Ten Takeaways For Private M&A Sellers And Buyers In Canada From Recent Court Decision

• Published date: 10 August 2021
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Energy and Natural Resources, M&A/Private Equity, Venture Capital, Corporate and Company Law, Energy Law, Oil, Gas & Electricity, Arbitration & Dispute Resolution, Privilege
• Law Firm: Bennett Jones LLP
• Author: Mr Gary Solway, Munaf Mohamed, John M Mercury, Michael D. Mysak and Paul Romaniuk

A private M&A purchase agreement customarily includes extensive representations and warranties and indemnification provisions. Post-closing, if the buyer alleges a breach of those provisions claiming significant damages, and the seller disputes that allegation, that dispute could end up before the courts for resolution.

One such recent court decision is the Alberta Queens Bench case of NEP Canada ULC v MEC OP LLC, 2021 ABQB 180 released April 1, 2021. The case provides some useful lessons for participants in private M&A transactions in Canada. The Court found that the private equity-backed seller had purposefully lied, or told half-truths, about its compliance with certain regulatory obligations associated with oil field assets, thereby committing fraud. In its disclosure schedule, the vendor repeatedly represented there were "potential" issues of non-compliance when they knew the issues were actual and substantial. The Court awarded almost $200 million in damages, including more than $120 million for loss of opportunity. The decision is under appeal. Bennett Jones¹ represented the successful buyer/plaintiff in the acquisition and the litigation.

Background

In 2010, the buyer developed a business strategy under which it would acquire previously developed oil and gas fields, use its expertise to workover existing wells and drill new wells to increase production and resell the investment within three years. This was memorialized at the time in various "waterfall" models and contemporaneous documents.

In June 2011, the buyer agreed to purchase oil field assets within Alberta from the seller through the purchase of all shares in a subsidiary of the seller. In accordance with the buyer's business strategy, it planned to resell the expanded oil field assets by 2014.

Not long after the transaction had closed, the buyer became aware of many regulatory non-compliance issues with the oil field assets. The buyer was required to close a third of its production and use its reduced cash flow to remedy these non-compliance issues, which effectively prevented the buyer from reselling the assets by 2014. Instead, due to remediation efforts and related financing delays, the buyer could not feasibly sell the assets until 2016'by that time the price of oil and the value of the assets had dropped significantly.

Takeaways

The following is a list of 10 key takeaways from this litigation for parties involved in M&A transactions:

1. Court Litigation Takes Time

Although the buyer was successful at trial, nearly 10 years passed from the closing date of the...