COURT FILE NO.: CV-15-538824 DATE: 20160614 ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
OCTAGON CAPITAL CORPORATION Applicant – and – NIKO RESOURCES LTD. Respondent
COUNSEL: W. Michael G. Osborne, for the Applicant Brett Harrison and Stephen Brown-Okruhlik, for the Respondents
HEARD: June 8, 2016
M. D. FAIETA, J.
INTRODUCTION
[1] Until its bankruptcy, the Applicant, Octagon Capital Corporation (“Octagon”), was an investment dealer that, among other things, arranged debt or equity financing for commercial enterprises from institutional investors. The Respondent, Niko Resources Inc. (“Niko”), is a publicly traded oil and natural gas exploration and production company.
[2] By agreement dated May 16, 2013 (the “Engagement Agreement”), Niko hired Octagon to arrange debt financing with JB Management Inc. One of the terms of the Engagement Agreement was that Niko agreed to retain Octagon as agent on any “further financing” with JGB (“Tail Provision”). In December 2013, a few months after debt financing was provided by JGB, Niko restructured all of its debt obligations. As part of that restructuring, Niko repaid some of the debt owed to JGB and converted the balance of the debt owed to JGB into another debt instrument with different terms.
[3] Octagon submits that the December 2013 debt conversion constitutes “further financing” and it brings this Application to enforce the Engagement Agreement. Octagon seeks a declaration that it is entitled to a fee of $211,500.00, based on a 1.5% commission, had it been retained.
[4] For the reasons described below, I dismiss this Application. I find that the debt conversion provided by JGB in December 2013 did not constitute “further financing” as JGB did not supply Niko with any additional funding.
BACKGROUND
[5] The Engagement Agreement states:
Octagon … writes in connection with our discussions concerning Niko Resources Ltd. and its subsidiaries …, that we act as sole and exclusive agent with regards to a US $50,000,000 or other amount, debt placement (the “Debt Offering”) with JGB Management Inc. (“JGB”). …
The Agent’s responsibility in acting as Agent, with regards to the Debt Offering, is limited to a “reasonable efforts” basis with no understanding … of a commitment by the Agent to purchase, offer or obtain any purchaser for all or any such Debt Offering.
…An initial retainer fee of US $25,000 is required upon signing this Agreement. No other work fees are required to be paid.
In connection with the Agent’s services hereunder, the Company has agreed to pay Octagon, on the date of closing of the Debt Offering 1.5% of the Face Amount of the Debt Offering (the “Success Fee”). In the event that the Company opts not to proceed with the Debt Offering, notwithstanding JGB’s willingness and commitment to proceed, then the Company will pay Octagon a further US$50,000 break fee (over and above any other amounts or reimbursements).
In addition, the Company agrees to retain Octagon as Agent on any further financings with JGB that are completed within two years from the date of acceptance of this agreement by the Company. … [Emphasis added.]
[6] As a result of the above engagement, Octagon raised USD $63.5 million in May 2013 through the issuance of unsecured notes (“Notes”) by Niko which paid interest at the rate of 7% per annum. About USD $37 million of the Notes were purchased by JGB (Cayman) Cambridge Ltd. (“JGB Cayman”) which is a hedge fund affiliated with JGB Capital Management Inc. (“JGB Capital”).
[7] As of July, 2013, Niko had the following debt obligations:
(a) USD $64.5 million of Notes; (b) CAD $115 million of convertible senior unsecured notes; (c) a USD $250 million credit facility; and (d) a USD $60 million secured loan.
