Court File and Parties

COURT FILE NO.: CV-15-525189-CP DATE: 20160606 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: James Middlemiss, Plaintiff AND: Penn West Petroleum Ltd., David E. Roberts, Murray R. Nunns, Todd H. Takeyasu, Frank Potter, James C. Smith, William E. Andrew and Jeffrey Curran, Defendants

BEFORE: Justice Edward P. Belobaba

COUNSEL: Jay Strosberg and Kirk Baert for the Plaintiff Scott Kugler for Defendants Penn West Petroleum, David E. Roberts and James C. Smith Lawrence Ritchie for Defendant Murray R. Nunns and for the remaining individual defendants as agent for counsel

HEARD: May 31, 2016

Proceeding under the Class Proceedings Act, 1992 Settlement and legal fees Approval

Endorsement

[1] The approval of this proposed securities class action settlement turns on whether the settlement amount falls within a range or zone of reasonableness. [1] The other factors that are repeated in the case law [2] – such as the risks of continued litigation and the experience of class counsel – more often than not amount to self-serving “boiler plate” that doesn’t really help the judge decide if the proposed settlement is truly in the best interests of the class (and not just in the best interests of class counsel.) [3] It is the “zone of reasonableness” analysis that, in my view, is not only the most helpful but is usually determinative.

[2] Here, as in too often the case, class counsel spent far too much time on the so-called “boiler plate” submissions and not enough time addressing and explaining the zone of reasonableness point. [4] Fortunately, class counsel agreed to file a supplementary affidavit providing more evidence about the latter and as a result, I was satisfied that the settlement was indeed within a zone of reasonableness and should be approved. [5]

Brief background

[3] The defendant Penn West Petroleum was one of Canada’s largest oil and gas companies. Its shares trade on the Toronto and New York Stock Exchanges. The individual defendants are current or former officers or directors.

[4] The factual narrative in this proposed securities class action follows a well-charted course. Penn West disclosed a need to restate earlier financials. The share price dropped. Class actions materialized within days in both the U.S. and Canada alleging misrepresentation and claiming substantial damages on behalf of aggrieved shareholders. Four class actions were commenced in Canada: two in Ontario that effectively merged into one; and one in each of Quebec and Alberta.

[5] This familiar litigation narrative was complicated in this case by the fact that during the same time period, world oil prices were falling dramatically [6] and the defendant oil and gas producer soon found itself in a precarious financial position facing a real risk of insolvency.

[6] It was in this context that class counsel persuaded all parties, including those involved in the parallel U.S. action, to sit down with a mediator. The mediation proved to be successful and shortly thereafter the American and Canadian class actions against Penn West were settled for $53 million Canadian. Given that an almost equal amount of shares were purchased on the TSX and the NYSE, it was agreed that the settlement amount would be divided equally and the Canadian class actions would receive $26.5 million.

[7] Class counsel now moves for settlement approval. More specifically, class counsel asks that leave be granted under s. 138.8 of the Securities Act, [7] the action be certified for settlement purposes under s. 5(1) of the Class Proceedings Act, [8] and the $26.5 million settlement and class counsel’s legal fees be formally approved by the court.

[8] Similar approval hearings have been scheduled in Quebec and Alberta.

The motions for leave and certification

[9] As I advised counsel at the hearing, I have no difficulty granting leave under the Securities Act and certifying the action for settlement purposes under the Class Proceedings Act. I am satisfied on the evidence before me that the action is being brought in good faith and there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff. As I noted in Rahimi, [9] it is hard to imagine a scenario where a publicly-traded company restates its financials and in doing so allegedly causes shareholder loss and leave under s. 138.8 is not granted. [10]

[10] I also find that the requirements of s. 5(1) of the CPA have been satisfied. The pleadings disclose a cause of action (namely, statutory misrepresentation); there is an identifiable class (all persons, other than residents of Quebec and Alberta, who purchased Penn West shares on the TSX during the class period); the claim raises a common issue (did any of the Penn West financials contain a misrepresentation?); there some evidence that a class action would be the preferable procedure; and there is a suitable representative plaintiff with no conflicts of interest.

[11] Leave and certification are thus granted for settlement purposes.

Settlement approval

[12] This was an early stage settlement. The proposed class action was settled within months of the action being filed and before any motions for leave or certification were brought. Early stage settlements understandably attract more judicial scrutiny than, say, settlements achieved on the eve of the common issues trial. [11]

[13] My concern here was as follows. The plaintiff used for $500 million in damages and the plaintiff’s expert concluded that the actual monetary loss sustained by the Canadian class members was in the range of $186.5 million. Why did class counsel agree to settle for $26.5 million?

[14] Class counsel tried to answer this question in very broad terms: in their view, the settlement amount was fair and reasonable because the defendant’s financial state was precarious and there was a real risk of insolvency; and the company’s available insurance coverage was being eroded by legal defence costs. Class counsel decided that while there was still a significant amount of coverage remaining under the insurance policies, it was better to settle rather than wait until judgment or a later settlement when the insurance policies would likely be depleted.

