• Post category:Court Cases

Dundee Oil and Gas Limited (Re), 2018 ONSC 6376

 What should a monitor do when a sale closing goes sideways?

Dundee Oil and Gas Limited (“Dundee”) became the subject of proceedings under the Companies’ Creditors Arrangement Act (CCAA“) by Order of the Court dated February 13, 2018. On April 4, 2018, Dundee entered into an Asset Purchase Agreement (“APA”) with Lagasco Inc. (“Lagasco”) as buyer, which was approved by the Court on June 11, 2018. The APA contemplated July 30, 2018 as the date for closing, and provided that any extensions would be predicated on the consent of National Bank of Canada and the Monitor. 

The first extension of the closing date—from July 30, 2018 to August 31, 2018—was requested in order to provide time for the Ministry of Natural Resources and Forestry (“Ministry”) to complete its review of the APA and ensure that well capping and de-commissioning obligations related to Dundee’s exhausted wells would be attended to. Meanwhile, Lagasco reached an agreement with MacLeod Energy Limited (“MacLeod”) for the subsequent purchase and sale of some of the assets that Lagasco was set to purchase under the APA. MacLeod, however, was bound by a third-party agreement with Canadian Overseas Petroleum Limited (“COPL”)—an unsuccessful bidder for the Dundee assets to be purchased by Lagasco under the APA—so, COPL sought an injunction to block MacLeod from purchasing any of the Dundee assets.

Given the evolution of Lagasco’s business plans, the Monitor and the Ministry needed to assess the stability of the new cash flow models, which now provided for two potential buyers instead of one. The parties agreed to a second extension of the closing date—from August 31, 2018 to October 12, 2018. It was then revealed that Lagasco may not have the financing to close on the APA, absent the expected funds from the MacLeod sale. Further extensions were granted in September to permit Lagasco to firm up alternative financing. However, on September 28, 2018, PACE Savings and Credit Union Limited (“PACE”), which had committed to provide the lion’s share of financing to Lagasco, was placed in Administration by the Deposit Insurance Corporation of Ontario for reasons unrelated to the Dundee transaction. Lagasco tried and failed to secure the consent of the administrator to the competition of the committed PACE financing. The APA could not close by the new October 26th closing date. Lagasco subsequently secured a Term Sheet from a lender whom the Monitor acknowledged to be serious and credible.

The Monitor also discovered that Lagasco and its financial advisor had established data rooms to permit potential investors in and lenders to Lagasco to assess the Dundee assets, without first obtaining the Monitor’s approval. The parties who had accessed the data rooms had not been screened nor approved by the Monitor, and at least one party had received confidential information without agreeing to any confidentiality agreement. Lagasco was of the view that it was within its rights to do what it did, but has since been fully co-operating with the Monitor to contain the problem as fully as can be done. The Monitor was of the view that the breaches of confidentiality could have serious implications for any future efforts to market the Dundee assets, should the APA fail to close.

The Monitor sought the Court’s advice and directions in relation to the latest proposed extension of the closing date. The Court considered two issues: first, whether the APA had passed the “point of no-return” or whether the Monitor ought to consent to a further extension of time; and second, what steps, if any, ought to be taken in light of the breaches of confidentiality. With respect to the first issue, the Court considered the following factors: 
  • Lagasco had been acting in good faith, and the delays that occurred were both unexpected and unwanted;
  • Lagasco had invested a lot in the APA and was strongly incented to see it close successfully. It paid a deposit consisting of 10% of the purchase price, a $300,000 extension fee, and amassed considerable professional fees to bring the transaction along this far; and
  • Lagasco has secured credible alternative financing. 
The Court considered the interests of all parties involved, as well as whether the efficacy and integrity of the process had been impaired. The Court noted that the extent of the resulting delay in closing, regardless of the reasons for it, was a prejudice in and of itself. Creditors suffered delay in receiving payment on their claims, and Dundee incurred significant operating costs. Further, since the Court initially approved the transaction on the basis of, inter alia, the unconditional nature of the APA, it now questioned how attractive the APA would have appeared in April 2018 had there been an accurate picture of the fragility of Lagasco’s financing. Nevertheless, the Court concluded that there was no basis upon which to conclude that a new sales process would deliver a higher or better price for the benefit of stakeholders. If the APA transaction could be nursed to the finish line, it represented the best economic outcome for existing and ongoing creditors. Further, there was no evidence that Lagasco had manipulated the process with a view to lever uncertainty into a lower price. Lagasco did not anticipate the loss of the MacLeod transaction nor the failure of the PACE financing, and it had not attempted to shirk its responsibility for dealing with consequences.

In light of the foregoing, the Court held that there had not been such unfairness in the working out of this process as to warrant a termination of the APA. The Court authorized the Monitor to consider and, if advisable, consent to the extension of the closing date to November 16, 2018. The Monitor was also directed to take steps as it deemed necessary to be in a position to resume the sales process at a running start should the transaction fail to close on November 16, 2018, with the Court noting that it must be clear to all that this was the LAST chance to salvage the APA.

With respect to the second issue of the confidentiality breaches, the Court held that there was no evidence of an intention by Lagasco to take advantage of Dundee and its stakeholders. Rather, the establishment of the data rooms was viewed as an attempt by Lagasco to prevent the considerable losses that it would suffer if the APA collapsed. Although these facts do not excuse the breaches of confidentiality, the question of what consequences ought to flow from Lagasco’s actions could be addressed at a separate hearing.
 
CounselGrant Moffat and Rachel Bengino of TGF for the Monitor, Aubrey Kauffman of Fasken for National Bank of Canada, Richard Swan of Bennett Jones for Lagasco Inc., Adam Mortimer of the Ontario Ministry of the Attorney General for MNRF, Victoria Yang for MacLeod Energy and Matthew Gottlieb and Andrew Winton of Lax O’Sullivan Lisus Gottlieb for Canadian Overseas Petroleum Limited.