[8] In August 2013 Niko retained JP Morgan Securities Canada Inc. and Credit Suisse to arrange the restructuring of its debt obligations. This restructuring was completed in December 2013. The provisions of this debt restructuring were as follows:
(1) Debt Financing. An agreement between Niko, its subsidiaries and various lenders to provide Niko with up to USD $340 million in debt financing (“Term Loan Facilities”). JGB was not one of the initial lenders. It only became involved shortly before the closing. (2) Equity Financing. The above debt financing was conditional upon Niko contemporaneously raising money through an equity offering sufficient to redeem the outstanding Notes. The new debt financing could not be used to pay off the Notes. As a result, the restructuring included a collateral equity offering in order to raise money to pay much of the outstanding debt owed under the Notes. Further, this equity offering could not close if the debt financing was unsuccessful. Niko raised about USD $30 million through the sale of over 16 million common shares. None of the money raised by the December 2013 equity financing was provided by JGB Cayman or JGB Capital. (3) Option for Debt to Equity Conversion. An amendment to the terms of the Notes was negotiated with the noteholders, including JGB, which made the Notes convertible into shares of Niko at the options of the holders. Rather than be repaid in full JGB decided to convert some of its Notes to debt under the new debt financing.
[9] The above transactions, which occurred simultaneously and were inter-dependent, had the effect of:
(1) repaying approximately USD $3.2 million of debt owed to JGB under the Notes; (2) converting USD $7.4 million of the debt owed to JGB under the Notes into equity; (3) converting the remaining USD $14.1 million of the debt owed to JGB under the Notes into the Term Loan Facilities.
[10] Octagon submits that the conversion of the $14.1 million of JGB’s Notes to debt under the Term Loan Facilities was a “further financing” within the meaning of the Engagement Agreement. It submits that the USD $14.1 million of debt owed under the Notes to JGB was paid off by Niko by funds that Niko borrowed from JGB under the Term Loan Facilities.
[11] Niko submits that JGB provided no new money to Niko under the debt restructuring scheme described above. It submits that JGB was a net recipient of cash from Niko.
[12] This Application raises two issues:
- Did the conversion of $14.1 million of JGB’s Notes to debt under the Term Loan Facilities constitute a further financing within the meaning of the Engagement Agreement?
- If so, what amount of damages is Octagon entitled to receive as a result of not being retained as Niko’s agent in respect of the JGB debt conversion?
ISSUE #1: DID THE CONVERSION OF $14.1 MILLION OF JGB’S NOTES TO DEBT UNDER THE TERM LOAN FACILITIES CONSTITUTE A “FURTHER FINANCING” WITHIN THE MEANING OF THE ENGAGEMENT AGREEMENT?
[13] Whether Octagon is entitled to a further commission under the Engagement Agreement in respect of the conversion of $14.1 million of Notes to debt under the Term Loan Facilities turns on whether such transaction constituted “further financing,” as provided by the Engagement Agreement. As noted earlier, the Tail Provision of the Engagement Agreement states:
… the Company agrees to retain Octagon as Agent on any further financing with JGB that are completed within two years from the date of acceptance of this agreement by the Company. [Emphasis added.]
[14] In Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, the Supreme Court of Canada stated that a contract should be interpreted in a practical, common-sense manner. The Court stated, at paras. 47-8:
… the interpretation of contracts has evolved towards a practical, common-sense approach not dominated by technical rules of construction. The overriding concern is to determine "the intent of the parties and the scope of their understanding" … . To do so, a decision-maker must read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract. Consideration of the surrounding circumstances recognizes that ascertaining contractual intention can be difficult when looking at words on their own, because words alone do not have an immutable or absolute meaning:
No contracts are made in a vacuum: there is always a setting in which they have to be placed... . In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating. ( Reardon Smith Line, at p. 574, per Lord Wilberforce) …
The meaning of words is often derived from a number of contextual factors, including the purpose of the agreement and the nature of the relationship created by the agreement … . As stated by Lord Hoffmann in Investors Compensation Scheme Ltd. v. West Bromwich Building Society, [1998] 1 All E.R. 98 (H.L.):
The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. [p. 115]
[Emphasis added.]