[15] But this still did not explain why the $26.5 million settlement amount was within a range or zone of reasonableness. In other words, why $26.5 million and not, say, $126 million? I needed more information, in particular about the available insurance coverage – the applicable policy limits and how quickly these limits were being eroded by defence costs. Fortunately, class counsel agreed to provide additional information by way of a supplementary affidavit.

[16] Having reviewed this additional information, I can now set out the reasons why the settlement amount is fair and reasonable and in the best interests of the class. At the time of the mediation and shortly thereafter when the settlement was concluded, class counsel had the following information:

(i) Even if oil prices were starting to slowly recover, the defendant’s share price was not following suit. In other words, the market was no longer confident about the defendant’s future as an ongoing concern. The defendant was off-side its financial covenants and there was a real risk of insolvency. (ii) The defendant would not be able to contribute financially to any class action settlement or judgment. Penn West had less than $2 million in cash on hand and was in no position to draw down on any existing credit facilities. The only realistic source of funding for class member claims was from the company’s insurance coverage. (iii) The available insurance coverage, after the payment of actual and anticipated legal defence costs in the U.S. and Canada, was in the range of C$55 million.

[17] The overall settlement amount of $53 million was therefore not only a reasonable portion of the available insurance monies but virtually the entire available amount. That is, the $53 million settlement, or $26.5 million for the Canadian class members, was not only within a zone of reasonableness, it was demonstrably at the high end of ultimate recoverability.

[18] This additional information about the insurance limits explains why class counsel decided that $26.5 million was fair and reasonable and allows me to conclude without hesitation that the settlement as it pertains to the Ontario class members is very much in the best interests of the class and should be approved. This is an excellent outcome.

Legal fees approval

[19] The retainer agreement provides for the recovery of a 33 per cent contingency fee plus disbursements and taxes. Following the reasoning in Cannon [12] I have no difficulty according presumptive validity to this contingency fee arrangement. As I have noted many times, it is only through a robust contingency fee system that class counsel will be appropriately rewarded for the wins and losses over many files and many years of litigation and that the class action will continue to remain viable as a meaningful vehicle for access to justice.

[20] Class counsel is entitled to receive one-third of the $26.5 million recovery plus disbursements and taxes. The legal fees request is approved.

[21] I am also pleased to formally approve the Fee and Retainer Agreement, the Consortium and Carriage Agreement and the Carriage and Co-operation Agreement - the latter two agreements were authorized by the Fee and Retainer Agreement.

[22] My congratulations again to counsel on both sides for resolving this matter in such an impressive fashion.

[23] Order to go as per the draft Order that I signed at the conclusion of the hearing.

Belobaba J. Date: June 6, 2016

[1] Dabbs v. Sun Life Assurance, [1998] O.J. No. 1598 (Gen. Div.) at para. 12; Parsons v. Canadian Red Cross Society, [1999] O.J. No. 3572, at para. 70 (S.C.J.). Winkler, Perell, Kalajdzic and Warner, The Law of Class Actions in Canada (2014) at 305. [2] Dabbs, at para. 13; Parsons at para. 71-72. [3] See the discussion in Sheridan Chevrolet Cadillac Ltd. v. Furukawa Electric Co., 2016 ONSC 729, at para. 12; Leslie v. Agnico-Eagle Mines, 2016 ONSC 532, at paras. 3-12; and O’Brien v. Bard, 2016 ONSC 3076, at paras.11-14. [4] As I noted in O’Brien v Bard, at para. 13: “It is simply not enough for class counsel (whose interests are not aligned with those of the class) to file a factum that in essence says nothing more than ‘We know what we’re doing … trust us.’ It is my hope that in approving class action settlements in the future, judges will urge class counsel to skip the wind-up (i.e. all the non-specific “boiler-plate”) and just throw the pitch (and explain why the settlement amount is within a zone of reasonableness.)” [5] In every one of my most recent settlement approval motions, class counsel had to file supplementary evidence about the “zone of reasonableness” before the settlement was approved: see Sheridan Chevrolet at paras. 13-15; Leslie at paras. 13-16 and Bard at paras. 11-14. [6] On July 29, 2014, the date of the company’s first disclosure about the need for a restatement, the price of West Texas Intermediate crude oil was US$104.91 a barrel. By the summer and fall of 2015, the oil price had fallen to about US$30 a barrel. The impact on the defendant company’s share prices was devastating: shares tumbled from a high of around $10.00 in July, 2014 to less than dollar ($0.82) in May, 2016. [7] Securities Act, R.S.O. 1990, c. S.5, as am. [8] Class Proceedings Act, 1992, S.O. 1992, c. 6. [9] Rahimi v. South Gobi Resources, 2015 ONSC 5948. [10] Ibid., at para. 25. [11] See the discussion in Clegg v. HMQ Ontario, 2016 ONSC 2662, at paras. 26-36. [12] Cannon v. Funds for Canada Foundation, 2013 ONSC 7686.