A great deal of attention has been focused recently on challenges faced by issuers in the resource sector, particularly in connection with short form prospectus distributions and the ability to respond to comments on technical disclosure within the timeframes of the deal.

In December of 2011, we saw the first of a series of short form prospectus offerings being withdrawn. Karnalyte Resources filed a preliminary short form prospectus on December 5 for its $115 million offering of common shares, with an expected closing date of December 19, 2011. On December 13, the company issued a press release indicating it was no longer proceeding with the offering as the final short form prospectus could not be filed within the required timeframe "as a result of the delay" caused by comments raised by regulators on its technical report. (The Company subsequently filed an amended and restated technical report effective March 30, 2012, announcing via press release on the same day that it had responded to the regulators' comments over the past few months and, as a result, was filing the amended and restated report.)

A similar situation arose in January of this year involving the $50 million short form offering by Extorre Gold Mines. The company issued a press release announcing its offering on January 30, 2012, indicating that the proceeds would be used for exploration and development of its mineral projects in Argentina. The preliminary prospectus was filed on February 3 with closing expected to occur on February 22. By press release dated February 16, the company announced that the offering was being withdrawn as it had received comments from securities regulators on its technical report, in particular relating its preliminary economic assessment and certain aspects of its public record relating to the technical report. The release went on to note that while the company had held discussions with regulators to resolve these comments, the final short form prospectus could not be filed in the required time "as a result of the delay". The company followed-up with a further press release the next day, clarifying that the comments raised by securities regulators did not relate to the mineral resource estimate as stated in the technical report, but were in connection with the portions of the preliminary economic assessment announced by the company in August of 2011, that were incorporated into the report.

The $20 million bought deal by Rio Novo Gold announced on February 9, 2012, was also terminated in a similar manner. Here, unlike the Karnalyte situation, the parties appear to have taken a "wait and see" approach announcing on February 29 (the originally expected closing date) that the closing would be pushed back to allow the company to clear comments with securities regulators, and finally announcing the termination on March 6, 2012.

Issues raised during the comment period can be particularly challenging in the bought deal or short form offering context given the tight timelines that apply to these transactions. Where it appears that comments cannot be resolved in time, the parties will inevitably need to look to the underwriting agreement to examine their recourse. While underwriters do have limited termination rights in the context of bought deals, it is not common for them to exercise such rights unilaterally. In the limited situations where bought deals have been terminated a more typical scenario involves mutual termination and withdrawal of the offering. Typically, the underwriters have the ability to terminate for a variety of reasons, including material breach by the issuer of its obligations under the agreement. Depending on the how the agreement is drafted, the company's obligation to file a final prospectus within the allotted timeframe may lead to an exercise in interpretation.

These recent challenges highlight the need to consider termination provisions carefully in order to avoid challenges caused by ambiguous provisions. From an underwriters' perspective, the agreement should clearly provide full flexibility to terminate if the final prospectus is not filed within the prescribed time. An express termination right in favour of the underwriters for failure to meet filing deadlines for the preliminary and final prospectus may also be appropriate in some circumstances.

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