Canada: ASC Rules On Conflicting Components Of Recapitalization Transactions

A common feature of many convertible debenture indentures is the ability of the issuing company to repay the debentures at maturity by issuing shares. The financial challenges faced by many oil and gas companies in today's markets are likely to result in an increase in repayments of convertible debentures in this fashion. This was the situation with Perpetual Energy Inc. (Perpetual). Perpetual recently announced that it would repay a series of its convertible debentures by issuing shares as part of a series of recapitalization transactions which included a dilutive rights offering that holders of debentures were not permitted to participate in. Several of Perpetual's debentureholders challenged the rights offering at the Alberta Securities Commission (the ASC) by attempting to have the rights offering cease traded.

On January 5, 2016, the ASC released the reasons for its decision in Perpetual Energy Inc. In the decision, the ASC declined the debentureholders' challenge.

Background to the debentureholders' challenge

On November 20, 2015, Perpetual announced recapitalization transactions that included: (i) a $25 million fully backstopped rights offering to existing shareholders and (ii) the repayment of its 7% convertible debentures due December 31, 2015 (the Debentures) using common shares (Perpetual Shares) of Perpetual (which Perpetual had the ability to do under its convertible debenture indenture). Each right entitled the holder to acquire a number of Shares for $0.163 per Perpetual Share based on a formula that will result in current shareholders owning 78% of the Perpetual Shares and debentureholders owning 22% of the Perpetual Shares upon completion of the recapitalization transactions.

The rights offering was challenged by Polar Asset Management, K2 & Associates Investment Management Inc. and Cambridge Global Asset Management (the Applicants). The Applicants viewed the rights offering as unfair and dilutive to the debentureholders' share ownership in Perpetual following the repayment of the Debentures in Perpetual Shares.

Under the terms of the indenture under which the Debentures were issued (the Indenture), the Debentures could be repaid at maturity in Perpetual Shares, based on a 20-day volume weighted average of Perpetual's share price (VWAP). The lower the VWAP, the greater the number of Perpetual Shares the debentureholders would receive on maturity and the greater the percentage ownership in Perpetual the debentureholders would hold post-repayment in Perpetual Shares.

The rights offering was structured such that the percentage ownership of Perpetual following the repayment of the Debentures in Perpetual Shares and the completion of the rights offering would be set at 22% for debentureholders and 78% for current shareholders. These percentages were established using what the ASC called a "notional value" of $0.64 per Perpetual Share based on advice Perpetual's independent committee received from its financial advisor and accepted (Perpetual's Shares closed at $0.45 on the day before the reorganization transactions were announced and have traded downward since the announcement of the recapitalization transactions, closing at $0.04 on January 6, 2016). In essence, the number of Perpetual Shares issued under the rights offering was to be such that, regardless of the 20-day VWAP amount, enough Perpetual Shares would be issued to existing shareholders so that they would hold 78% of the equity upon completion of the recapitalization transactions. The Applicants noted at the hearing that this would give the shareholders holding rights more Perpetual Shares than the debentureholders at a much lower cost per Perpetual Share.

The locked-in percentage ownership mechanism was not explicitly precluded by the Indenture. From Perpetual's perspective, the rights offering was necessary in the context of its financial challenges and the locked-in percentage ownership mechanism was a key element in securing the backstop support for the rights offering. From the Applicants' perspective, the locked-in percentage ownership mechanism thwarted the bargain the debentureholders made with Perpetual that the Debentures could be repaid in Perpetual Shares of equivalent worth to the principal of the Debentures on maturity. The crux of the disagreement between the parties was how to determine what value to provide to the debentureholders. The Applicants believed debentureholders should receive Perpetual Shares with a value based on TSX trading prices that reflected the principal amount of the Debentures. Perpetual believed that it was appropriate to set a measure of value other than TSX trading prices and did so in establishing the notional value which was used for the locked-in percentage ownership mechanics of the rights offering.

The hearing

The hearing was the first of its kind to be heard by the ASC. Given the time constraints inherent with the recapitalization transactions, the ASC heard the application in two days on December 22 and 23, 2015. The ASC found that the Applicants did not establish that the rights offering amounted to abuse of the debentureholders nor did they establish harm to the capital markets, which were the thresholds that the Applicants had to meet for the ASC to grant the application to cease trade the rights offering. In assessing abuse, the ASC found that Perpetual had a genuine and legitimate business purpose for the recapitalization transactions and while there was some internal logic to the transactions (which the ASC did not find as "entirely compelling" from the perspective of a pre-announcement debentureholder), Perpetual's board had a basis for believing that they were treating debentureholders fairly. The ASC further found that the Applicants failed to prove widespread harm to the capital markets and noted that in the future convertible debenture indentures could be drafted to avoid the dilutive effect of similar rights offerings. While the ASC ultimately declined to cease trade the rights offering for those reasons, it found the rights offering "troubling" and discerned "unfairness" to debentureholders that invested before the announcement of the recapitalization transactions. The ASC specifically noted that arrangements designed and likely to "thwart a negotiated bargain could well face an unwelcome regulatory response – irrespective of the outcome of this [a]pplication" in the future.

The ASC's only remedy would have been to cease trade the rights offering. The ASC was reluctant to issue such an order given the potential consequences in that there could be a "regulatory windfall" to debentureholders that purchased Debentures post-announcement of the recapitalization transactions and that it could harm shareholders who did not have any say in the recapitalization transactions.

Implications of the ASC's decision

The decision is noteworthy in view of the potential financial challenges faced by many oil and gas companies given current commodity prices and the optional repayment in shares at maturity feature found in many convertible debenture indentures for oil and gas companies. There is a significant market for convertible debentures with approximately $12 billion in such publicly traded convertible debentures in Canada.

The key takeaways from the decision and the recapitalization transactions are:

  • Companies should carefully consider, with the benefit of advice from financial advisors, the impact that recapitalization transactions would have on their debt and equity holders. While the ASC declined to cease trade the rights offering, it cautioned that the regulatory response may be different for future transactions that "thwart a negotiated bargain." Companies should not view the ASC's decision as a sanction for recapitalization transactions that could have a potential dilutive effect to certain debt holders; in fact, the ASC's decision may deter such arrangements.
  • For underwriters/debenture investors negotiating convertible debenture indentures, anti-dilution provisions should be added that would cure what the Applicants felt was an unfair result. One drafting solution would be to include a mechanism to allow debentureholders to take part in any potentially dilutive equity transactions, such as rights offerings, that are announced concurrently with or within a certain period after the announcement that repayment of such convertible debentures at maturity will be satisfied in shares.
  • Securities regulators are often constrained by the limited remedies available to them, such as the cease trade order in this case, when addressing appropriateness of equity transactions (such as defensive private placements and any dilutive recapitalization rights offerings). They will be reluctant to use such remedy where there are windfalls to some parties and harm to other parties, particularly where those other parties did not take part in establishing the impugned transactions. Securities regulators will, as the ASC did specifically in this case, likely continue to note that commercial courts are better equipped to provide remedies to aggrieved parties that can balance the interests of various parties.

*Osler represented Polar Star, K2 & Associates and Cambridge Global as co-counsel before the ASC.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions