ONTARIO – Corporations – Right of first refusal in an asset sale and the duty of good faith and honest performance. Allocating price in a manner to discourage the exercise of a right of first refusal in an asset sale is not a breach of the duty of good faith and honest performance. The relationship between the holder of the right of first refusal and a third party is competitive, and parties are entitled to act in their self-interest.
Greta Energy Inc. v. Pembina Pipeline Corporation
2022 ONCA 783 (November 17, 2022)
Ontario Court of Appeal (Gillese, Huscroft and Sossin JJ.A)
This case involved the sale of three wind farms. Two of the three asset sales were subject to right of first refusal clauses (“ROFR”). The Appellant Greta held the ROFR on two of the assets (wind farms), which BluEarth Renewables Inc. sought to purchase. The seller was Veresen, who owned 75-90% of the assets. Greta held the ROFR for GV1 and the General Partner held the ROFR for GV2. There was no ROFR for SCELP.
The Appellants motion for summary judgment (“SJ”) was dismissed. The Respondents SJ motion was granted. The Court found that the Respondents acted in their self-interest and did not act improperly in doing so.
In 2016, Veresen announced its intention to sell the three wind farms, preferably “en bloc”. BluEarth submitted a bid in January 2017, which was successful. (para. 8) The seller requested BluEarth begin the process of negotiating a purchase and sale agreement. BluEarth provided a breakdown of purchase prices for the three properties. A final Agreement of Purchase and Sale was signed in February 2017.
On February 23, 2017, ROFR notices were sent to Greta and GG2. Greta wanted to buy GV1 and GV2. On March 14, 2017, after reviewing requested documentation and information. Greta informed the Vendor it would exercise its ROFR on GV2 but not on GV1. (para.10)
BluEarth’s purchase of Veresen’s interest in GV1 was conditional on a corporate reorganisation. Greta would not consent to the reorganisation unless certain conditions were met, alleging that the price allocation for GV2 and SCELP had been “gamed”. As a result, BluEarth did not complete the acquisition of GV1. (para. 11)
Specifically, Greta and GG2 alleged that Veresen and BluEarth conspired to manipulate the price of the assets being sold by Veresen in a bad faith attempt to prevent them from exercising their ROFRs. Greta and GG2 alleged that Veresen and BluEarth knowingly misled them as to the bona fide nature of the price allocation for the assets resulting in a breach of the duty of good faith.
The motion judge dismissed Greta’s and GG2’s motion for SJ and did not find that Veresen had breached its duty of good faith and honest performance by asking bidders to bid for the en bloc package and to defer price allocation until the bidding process was complete. The court also held that Veresen did not encourage BluEarth to inflate the price allocation for GV2 or take steps to dissuade Greta from exercising its ROFRs. (para. 14) Veresen did not owe a fiduciary duty to Greta or GV2. (paras. 14 and 15)
The issue on appeal was whether the Respondents worked together to manipulate the price of assets in bad faith thereby preventing the Appellants from exercising their ROFR.
The Appellants argued that Veresen was required to disclose the process it engaged in with BluEarth in allocating the price per asset. They submitted that the motion judge applied too high a standard by requiring them to prove a specific intention to “eviscerate” the ROFR, as per the test set out in GATX Corp. v. Hawker Siddeley Canada Inc. (1996), 1996 CanLII 8286 (ONSC), at para. 72. (para. 22)
The ONCA agreed with the motion judge that there was no evidence that supported the position that Veresen consciously permitted and encouraged BluEarth to inflate the price of GV2. (para. 24) and that fair market value was not determinative of whether Veresen acted in good faith.
The ONCA deferred to the motions judge’s finding that Veresen provided all documents the Appellants requested and that they had sufficient information to decide whether to waive the ROFR. The motion judge referred to C.M. Callow Inc. v. Zollinger, 2020 SCC 45, in which the Supreme Court of Canada held that a duty of disclosure is not imposed as long as a party does not knowingly mislead the other party. (para. 26)
The ONCA also deferred to the motions judge’s finding that there was no evidence that BluEarth intended to cause a breach of contract or caused a breach of contract. The dynamic between the ROFR holder and the third party was competitive and the Respondents were entitled to discourage the exercise of the ROFR. The ONCA held that the motions judge correctly applied the test for the tort of inducing breach of contract as set out in para. 99 of Correia v. Canac Kitchen, 2008 ONCA 506. (para. 29)
The appeal was dismissed.