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Can a bidder structure an offer to discourage the exercise of a ROFR?

Will the existence of a Right of First Refusal (“ROFR”) trigger special duties to ROFR holders on the part of bidders and sellers? In Greta Energy,[1] the Court of Appeal for Ontario held that bidders can structure offers to discourage the use of ROFRs, and sellers are not obliged to challenge bid structures, provided the offer is bona fide.

This is the first time an appellate court has considered what obligations are owed to ROFR holders since the Supreme Court of Canada’s landmark decisions recognizing the organizing principle of good faith performance and the duty of honest performance in contract law.[2] Greta Energy clarifies that asset sales remain a competitive bidding process in which bidders and sellers can and should act in their own self-interest. This is a significant holding and brings additional clarity to the law concerning ROFRs.

Summary of Facts

Veresen sought to sell its interests in three wind farms: GV1, GV2 and SCELP. Greta held ROFRs on the sale of Veresen’s interests in GV1 and GV2, but not in SCELP.

Bluearth ultimately won the bidding process for Veresen’s interests in GV1, GV2 and SCELP. It then worked with Veresen on a Purchase and Sale Agreement (“PSA”) for all three assets. A term in the draft PSA required Bluearth to provide a bona fide allocation of the purchase price of GV1,  GV2 and SCELP so that Veresen could provide its ROFR notices to Greta in respect of GV1 and GV2. While Bluearth initially valued GV2 at $151 million, it increased its allocation of value to $156 million after a corresponding reduction in the price allocated to SCLEP.[3] Veresen accepted the revised price allocation.

Greta exercised its ROFR on GV2, but not GV1. Greta then brought a summary judgment motion seeking damages against Veresen and Bluearth (the seller and bidder, respectively). Greta alleged that Veresen breached its contractual duties of good faith and honest performance by allowing Bluearth to reallocate the pricing between GV2 and SCELP in a deliberate attempt to prevent Greta from exercising its ROFR (by artificially inflating the exercise price in respect of GV2). Greta also argued that Bluearth was liable for inducing breach of contract.

Motion decision

The motion judge dismissed Greta’s claim. Veresen was required to give Greta a bona fide opportunity to exercise its ROFR in respect of GV1 and GV2. Veresen was not allowed to structure the asset sale in a way that “eviscerated” the ROFR[4] — for example, by allocating prices in a way that forced Greta to decline its ROFR, and then adjusting the sale price downward once the election to not exercise the ROFR had been made.[5] But, on the evidence, Bluearth made a bona fide offer to purchase GV2 for $156 million and Veresen was willing to accept this price. There was no breach of contract in these circumstances.

The motion judge also rejected Greta’s argument that Veresen had to take various steps to protect its interest as an ROFR holder. Specifically, Veresen was not obliged to:

  • Market and sell assets individually: Veresen was allowed to market and sell its assets en bloc. In the absence of any express requirement in the language of the ROFR, Veresen was not required to solicit separate bids for each of the ROFR assets.[6]
  • Challenge Bluearth’s price reallocation: Veresen was not obliged to challenge the price reallocation of Bluearth. Veresen only needed to decide if it would accept the revised price offered by Bluearth.[7] It was also not required to determine the reasonableness of the allocation between assets.
  • Determine the assets’ fair market value: The ROFR holder’s view of fair market value of the assets was not relevant. There “is no correct price for a ROFR, only what the vendor offers and the purchaser is willing to accept.”[8]
  • Disclose pricing discussions: Veresen was not obliged to disclose its discussions that led to the price reallocation.[9]

The motion judge also dismissed Greta’s claim against the bidder, Bluearth. Bluearth did not owe a duty to Greta in the bidding process.[10] It was in competition with Greta. While Bluearth’s bid structure discouraged Greta from exercising its ROFR, “there is nothing nefarious about having a bid strategy which could discourage the exercise of a ROFR so long as such a strategy was not unreasonable” (i.e., bad faith price manipulation).[11]

Also, Bluearth had no obligation to justify its valuation[12] or disclose its price discussions with Veresen.[13] Provided Bluearth was willing to close at its offer price, it could make any offer it wished to make.

