought deal at $5.50 a share -- a hefty multiple to NAV. Cyries (CYS/TSX) closed Friday at $12.30. It has a market cap of $328-million.
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So what's the rationale for the private placement? With the straightest of faces, this is how it was said in the circular:

- It will "allow Dual service providers to increase their ownership position in Dual, at a fair price and in a manner which encourages continued employment."

- It will "align the interests of holders of Dual shares and Dual service providers through the capital commitment being made."

- It will "allow Dual to meet the challenges in retaining qualified personnel in a very competitive employment market."

- It will "provide additional capital for use in its exploration and development program."

Calls made to Devlan on Friday were not returned.
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Devlan's shareholders, some of whom have taken their concerns to the regulatory authorities, have a different take:

THE DEAL IS UNFAIR Since April 21, the day the merger was announced, Cyries shares have risen substantially -- to 12.30 from $9.86 -- while Devlan's have stayed around $3.80 a share. Devlan (DXI/TSX) closed Friday at $4. As a result the package (0.50 of Dual share plus 0.25 of a Cyries share) is worth less today than the current share price of Devlan. Back in April, the package was worth $2.99 a Devlan share.

"You are basically getting three-quarters of the current market price for Devlan," noted one shareholder who is also highly critical of Devlan's decision to split itself in two. "There was no reason for them to do the deal."

When current market prices are used, the package is valued at less than Devlan's current price.

But if a realistic trading price is used for the Dual share -- say $3 -- the package back in April was worth $3.97 a share, which is much closer to the current trading price of Devlan's shares.

"Guess what? Management is getting shares [of Dual] at a 70% discount," noted this shareholder, adding that after the announcement, Devlan shareholders showed what they thought of the deal by dumping the stock. About 10 days after the announcement Devlan traded at $3.12, a six-month low.

THE DEAL HAS BEEN STRUCTURED AS A WAY AROUND THE RULES. Insiders aren't normally allowed to be offered stock at prices that are at a substantial discount to the current market price. For options, the normal operating rule is grants are required to be made at a price at least equal to the current market price.

But the normal rules don't come into effect for a private placement done before the shares of the new company start trading.

"Because they are doing this placement before the stock starts trading ... they are doing an end-run around the rules."