On August 31, 2009, the Alberta Court of Appeal unanimously dismissed an appeal by dissenting shareholders from a $31 fair value award arising from the takeover of Deer Creek Energy Limited by the Canadian subsidiary of French multinational Total S.A.: Deer Creek Energy Ltd. v. Paulson & Co. Inc., 2009 ABCA 280.
The litigation arose in the wake of an August 2005 takeover bid of $25 per share by Total E&P Canada Ltd. for Deer Creek, an early-stage oil sands company. The bid was increased in September to $31 per share to match a competing bid. Of Deer Creek's outstanding shares at the date of the takeover bid, 82.4 per cent were tendered to the Total bid. However, an American hedge fund, Paulson & Co. Inc., began accumulating shares in the market upon the announcement of the offer and ultimately acquired nearly 8.5 million shares, roughly a 16 per cent interest.
When Total proceeded with a second-stage transaction to acquire 100 per cent of Deer Creek's shares, it offered the other shareholders the same $31 per share. Paulson and a small number of individual shareholders dissented on the second-stage transaction and asserted that the fair value of Deer Creek's shares was greater than $31.
At trial, Justice Barbara Romaine of the Alberta Court of Queen's Bench rejected the dissenting shareholders' claims, and found that the fair value of Deer Creek's shares was $31 at the relevant valuation date. Given the number of shares in respect of which dissents had been registered, the amount claimed in excess of that offered by Deer Creek ranged from roughly $675 million to nearly $1.5 billion.
In its decision, the Court of Appeal held that the trial judge's use of a market valuation approach was appropriate in the circumstances of this case. The panel affirmed her rejection of the contention that Deer Creek became more valuable between the first and second stages of the takeover in light of market developments and the presence of Total E&P Canada Ltd. as a new majority shareholder. It affirmed her analysis of the evidence on a discounted cash flow analysis, which she had used as a check against the market valuation, and her preference for the expert evidence presented by Deer Creek. The Court of Appeal disagreed only with her conclusion that the case involved “special circumstances” warranting a departure from the normal rule that dissenting shareholders should not be required to pay costs on valuation litigation. The award of trial costs against the dissenting shareholders was therefore set aside.
Deer Creek was represented on the appeal by Clarke Hunter, QC, Glen Poelman and Steven Leitl of Macleod Dixon LLP, with preparation assistance from Lori Bevan and Scott Gordon. Securities law support was provided by Robert Engbloom, QC, who had earlier led the legal team on the takeover bid itself.
Paulson & Co. was represented by Frank Foran, QC, Randall Block, QC, and Jennifer Faircloth of the Calgary office of Borden Ladner Gervais LLP. The David Gabai family and a group of individual shareholders, led by their broker Steve Boivin, were represented by Peter Linder, QC, of Peacock Linder & Halt LLP.
Ontario CA Dismisses Breach of Tender Contract Appeal
On September 24, 2009, the Ontario Court of Appeal upheld an earlier order of the Ontario Superior Court of Justice that had declared the Town of Newmarket to be in breach of a tendering contract with Maystar General Contractors Inc.: Maystar General Contractors Inc. v. Newmarket (Town), 2009 ONCA 675. The breach was due to the town's acceptance of the non-compliant bid of Bondfield Construction Company Inc. for the construction of the Magna Centre, a multi-purpose community recreation centre.
Maystar complained that Bondfield's bid contained an uncertain bid price for the project contract and that the town could not correct perceived errors in Bondfield's bid price without breaching its obligations to Maystar and the other compliant bidders.
Citing Supreme Court of Canada authority, the Court of Appeal re-affirmed that “the integrity of the tender process is essential in order to foster a fair and orderly bidding process where contractors will expend the time, effort and expense to bid, knowing they will be treated fairly and equally.” The Court of Appeal also confirmed that price is an essential term of contract formation and that an owner, in the town's circumstances, could not accept Bondfield's bid because the intended price was unclear. The evidence showed that the stipulated price in Bondfield's bid was $33,000,528. However, the GST amount of $2,346,960 was not 7 per cent of $33,000,528, but 7 per cent of $33,528,000, a figure not shown on the Bondfield bid form. Further, the total cost of work (the stipulated price plus GST amounts) was $35,874,960, which was the sum total of $33,528,000 plus the GST value of $2,346,960. Importantly, the total cost of work value was required to be specified in the bid forms and was the only bid value read out at the public tender opening.
The town corrected Bondfield's GST and total cost of work calculations and awarded the contract to Bondfield for a revised total price of $35,310,564.96, which was lower than Maystar's total bid price of $35,524,000. The Court of Appeal held that the town's correction of Bondfield's GST and total cost of work prices “gave Bondfield an unfair advantage over other bidders and was not compliant with the terms of the tender documents.”
The Court of Appeal accepted the application judge's finding that the town's council, in making its decision, had a letter from Bondfield, delivered five days after the tenders were opened, purporting to identify the lower of the two competing prices as Bondfield's intended bid price. Here, the court stated that “a public owner cannot undermine that process by purporting to accept a bid with an uncertain price, or to encourage contractors to believe that they can communicate with owners after the fact to clarify or explain inconsistencies in their bids.”
The Court of Appeal rejected the town's argument that it was entitled to rely upon a privilege clause in its instructions to bidders and accept Bondfield's bid as “unbalanced, irregular or informal.” Here, the court found that the discrepancy and uncertainty in Bondfield's bid price constituted a fundamental error that was not able to be unilaterally corrected or waived by the town's reliance upon any of the provisions in its instructions.
While the Court of Appeal acknowledged that the town was in a difficult situation and may have believed that it was acting in good faith, it re-affirmed the principle enunciated by the Supreme Court of Canada in M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd.,  1 S.C.R. 619 that good faith is not a defence to a claim for breach of contract.
This case highlights the importance for owners and bidders alike to adhere to the express terms of tender, while recognizing that each tender process may prescribe its own terms. This case also provides cautionary advice for owners to carefully review the requirements of their tender calls, so as to ensure that they are not requiring bidders to submit extraneous or otherwise unnecessary information. The fact that the town mandated that bidders include both GST and total cost of work values, in addition to a stipulated price, was its undoing, since these mandatory prices were found to be neither superfluous nor subordinate to the stipulated price, but rather, an important component of the Bondfield tender.
Maystar General Contractors Inc. was represented on the application and before the Ontario Court of Appeal by Matthew R. Alter and Daniel A. Boan of Borden Ladner Gervais LLP, with the assistance of Morgana Kellythorne.
The Town of Newmarket was represented by Les O'Connor and Michael Swartz of WeirFoulds LLP.