Appeal decision

The Court of Appeal upheld the motion judge’s decision. Significantly, the Court confirmed that Bluearth could structure its bid to discourage exercise of the ROFR, provided the price allocation was a good faith offer:

[29] …the dynamic between the ROFR holder and the third party is a competitive one: the respondents were entitled to attempt to discourage the exercise of the ROFR and did not “eviscerate” the appellants’ rights. …[14]  

Takeaways

Greta Energy provides additional clarity on the obligations that sellers and bidders owe ROFR holders. Sellers and bidders are entitled to act in their self-interest. Absent any express contractual requirement to the contrary, a seller will be permitted to:

  • sell ROFR assets en bloc;
  • accept a bidder’s price allocation without any evidence of fair market value, and;
  • keep price discussions private.

In addition, bidders can structure their offers in a way that discourages exercise of a ROFR.  

Still, sellers and bidders should always ensure that the price allocation is bona fide. If there is price manipulation — meaning the seller or the bidder is not willing to close on the price presented to the ROFR holder — they could face liability.

In the future, courts will need to define more precisely the line between: (1) acceptable bid structuring that discourages the exercise of a ROFR; and (2) unacceptable price manipulation that eviscerates a ROFR. For example, what if the bidder makes an en bloc offer for all assets and is unwilling to acquire only some of them? Can the ROFR holder be compelled to offer the en bloc price? What if the bidder offers unique consideration that a seller is willing to accept but the ROFR holder is incapable of matching? Greta Energy does not provide a clear answer. Greta Energy suggests this is an acceptable bid, since sellers are allowed to make sale decisions based on strategic economic and business considerations, not simply the asset’s objective fair market value.[15] But cases before Greta Energy have held that the offer presented to the ROFR holder must be “one which they can accept, and not one which it would be beyond their powers to accept.”[16] Future cases will need to resolve these outstanding questions.

 

[1] Greta Energy Inc. v. Pembina Pipeline Corporation, 2022 ONCA 783.

[2] Bhasin v. Hrynew, 2014 SCC 71 and C.M. Callow Inc. v. Zollinger, 2020 SCC 45.

[3] Greta Energy Inc. et al. v. Pembina Pipeline Corporation et al., 2021 ONSC 7579, at paras. 27, 29.

[4] Greta Energy Inc. et al. v. Pembina Pipeline Corporation et al., 2021 ONSC 7579, at para. 58.

[5] Greta Energy Inc. et al. v. Pembina Pipeline Corporation et al., 2021 ONSC 7579, at para. 87.

[6] Greta Energy Inc. et al. v. Pembina Pipeline Corporation et al., 2021 ONSC 7579, at paras. 45-46, 60-61.

[7] Greta Energy Inc. et al. v. Pembina Pipeline Corporation et al., 2021 ONSC 7579, at para. 52.

[8] Greta Energy Inc. et al. v. Pembina Pipeline Corporation et al., 2021 ONSC 7579, at para. 63. See also paras. 64, 68, 93, 111. (Emphasis added).

[9] Greta Energy Inc. et al. v. Pembina Pipeline Corporation et al., 2021 ONSC 7579, at paras. 67-70.

[10] Greta Energy Inc. et al. v. Pembina Pipeline Corporation et al., 2021 ONSC 7579, at para. 90.

[11] Greta Energy Inc. et al. v. Pembina Pipeline Corporation et al., 2021 ONSC 7579, at para. 100.

[12] Greta Energy Inc. et al. v. Pembina Pipeline Corporation et al., 2021 ONSC 7579, at para. 90.

[13] Greta Energy Inc. et al. v. Pembina Pipeline Corporation et al., 2021 ONSC 7579, at para. 109.

[14] See also Greta Energy Inc. v. Pembina Pipeline Corporation, 2022 ONCA 783, at para. 32.

[15] Greta Energy Inc. et al. v. Pembina Pipeline Corporation et al., 2021 ONSC 7579, at para. 63. See also paras. 64, 68, 93, 111.

[16] See: Landymore et al. v. Hardy et al., 1991 CanLII 4299 (NS SC), quoting Manchester Ship Canal Company v. Manchester Racecourse Company, [1900] 2 Ch. 353.

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