Ontario Court Confirms Enforceability of Bought Deal Engagement Letters

In Stetson Oil & Gas Ltd. v. Stifel Nicolaus Canada Inc., the Ontario Superior Court of Justice confirmed the binding nature of a bought deal letter agreement, and awarded damages of $16 million plus interest and costs for breach of contract.
In Stetson Oil & Gas Ltd. v. Stifel Nicolaus Canada Inc., the Ontario Superior Court of Justice confirmed the binding nature of a bought deal letter agreement, and awarded damages of $16 million plus interest and costs for breach of contract.

In July 2008, Stetson, a junior oil and gas exploration company listed on the TSX, set out to raise capital for the acquisition and exploration of lands in the Bakken formation in North Dakota. Stetson wanted to raise money through a bought deal financing “because it wanted a guarantee with no financing risk.” Stetson and the defendant (then Thomas Weisel Canada Partners Inc. (“Weisel”)) entered into an engagement letter agreement over the weekend of July 11, 2008, under which Weisel agreed, on a bought deal basis by way of private placement, to purchase for resale subscription receipts for gross proceeds of approximately $25 million. The engagement letter provided that the definitive terms of the agreement would be governed by a formal underwriting agreement to be entered into prior to closing, which would contain standard “material adverse change-out” (MAC-out) and “due diligence-out” termination provisions. The closing date was July 31, 2008.

Weisel attempted to, but was not able to, place the subscription receipts with investors. On July 28, 2008, through counsel, Weisel advised Stetson that it did not intend to close the deal on July 31, 2008. The transaction ultimately did not close. The parties never negotiated a formal underwriting agreement.

Stetson raised $12 million gross through an alternative “best efforts” financing that closed in September 2008. Stetson started its legal action against Weisel in October 2008.

Justice Newbould rejected Weisel's contention that the engagement letter was only an agreement to agree and that there could be no binding agreement until an underwriting agreement was signed. He found that the underwriting agreement was not a “condition of the bargain.” In doing so Justice Newbould relied on the provisions of the engagement letter itself (a standard form agreement created by Weisel), the terms of Weisel's own “deal book” regarding the engagement letter, and the parties' conduct after signing the engagement letter.

Weisel asserted in the alternative that if there was a binding agreement, it was justified in terminating the agreement based on MAC-out and disaster-out termination provisions (relying on expert evidence with respect to “standard” termination provisions). In particular, Weisel maintained that the drop in the price of crude oil after the engagement letter was signed triggered the operation of these clauses.

Justice Newbould found that having failed to attempt to negotiate an underwriting agreement before the closing date, which would have contained the actual termination provisions, Weisel could not rely on them. Further, Weisel never purported to rely on these “outs” until after the fact. There was no evidence that prior to July 31, 2008, Weisel formed an opinion that the oil price changes would be expected to have a significant adverse effect on the market price or value of the Stetson securities, nor did Weisel ever give written or other notice to Stetson that it was relying on the out clauses.

Justice Newbould concluded that the drop in the price of oil was not a material change in any event, since Weisel knew that the price of oil was very volatile and had a high beta, the price of oil remained above the assumed pricing used by Weisel in its analysis of the share price of Stetson, and the evidence showed that Weisel did not believe the drop in the price of oil had materially affected the value of Stetson at the relevant times. Further, documented feedback from prospective purchasers at the time the deal was marketed did not reflect any concern with oil pricing. Justice Newbould found that the MAC-out and disaster-out clauses should not be effectively interpreted as a “market-out” clause, which is inconsistent with a bought deal. He further accepted the opinion of Stetson's expert witness that “reasonable market actors would not have an expectation that a bought deal underwriter would be entitled to terminate its commitment by invoking standard disaster out or MAC out provisions solely on the basis of a decline in the price of oil which neither result in or leads to a serious deterioration in financial markets generally, nor affects the issuer in question in a manner disproportionate to its effect upon other entities in the issuer's industry sector.”

Stetson was awarded the difference between the price per subscription receipt under the Weisel bought deal and the price per share that it raised in the September 2008 financing, multiplied by the number of shares issued in that financing, plus costs and interest.

The defendant has served a Notice of Appeal.

Cassels Brock & Blackwell LLP represented Stetson, with a team that included William Burden, Arthur Hamilton and Lara Jackson.

Groia & Company Professional Corporation represented Stifel Nicolaus, with a team that included Joseph Groia, Kellie Seaman, David Sischy and Tatsiana Okun.


Lara Jackson William J. Burden David Sischy Kellie Seaman Joseph Groia Arthur Lloyd Hamilton


Cassels Brock & Blackwell LLP Groia & Company Professional Corporation