Ordinary and Grammatical Meaning
“Financing”
[15] The Oxford Dictionary does not define “financing”. However it does define “finance” to mean to “provide funding for (a state, organization or person)”. Black’s Law Dictionary defines “financing” as “the act or process of raising or providing funds”. In Ellen Creek Developments Inc. v. Charlottetown Area Development Corp., 2008 PESCTD 14, [2008] P.E.I.J. No. 16, the court stated, at para. 53:
The word "financing", as a concept, does not mean simply that some bank be prepared to lend some money to a borrower. Indeed, partial self-financing is a necessary component of almost all bank-assisted purchases, and 100% self-financing of a project is certainly one way of doing it: the definition of financing does not presume involvement by a lending institution. Webster's New Collegiate Dictionary, and also Merriam-Webster's Dictionary of Law define "financing" as "the act or process or an instance of raising or providing funds, also: the funds this raised or provided". The American Heritage Dictionary defines "financing" as "the supplying of funds or capital".
[16] Based on the above sources, I find that the ordinary and grammatical meaning of “financing” is the supplying of funds.
“Further”
[17] The Oxford Dictionary defines “further” in numerous ways. The most relevant definition is “additional to what already exists or has already taken place, been done, or been accounted for: cook for a further ten minutes.
Surrounding Circumstances
[18] A draft of the Engagement Agreement, dated May 1, 2013, provided the following tail provision:
In addition, if at any time within eighteen months of the termination of this Agreement a transaction is consummated with any party contacted by Octagon, then it would result in the Success Fee for the Debt Offering, as set forth herein, being due and payable to Octagon, forthwith, in accordance with the Agreement. [Emphasis added.]
[19] An email from John Palumbo, President and Chief Executive Officer of Octagon to Glen Valk, Vice-President and Chief Financial Officer of Niko dated May 1, 2013 explained the purpose of this draft tail provision as follows:
We are also asking for protection if Niko ends up doing some other deal with any potential investors introduced by us.
[20] This provision was also explained on cross-examination by Palumbo as follows:
… typically if we make an introduction which creates value for the company, it’s a relationship they didn’t have before, there’s an understanding that if they go and tap that company again for further capital that they were going to get retained. That is just a [sic] absolutely plain vanilla, normal thing that we would ask for. And, again, it’s common industry practice. [^1] [Emphasis added.]
[21] Octagon and Niko agreed to revise the language of the Tail Provision. The triggering event of the Tail Provision was narrowed from any “transaction” consummated with any party contacted by Octagon, to “further financings” with JGB. As well, the reference to a “Success Fee” of 2.75% in the Tail Provision was removed.
CONCLUSIONS
[22] Considering the ordinary meaning of words used as well as the surrounding circumstances, I conclude that the phrase “further financing” means the supply of additional funds and does not include the conversion of an existing debt instrument. Octagon was not entitled to be retained as Agent under the Tail Provision because JGB did not supply any additional money to Niko in the December 2013 conversion beyond that which it had already lent to Niko.
[23] Octagon submits that “further financing” can include the conversion of Niko’s existing debt owed to JGB if the terms of the new debt instrument are “substantially different” from the original debt instrument. It submits that the interest rate, term and instalment payments were different. However, this standard sets the threshold too low and lends itself to uncertainty in its application. Had the parties intended that a debt conversion would trigger the Tail Provision, then the triggering event would have remained any “transaction” between Niko and JGB, which had been the language in an earlier draft of the Tail Provision.
[24] Given my answer to this question, it is unnecessary to answer the second question raised by this Application. Nevertheless, I briefly note that I would have been unable to imply a 1.5 % fee in any case since the parties agreed to remove the reference to the “Success Fee” found in the draft Tail Provision.
[25] I dismiss this Application. I encourage the parties to make best efforts to resolve the issue of costs. However, if the parties are unable to do so, Niko shall deliver its costs submissions and an outline of costs within ten days of today’s date. Octagon shall deliver its reply costs submissions and its outline of costs within seventeen days of today’s date. The costs submissions shall be no more than three pages long.
M. D. FAIETA, J. Released: June 14, 2016
Reasons for Judgment Cover Page
COURT FILE NO.: CV-15-538824 DATE: 20160614 ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN: OCTAGON CAPITAL CORPORATION Applicant – and – NIKO RESOURCES LTD. Respondent
REASONS FOR JUDGMENT
M. D. FAIETA, J. Released: June 14, 2016