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LETTERS OF INTENT
Tips and Traps for Commercial Lawyers 




Presented by: Heather Barnhouse, Partner 



                                            1
Background




             2
Background
• Business deals take on different structures, but in 
  many situations begins with a letter of intent ("LOI").

• LOIs often set out the general intention of the parties 
  with respect to a particular transaction, including the 
  conditions of a deal (due diligence, financing etc.) and 
  summarize in a general way what the transaction 
  should look like; often leaving the specific details to be 
  further negotiated at a later stage.

                                                            3
Purpose of a LOI




                   4
Purpose of a LOI
• sets out the proposed parties to a commercial 
  transaction’s intentions to allow them to move 
  forward with a commercial transaction.

• establishes the ground rules between the parties‐
  process for detailed negotiations; what each party’s 
  responsibilities will be; approximate timelines moving 
  forward; etc.


                                                        5
Purpose of a LOI, cont’d
• identifies other requirements to the transaction:
  – ex: third party consents required, such as TSX 
    approval; landlord consent; board of director and/or 
    shareholder approval; financing.

• LOI needs enough certainty with respect to the 
  fundamental business terms in order to be effective:  
  need certainty with respect to parties, price, property 
  subject to the transaction.


                                                            6
Issues with LOI




                  7
Issues with LOI
• Often when the main deal is done, the transaction document 
  looks nothing like the LOI, as the deal may have morphed or 
  been further negotiated since the time of execution of the LOI.
• The process of due diligence (legal, financial) may uncover 
  issues that could not possibly be contemplated at the stage 
  that the LOI was drafted, which requires resolution in order for 
  the transaction to close.  This may require a modification from 
  the terms of the LOI (ex: share deal vs. asset deal), or a shift 
  from the terms contemplated in the LOI.
• LOIs often take one of two forms: either (1) a non‐binding 
  expression of interest in a particular transaction; or (2) a 
  binding expression of interest in a particular transaction.

                                                                  8
Issues with LOI, cont’d
• Non‐binding LOIs are often used to present an "offer" to 
  complete a transaction in a particular manner, with no 
  "penalty" or consequence if the transaction is not 
  completed in the specific manner contemplated‐ the 
  parties may walk away with no further commitments to 
  each other in the event that the deal is not completed as 
  contemplated.
• Recent case law establishes that non‐binding letters of 
  intent may be relevant and enforced in certain 
  circumstances:  IHAG‐Holding, A.G. c. Intrawest 
  Corporation, 2009 QCCS 2699.

                                                               9
Discussion of IHAG – Holding A.G. c. 
Intrawest Corporation, 2009 QCCS 2699 
(“IHAG”) 




                                         10
The Parties
• Intrawest Corporation (“Intrawest”) was a developer 
  and manager of a world class destination ski and golf 
  resort, headquartered in Vancouver, BC.

• IHAG was a Swiss holding company that owned 100% 
  of the shares in Mont Ste. Marie (1994) Inc. (“MSM”).




                                                           11
Background ‐ MSM
• MSM is a 4 seasons mountain resort situated 80 Km North of 
  Ottawa in the Gatineau area of the Province of Quebec.  The 
  resort is comprised of the following:  (a) ski centre with 13 km 
  of downhill trails over 2 communicating mountains (55,000 
  skiers per year); (b) 18 hole, par 72 championship golf course 
  on 317 acres (18,000 rounds of golf per year); and (c) 
  architectural award winning 54 room inn and conference 
  centre, which was built in 1974 but closed in 1991 because of 
  losses‐ it was not heated or maintained, so subsequently 
  suffered water, ice and mould damage, in addition to 
  vandalism.
• MSM and IHAG had invested approximately $35,000,000 in the 
  development of the resort.
                                                                  12
Facts




        13
Facts
• In 1995, IHAG decided that it wanted to sell MSM.
• It retained Mazarin Financial Inc. (“Mazarin”) in February 
  1996 to act as the exclusive financial advisor to explore 
  alternatives to sell shares or assets.
• Pierre Mantha was the principal of Mazarin. His 
  credentials include an MBA degree; he was trained as an 
  accountant; was the former managing partner of PWC; 
  had acted as a consultant in respect of numerous 
  mergers, acquisitions, privatisations, dispositions during 
  which it organized and conducted due diligence 
  studies/exercises on a regular basis.
                                                                14
Facts, cont’d
• Mantha prepared a confidential information 
  memorandum (CIM) dated May 2, 1996, which set out a 
  two stage process for those expressing an interest in 
  purchasing MSM:
  1. Submission of a letter of intent (LOI) on or before June 30, 
     1996; and 
  2. A limited group of qualified purchasers were then to be 
     invited to conduct further due diligence and shortly 
     thereafter, submit a final binding offer.
• A significant advantage was the availability of 
  approximately $25,000,000 worth of tax losses available 
  in Ste. Marie for a qualified purchaser.
                                                                 15
Facts, cont’d
• Mantha identified Intrawest as a potential interested buyer, 
  and in June 1996 sent CIM to Andrew Voysey, Director of 
  Finance and Acquisition. Voysey’s credentials include an 
  accounting designation and senior manager of KPMG, 
  specializing in taxation, estate planning and some corporate 
  reorganization work.
• Voysey indicated that despite some initial reservations (ie:  
  MSM was “small and tired resort”), there was “some” interest 
  in MSM, as Intrawest believed it may act as a feeder to 
  another resort it owned, Tremblant. Intrawest also had some 
  interest in the tax losses.


