The Ontario Superior Court of Justice in Stetson Oil &
Gas Ltd. v. Stifel Nicolaus Canada Inc. recently awarded $16
million in damages against an underwriter that failed to complete a
"bought deal" financing it proposed. The decision
confirms the generally held industry view that bought deal
engagement letters are enforceable.
In July 2008, Stetson Oil & Gas Ltd.
("Stetson"), a TSXV listed junior oil
and gas exploration company, needed $25 million to acquire an
interest in lands located in the Bakken formation in North Dakota.
Thomas Weisel Partners Canada Inc. ("Thomas
Weisel") offered to raise the money for Stetson by
way of a bought deal private placement of Stetson's common
shares. Thomas Weisel initiated the financing by delivering to
Stetson a customary bought deal engagement letter under which it
offered to purchase $25 million of Stetson's common shares for
resale – at its risk – to investors.
The offering was not well received by investors, leaving Thomas
Weisel to pay for the shares itself. On the scheduled closing date,
Thomas Weisel did not complete the financing, forcing Stetson to
pursue other alternatives to secure the money it needed.
In September 2008, Stetson managed to complete a financing with
another dealer but only raised $12 million and at a much lower
price than what Thomas Weisel had offered. Stetson sued Thomas
Weisel for breach of the bought deal engagement letter.
In response to Stetson's claims, Thomas Weisel argued that
it was not required to complete the bought deal because:
no binding agreement existed; the engagement letter was merely
an "agreement to agree", and no binding agreement would
exist until the for mal underwriting agreement contemplated by the
engagement letter had been signed; and
even if the engagement letter was a binding agreement, Thomas
Weisel's obligation to complete the financing was subject to a
number of "outs" (including a "material adverse
change out" and a "disaster out") on which it could
rely in the circumstances.
The Court found that:
both the language of the engagement letter and the par
ties' conduct clearly indicated that the engagement letter was
a binding agreement;
the engagement letter itself did not provide any of the outs
that Thomas Weisel pur por ted to rely upon; it simply indicated
that the underwriting agreement would contain those outs;
even if the engagement letter was subject to the outs that
Thomas Weisel identified, (i) Thomas Weisel did not, at the
relevant time, purpor t to rely on the outs as justification for
not closing the financing, and (ii) the outs did not allow Thomas
Weisel to refuse to close in any event. The Court held that Thomas
Weisel's interpretation of the outs would effectively turn them
into "market outs"; a concept that is fundamentally
inconsistent with bought deal financings.
The Court held that (i) the engagement letter was a binding
agreement requiring Thomas Weisel to close the bought deal and (ii)
Thomas Weisel breached that agreement. Stetson was awarded damages
of approximately $16 million, representing the shortfall between
the proceeds it would have received under the Thomas Weisel bought
deal and the proceeds it received under the subsequent financing
(based on the number of shares that Thomas Weisel offered to
Stifel Financial Corp., which now owns Thomas Weisel, has
announced that it intends to appeal the decision.
Implications of the Stetson Decision
The Stetson decision is the first time Canadian courts
tested the enforceability of a bought deal engagement letter. The
result should be reassuring to market participants as it is
consistent with long held and fundamental assumptions about how
bought deal financings work.
For investment dealers and issuers, the decision provides
guidance on the interpretation of material adverse change and
disaster outs in the context of bought deals. It also reinforces
the importance of clear drafting in bought deal engagement
The content of this article does not constitute legal advice
and should not be relied on in that way. Specific advice should be
sought about your specific circumstances.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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