Western Cdn Coal faces lawsuit from former adviser

2008-06-16 15:00 ET - Street Wire

by Stockwatch Business Reporter

Before its 2008 surge, Western Canadian Coal Corp. (WCC) had a tumultuous 2007. It faced insolvency and a delisting, and at one point warned that it did not have enough money to meet its near-term financial obligations. To help stave off a crisis, on June 27, 2007, the company allegedly contracted Endeavour Financial International Corp. for financial advice, with the initial goal of restructuring the company's debt. Fast-forward to 2008, and Western Canadian has made an impressive recovery. In late 2007, it successfully restructured its debt and raised $40-million through a convertible debt financing with Audley European Opportunities Master Fund. Endeavour would appear to have been a very capable adviser. However, there is more to the story.

Western Canadian now faces a lawsuit from its former adviser Endeavour, alleging that WCC breached the contract between the two companies by seeking financial advice from a different company, when there was an exclusivity clause built into the contract with Endeavour. Endeavour claims that, in breach of the contract, Western Canadian carried out debt transactions with other financial companies, when Endeavour was supposed to be the sole adviser. Endeavour is suing Western Canadian -- as well as its major shareholder Cambrian Mining PLC -- for the fees allegedly owed to it under the contract, including some fees arising after the contract's termination. Endeavour alleges that United Kingdom-based Cambrian was largely responsible for WCC's breach.

The debt component

According to Endeavour's statement of claim, on June 27, 2007, the two companies signed a contract under which Endeavour would provide advice mainly about reorganizing or restructuring WCC's debt. Endeavour says the deal called for it to "provide WCC with advice and assistance regarding the analysis, structuring, marketing, negotiating and closing of a debt transaction." Under the agreement, it would be WCC's sole adviser on an exclusive basis, says Endeavour.

Several different circumstances would compel payment to Endeavour. Successfully completing its debt mandate would earn an option to buy 300,000 shares of WCC at the market price upon refinancing (or the value of the option). As well, at the closing of any debt transaction, WCC would pay it a "success fee," which was based on a predetermined formula, and had a minimum of $750,000 (U.S.).

Endeavour says the deal also allowed it to terminate the contract for any legitimate reason, including any circumstances that would make representation of WCC by Endeavour unsuitable. If such a termination occurred, WCC would have to pay Endeavour's fees and expenses up to the date of termination. However, the contract also allowed Endeavour to receive payment after the termination in certain circumstances. Specifically, in the event that, within 18 months of termination, WCC concluded a debt transaction with any party that it or Endeavour had contacted during the term of Endeavour's contract, then Endeavour would still receive the success fee as if no termination had occurred.

The merger and acquisition component

The two parties expanded their relationship in early August, 2007, with another, separate agreement. Endeavour says this agreement was partly written and partly oral and called for it to provide financial advice for WCC's "strategic direction." Specifically, Endeavour says that its advice was sought mainly for the proposed combination of WCC and its major shareholder, Cambrian Mining. Endeavour claims that, as part of the agreement, WCC committed to taking active steps to bring about this combination quickly. More generally, under the contract, Endeavour would also act as a financial adviser "regarding the solicitation, structuring, negotiating and closing of a [merger and acquisition] transaction." Again, according to Endeavour, this agreement called for Endeavour to be WCC's sole adviser on an exclusive basis.

Under this separate agreement, Endeavour would receive a success fee at the closing of any such merger and acquisition transaction; this fee was also based on a predetermined formula (again with a minimum of $750,000 (U.S.)). Just like with the debt agreement, Endeavour could terminate the contract at any time, and in certain circumstances, could receive payment after the termination. Specifically, in the event that, within 12 months of termination, WCC closed a merger or acquisition transaction with any party that it or Endeavour had contacted during the term of Endeavour's contract, then Endeavour would still receive the success fee as if no termination had occurred.

The breach

Endeavour alleges that WCC's major shareholder Cambrian knew of the agreements and also of the exclusivity clause within the agreements. According to Endeavour, Cambrian wrongfully caused WCC to breach the agreements in a number of ways. Specifically, Endeavour alleges that in October, 2007, WCC, at the direction of Cambrian, violated the exclusivity term by taking strategic financial advice from another consultant, Hatch Corporate Finance Ltd. of the United Kingdom. This advice centred on the tasks Endeavour was contracted for: financing strategies, investments, acquisitions etc. Also, Endeavour alleges that WCC failed to take steps to combine itself with Cambrian, as promised, and instead considered a range of transactions other than this combination. Endeavour characterizes all this as "serious misconduct." It says it approached WCC and Cambrian on Oct. 22, 2007, and requested that WCC abide by the exclusivity terms of the agreements. WCC and Cambrian allegedly refused, saying that they would continue to seek financial advice from Hatch in the U.K. On Oct. 24, 2007, Endeavour terminated the agreements, citing WCC's serious misconduct.

Endeavour's entitlements

Endeavour says it is entitled to several different payments under the contracts. Some of these payments arise from events during the term of the contracts, while others come from events after the termination. Endeavour is suing WCC for these amounts.

Prior to the termination of the agreements, Endeavour says that it helped restructure WCC's debt, thus fulfilling one of its mandates. Specifically, it negotiated with WCC's primary lender, a banking syndicate led by BNP Paribas, to avoid forthcoming defaults faced by WCC. As a result of Endeavour's efforts, the BNP syndicate and a WCC subsidiary entered into a waiver agreement on Sept. 14, 2007, that reduced the outstanding principal under the BNP loan from $55-million to $35-million. As a result of this debt transaction, Endeavour says it should have received an option to buy 300,000 WCC shares as well as a success fee of $750,000 (U.S.) (because the fee would have been less than the minimum of $750,000 (U.S.)). Endeavour sent an invoice to WCC for these fees, but has not yet received payment. It is suing for these amounts.

Endeavour says that in September, 2007, WCC approached the Audley European Opportunities Master Fund and started negotiating a debt financing. WCC then issued a news release on Nov. 23, 2007, saying that it had arranged a $40-million convertible debt financing with Audley. While this financing occurred after the termination of the agreements, Endeavour says that because WCC first contacted Audley during the term of the agreements, the financing falls under the 18-month period whereby Endeavour would still receive a success fee as if no termination had occurred. Thus, Endeavour says it is owed the minimum fee of $750,000 (U.S.), and it is suing for this amount.

Endeavour also wants a declaration from the court confirming that it is entitled to success fees for any subsequent debt transactions concluded before April 24, 2009 (the 18-month period), and any subsequent merger and acquisition transactions completed before Oct. 24, 2008 (the 12-month period). Endeavour also is seeking a court order forcing WCC to provide a detailed list of all transactions that it has entered into since the Endeavour agreements were terminated on Oct. 24, 2007. That way, Endeavour can see just what it may be entitled to under the now-terminated contracts. Finally, Endeavour is also suing for remuneration. It says that it dutifully performed the work under the terms of the two agreements, and should receive reasonable compensation for this work.

Paula Price of Stikeman Elliot LLP is counsel for Endeavour. Western Canadian has not yet filed it defence.