In its recent decision in Stetson Oil & Gas Ltd. v. Stifel Nicolaus Canada Inc., the Ontario Superior Court of Justice ruled that Stifel (formerly Thomas Weisel Partners Canada Inc.) breached its obligation to Stetson to purchase $25 million of Stetson’s subscription receipts pursuant to a “bought deal” financing and ordered Stifel to pay Stetson approximately $16 million in damages for the failed private placement.

Stifel argued that the bid letter between Stifel and Stetson was not a binding agreement, but merely an agreement to agree and that, in any event, it could rely on the termination provisions that would have been included in the underwriting agreement contemplated by the bid letter to terminate its obligations.

The court found that the bid letter was a binding agreement and that Stifel could not rely on the termination provisions to be contained in the underwriting agreement as a basis for backing out of its commitment in the bid letter. This decision confirms the binding nature of a bid letter for a bought deal financing, and also underscores the importance of including specific termination rights in bid letters to ensure that underwriters in capital markets transactions have the flexibility to terminate a financing commitment upon the occurrence of certain events prior to the execution of a definitive underwriting agreement.


On July 14, 2008, Stifel issued a press release announcing, on behalf of Stetson, that Stetson had entered into an agreement with Stifel as lead underwriter to purchase, on a bought deal private placement basis, approximately $25 million of subscription receipts of Stetson at a price of $0.55 per subscription receipt. Each subscription receipt was exchangeable into one common share of Stetson upon the approval of a lease arrangement. The proceeds from the financing were to be used by Stetson to meet certain commitments under land leases in the oil-rich Bakken Formation of North Dakota.

A week later, following an unsuccessful marketing process, Stifel had only placed $2 million of its position. On July 28, Stifel’s lawyers communicated with Stetson’s lawyers that Stifel did not intend to close the financing on July 31, as contemplated by the bid letter.

No reason was provided. Stifel took no steps to close the financing, including the negotiation and execution of a definitive underwriting agreement. On August 1, Stetson granted Stifel an unsolicited extension of the July 31 closing date, in hopes that an extension would give Stetson and Stifel time to renegotiate the terms of the financing. By mid-August, negotiations between Stetson and Stifel had gone nowhere, and Stifel offered to make an $8 million debt investment in Stetson in return for a release of its obligations under the bid letter. Stetson rebuffed the offer a few days later, informing Stifel that it would “take action” against Stifel if it did not fulfil its commitments under the bid letter and close the financing.

In early August, with lease payments looming, Stetson began to consider alternatives to the Stifel financing. It ultimately signed an agreement with Canaccord Capital Corporation, pursuant to which Canaccord agreed to provide Stetson with a $12 million “best efforts” private placement financing at a reduced price and with a full warrant sweetener. Stetson also agreed to issue new preferred shares to existing shareholders of Stetson, entitling them to the proceeds of any final judgement or settlement paid to Stetson in connection with its claim against Stifel. The Canaccord financing closed in mid-September, but the net proceeds fell well short of the funds needed for Stetson to undertake its development in the Bakken.

In the end, Stetson was unable to raise additional funds to develop the lands and, after a failed strategic partnering, the project was terminated and the leases lost.

Bid Letters: Agreement to Agree or Binding Commitment?

At trial, Stifel argued that the bid letter was not a binding agreement, but only an agreement to agree, and that a binding agreement would only arise on signing of the underwriting agreement.

The court, however, found that the language of the bid letter indicated that there was an intention to be bound, and that there were a number of provisions in the bid letter that suggested it was a binding agreement, such as an arbitration provision and indemnity provision. The court pointed to internal Stifel correspondence exchanged after the bid letter was executed – and after Stifel experienced difficulties selling the shares – as evidence that Stifel clearly understood it had bought deal liability and that it wanted to sell the shares before it was required to close the financing.

On the issue of whether an underwriting agreement had to be signed by the parties before a binding agreement could be recognized, the court held that executing a formal underwriting agreement was not a condition of the bargain between Stetson and Stifel, but rather an expression of the desire of parties as to the manner in which the transaction already agreed to would proceed.

Termination Provisions in Bid Letters

The bid letter contained the customary “underwriting agreement condition” that the definitive terms of the agreement would be governed by a formal underwriting agreement negotiated in good faith by the parties and containing industry-standard termination provisions:

“The definitive terms of this agreement will be governed by a formal underwriting agreement to be entered into prior to closing of the purchase by Thomas Weisel (the “Underwriting Agreement”) in respect of the Offering. The Underwriting Agreement will be negotiated in good faith between the Company and Thomas Weisel, on behalf of the Underwriters, and will contain…termination provisions (including, without limitation, standard “due diligence out”, “disaster-out”, “material adverse change-out”, and “regulatory-out” rights) customary in agreements of this type…”

In its closing arguments, Stifel attempted to rely on the “material adverse change-out” and “disaster-out” provisions, which were not specifically included in the bid letter itself but only referenced in the underwriting agreement condition. The court held that, because Stifel had never attempted to negotiate and execute a definitive underwriting agreement before failing to close the financing, there was no agreement containing the “material adverse change-out” and “disaster-out” provisions that Stifel could rely on as a basis for terminating its obligations.

The court went on to note that, even if the termination provisions referenced in the bid letter could be relied on by Stifel as a basis for not closing, in order for Stifel to rely on the provisions, it would have had to form the opinion that there had been a “material adverse change” or a “disaster” and then provide Stetson with notice to that effect prior to the closing date, neither of which Stifel did.


The decision reinforces the notion that bid letters are binding agreements, despite that they contemplate that a formal underwriting agreement will be entered into prior to closing.

Underwriters that wish to protect themselves with industry-standard termination provisions customarily contained in underwriting agreements should specifically include those provisions in their bid letters or, at a minimum, make specific reference to the applicability of such provisions to the offer set out in the bid letter.

The decision also serves as a useful guide for underwriters that may wish to rely on a termination provision in a bid letter or underwriting agreement to terminate their obligations. Termination provisions require that, in order to terminate the obligation created by a bid letter or underwriting agreement, the underwriter must form an opinion prior to the time of closing that the conditions contemplated by the termination provision have occurred, and must consider whether, in order to be effective, they must give notice to the issuer of its exercise of the rights contained in the provision.


Andrew Powers


Securities, Capital Markets and Public Companies