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Termination Provisions In Securities Offerings – Impacts Of COVID-19 – Coronavirus (COVID-19) – Canada – Mondaq News Alerts

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The increasing global spread and uncertainty of the COVID-19
pandemic has produced significant legal consideration of force
majeure clauses and the law of frustration as they relate to
commercial agreements. In brokered equity offerings that are
conducted on an underwritten or agency basis, a similar concept is
applicable; the underwriting or agency agreement, as the case may
be, will include rights of the underwriter or agent to terminate
its obligations under the agreement, including “material
adverse change out,” “market-out” (for non-bought
deal offerings) and “disaster-out” clauses. Such clauses
can take many forms, but are generally drafted so that the
underwriter or agent can terminate its obligations under the
agreement in an offering if, in its sole determination, an event,
action, law, condition, circumstance, etc. develops or comes into
existence that has a significant or material adverse effect on
financial markets or the business or operations of the issuer.

Historically, such clauses have (thankfully) not enjoyed much
recognition due to, generally speaking, both the rarity of such
material adverse effects on the state of the market for securities,
and the short time frame between the signing of offering agreements
and the closing of the offerings. Such clauses are often only
operative for a matter of days up to a few weeks. Therefore, the
likelihood of an event material enough to trigger the
“market-out” clause arising in such a short time frame is
limited. Additionally, once an offering has been priced and the
underwriting or agency agreement signed, the underwriters/agents
are incentivized to close the deal.

Notwithstanding the rarity of termination of offerings, the
current COVID-19 pandemic has caused at least one planned
bought-deal offering to terminate. On March 11, 2020, Silvercrest
Metals Inc. (“Silvercrest“) entered into
an underwriting agreement with a syndicate of underwriters led by a
well-known Canadian Bank (the “Bank“)
for a bought-deal offering to raise approximately $75 million. The
offering was scheduled to close on April 3, 2020. One week after
signing, on March 18, 2020, Silvercrest issued a press release (the
Press Release“) announcing that it had
received notice that the Bank was invoking the
“disaster-out” provision to terminate the offering,
citing extreme financial turmoil due to COVID-19. In the Press
Release, Silvercrest made it clear that they did not agree with the
Bank invoking the “disaster-out” provision because the
COVID-19 pandemic was well known on the date of signing (in fact,
the World Health Organization formally labelled COVID-19 as a
‘pandemic’ on March 11th) and the parties’
expectation was “that the precious metals market would respond
positively to this known risk.” The Press Release also
announced that Silvercrest’s view was that the underwriting
agreement created a binding legal obligation on the Bank to
complete the offering and that Silvercrest intends to pursue legal
remedies against the Bank for breach of the agreement.

Subsequent to the Silvercrest offering, there has been at least
one new offering that has attempted to address the potential
offering risk created by COVID-19. On March 30, 2020, Orla Mining
Ltd. (“Orla Mining“) entered into an
underwriting agreement (the “Orla Mining
Agreement“) with a syndicate of underwriters
(the “Underwriters“), which included a
provision to expressly exclude COVID-19 as a cause for termination
of the offering. The provision states that “any related
interruption to the business, affairs or financial condition of
[Orla Mining], or any event, action, state or condition or
financial occurrence related directly or indirectly to the COVID-19
Outbreak (whether now known or unknown or whether foreseeable or
unforeseeable in the future), including any adverse effect on the
financial markets generally” will not be considered an event
or occurrence that will enable the Underwriters to terminate the
Orla Mining Agreement. While relatively uncommon prior to COVID-19,
carve-outs such as the one in the Orla Mining Agreement should
become an important point of consideration for issuers and
underwriters/agents during the COVID-19 crisis and beyond.

The pandemic is a fluid situation and outbreaks could wax and
wane for months. COVID-19 has led to border closures, travel
restrictions and declarations of states of emergency. These
measures, among many other market interruptions, have profoundly
impacted the Canadian and global financial markets, and have made
typical offering activities such as in person roadshows

Issuers and underwriters/agents will need to consider how
further efforts by governments to curb COVID-19 or future
resurgences of the virus could impact offerings. The likelihood of
completing a successful offering should be considered before
launching a brokered offering, particularly if the proceeds of such
offering are intended to be used to complete an acquisition or
other transaction. It will be important for the documents governing
the acquisition or transaction to include a corresponding right of
termination for the issuer in the event the offering cannot be
completed due to a termination event.

A determination of whether “out” clauses can be
invoked during, or as a result of, COVID-19 necessarily involves an
analysis of the specific contract in question and the timing of the
termination, and will depend on how Canadian courts interpret these
clauses given the novelty of this type of global event.

When thinking about an offering, issuers and underwriters/agents
should consider the following before proceeding:

  1. Proper Disclosure of Risk Factors. All
    prospective offering materials should contain all potential risks
    related to the current state of COVID-19 and other material risks
    that could impact the issuer or the offering.
  2. Negotiating the Scope of Termination
    In the context of many offerings and in other
    market circumstances, “out” clauses may not be given the
    consideration that they deserve. However, in the current climate,
    issuers and underwriters/agents should carefully consider and
    negotiate “out” provisions to ensure they accurately
    reflect the expectation of the parties as to when
    underwriters/agents may terminate the offering. For issuers, this
    may mean limiting the scope of the provision so that it is not
    drafted so broadly as to allow underwriters/agents to terminate the
    offering based on the impact of COVID-19, or other circumstances
    already known on the date of signing. An example of such a
    limitation is seen in the Orla Mining Agreement noted above. For
    underwriters/agents, this may mean considering the potential impact
    of COVID-19 on an issuer’s business or the financial markets in
    advance of entering into an underwriting or agency agreement, as
    the case may be.

In the end, termination provisions may or may not reference
specific risks, such as the current state of the pandemic, but in
all cases should reflect the expectation of the parties as to when
and in what circumstances the offering may be terminated.

The Capital Markets Group at Aird & Berlis can advise on
offering documents and termination proceedings. For more
information, please visit our
Capital Markets webpage

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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