Well, to quote the great master:

When Windows needs to load a DLL module before running a program that requires it, the library file must be stored in the directory containing the .EXE program, the current directory, the Windows system directory, the Windows directory, or a directory accessible through the PATH string in
the MS-DOS environment. (The directories are searched in that order.)

Programming Windows 5th edition, page 962

MSDN ref

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