It is likely that a trend will emerge in the coming months of cancelled transactions leading to litigation as to whether the impact of the novel coronavirus ("COVID-19") amounts to a "disaster" or a force majeure under various agreements. Standard underwriting agreements contain termination provisions, some of which may be triggered by COVID-19. As a result, we expect the bought deal market to be impacted by this trend.
Issuers may have recently received notice from underwriters of an intention not to close bought deals, or to terminate obligations arising from underwriting agreements, citing reliance on "disaster-out" or force majeure clauses. We expect these issuers may elect to pursue legal remedies for breach of contract.
A force majeure or "disaster-out" clause will typically protect parties in the event of non-performance of a contract due to circumstances beyond their control. As such, the timing of the agreement relative to the outbreak of COVID-19 may be relevant to a court's finding on the matter. Additionally, some underwriting agreements contain a market out clause, which typically allows underwriters to terminate contracts without penalty if the market conditions have changed such that the securities could no longer be marketed profitably. In order to predict the outcome of each case, the language of the relevant provisions must be reviewed so as to determine whether they constitute a market out clause or a force majeure clause.
Precedent for Reliance on Disaster-Out Clauses to Terminate Bought Deals
In 2013, the Ontario Superior Court of Justice (the "Court") awarded damages of just over C$16 million against Thomas Weisel Partners Canada Inc. (a predecessor to Stifel Nicolaus) ("Thomas Weisel") in Stetson Oil & Gas Ltd. v. Stifel Nicolaus Canada Inc., for failing to close on a bought deal private placement agreed to pursuant to a signed letter agreement with Stetson Oil & Gas Ltd. ("Stetson"). Thomas Weisel notified Stetson that it did not intend to close the offering after marketing efforts were unsuccessful due to a drop in oil prices that occurred around the relevant time. Thomas Weisel attempted to argue that its offer to purchase the securities was conditional on completion of the due diligence process. The Court disagreed and held that the letter was binding although there was a termination right in the event that Thomas Weisel had uncovered material undisclosed information in the due diligence process. Thomas Weisel further argued that because the engagement letter stipulated that termination provisions, including a "disaster out" clause, were to be included in the underwriting agreement, Thomas Weisel should be able to rely on these provisions to terminate the letter. The Court again disagreed as no attempts were made to negotiate the underwriting agreement prior to refusal to close, and at the time of giving notice of refusal to close, no indication was made that Thomas Weisel intended to rely on such clauses. The Court also held that the facts of the case would preclude Thomas Weisel from relying on a standard "disaster-out" clause even if one was available to them.1
Is COVID-19 a Force Majeure?
The question of whether COVID-19 constitutes a force majeure has yet to be determined by a court. In every case, it will be a factually-specific analysis that will turn on the language and context of the specific provision and transaction. While certain force majeure provisions, especially those drafted after the SARS outbreak, may specifically reference epidemics or pandemics, the majority of those clauses are more general and more ambiguous. We also would expect that where a party to a contract provides notice and attempts to terminate pursuant to a force majeure clause, that the other party may argue that a suspension or deferral is the more appropriate interpretation under the terms of the clause, rather than termination. Even in contracts where there is no force majeure clause, there is a risk that a party may seek to terminate, arguing that the contract has been frustrated, such that performance under the contract was rendered impossible or radically different from the obligations undertaken by both parties at the time they contracted. For a review of disclosure obligations and other considerations regarding force majeure provisions and frustration, there is a bulletin available here.
Fasken will follow developments in this matter and provide updates as they become available.
Footnote
1 The Court used the "disaster-out" clause from the IIAC Handbook for its analysis.
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