A recent decision of the Ontario Superior Court in Stetson
Oil & Gas Ltd. v. Stifel Nicolaus Canada Inc.1
highlights the importance of including termination rights in bought
deal letters and other engagement letters used in capital markets
The case involved Stifel Nicolaus Canada (then Thomas Weisel
Partners) refusing to close a private placement of subscription
receipts after executing a bought deal letter with Stetson Oil
& Gas Ltd. in July of 2008.2 Following an
unsuccessful marketing process, Stifel refused to proceed with the
transaction, including failing to negotiate a definitive
The bought deal letter contained the following customary
condition (the "underwriting agreement
condition") that Stetson and the underwriters
negotiate in good faith an underwriting agreement containing
certain standard termination rights:
The definitive terms of this agreement will be governed by a
formal underwriting agreement to be entered into prior to closing
of the purchase by Thomas Weisel (the "Underwriting
Agreement") in respect of the Offering. The Underwriting
Agreement will be negotiated in good faith between the Company and
Thomas Weisel, on behalf of the Underwriters, and will contain ...
termination provisions (including, without limitation standard
"due diligence-out", "disaster-out",
"material adverse change-out" , and
"regulatory-out" rights) customary in agreements of this
type ... (Underlining Added.)
The termination rights were not, however, specifically included
in the bought deal letter itself.
After confirming the bought deal letter established a binding
obligation on Stifel to close the transaction, the court considered
whether any termination rights were available to Stifel. Focusing
on the absence of termination rights in the bought deal letter and
the failure to negotiate and execute a definitive underwriting
agreement, the court concluded that the termination rights
referenced in the underwriting agreement condition were not
available to Stifel. In other words, the mere reference to the
termination rights in the underwriting agreement condition was not
sufficient to permit Stifel to rely on them absent the execution of
a definitive underwriting agreement actually containing the
This decision serves as a useful reminder of the importance of
specifically including termination rights in bought deal letters
and other forms of engagement letters to ensure underwriters have
flexibility to terminate or renegotiate transactions if the events
covered by the agreed-upon termination rights arise prior to
execution of a definitive underwriting agreement.
1 2013 ONSC 1300.
2 Although the court and this article refer to the
engagement letter as a "bought deal letter", the deal was
a private placement and, accordingly, did not involve the bought
deal procedures under National Instrument 44-101.
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