                                                                   16
Facts, cont’d
• Intrawest visited the resort, and decided not to 
  participate in the bid process, therefore did not submit a 
  LOI by June 30 as required.
• No LOIs were received by IHAG by the June 30 deadline.
• Mantha continues to shop MSM, and in late summer 1996 
  contacted Voysey again.
• Ultimately IHAG and Intrawest signed a share purchase 
  agreement in respect of the purchase of MSM, on January 
  29, 1997.


                                                            17
The Offer




            18
Offer/Process
• September 3, 1996:  Voysey wrote a letter to Mantha 
  outlining the approach to purchase MSM:
   – Purchase price of a resort is generally established on the basis of 
     a multiple of net earnings.  The average multiple for North 
     American ski resorts at the time was 4.8 times EBITDA, over the 
     prior three year period.
• Voysey’s proposal for Intrawest’s acquisition:
       • (a) Shares of Ste. Marie Inc. were to be acquired for $1.00;
       • (b) Intrawest would assume outstanding third party debt 
         (approximately $2.3M of government loans with a net present 
         value of $1.5M); and
       • (c) Intrawest to provide IHAG with an ongoing 50% participation 
         interest in the sale of MSM’s undeveloped real estate.


                                                                            19
Negotiations
• September 9, 1996:  IHAG counter‐offered as follows:
  – (a) minimum purchase price of $6M:  $2M paid on closing and 
    the balance over time; such payment to be reduced by the cost 
    incurred to restore the inn and conference centre up to a 
    maximum of $3M; and
  – (b) 50% participation interest in (i) the sale of all MSM assets 
    within 7 years of closing; and (ii) the forgiveness of any 
    government loans.




                                                                        20
Negotiations, cont’d
• Intrawest’s response to counter‐offer: (i) Intrawest to pay 
  $1,000,000 for shares of MSM; and (ii) Resort Operation 
  Payment Amount (“ROPA”) Payment.
• ROPA was a purchase price adjustment clause: for Intrawest to 
  justify a $2,500,000 investment ($1,000,000 cash for shares 
  and $1,500,000 for value of the government debt it is 
  assuming), it needed to generate a minimum of $500,000 of 
  net revenue from MSM operations a year over a three year 
  period
   – Should Intrawest earn $500,000 of net revenues a year from the 
     resort, it would have paid a “fair” price for MSM; however, if 
     Intrawest earned more than $500,000 of net revenues a year 
     over a 3 year period, it would be willing to pay IHAG an amount 
     which would compensate it for having underpaid for the resort.

                                                                    21
Negotiations, cont’d
• September 30, 1996:  Intrawest offers IHAG a ROPA at the 
  end of the third year of operations, which was equal to 
  4.8 times the average annual EBITDA for resort operations 
  over the said period “in excess of $500,000 annually”.
• IHAG basically agreed with the September 13 proposal, 
  subject to two changes:
  – (a) ROPA Payment be calculated over a period of 4 years, not 3; 
    and 
  – (b) $1,000,000 payment be paid to IHAG in the form of a partial 
    repayment of debt owing to it by MSM.


                                                                       22
Offer
• Voysey agreed and drafted a non‐binding letter of intent.  
  The important provision from the non‐binding LOI was as 
  follows:
  – “ROPA Payment would be equal to 4.8 times the amount by 
    which Earnings Before Interest, Taxes, Depreciation and 
    Amortization (“EBITDA”) for the Resort’s Operations less a 
    Prescribed Interest Amount during the period between the first 
    anniversary of the Closing Date and the fifth anniversary of the 
    Closing Date exceeds $2,000,000.”




                                                                        23
Offer, cont’d
• LOI was forwarded to Mantha on September 23, 1996.
• IHAG agreed to LOI, sent to Desjardins Ducharme to 
  examine and provide comments on the LOI‐ lawyer 
  reviewed and sent comments to Intrawest on October 9, 
  1996
  – No changes were proposed to the formula set out to calculate 
    the ROPA payment.




                                                                    24
Offer, cont’d
• Non‐binding LOI signed by both parties on October 18th
  and 21st, 1996, setting forth the following terms:
  – (a) Intrawest to purchase IHAG’s shares in MSM for $1.00;
  – (b) Intrawest to advance $1,000,000 to MSM, which would repay 
    a portion of the debt owing by the company to IHAG; 
  – (c) the terms of $12,000,000 debt in MSM (repayable on 
    demand to IHAG) were changed; debt was not to be repaid by 
    the Real Estate Participation, the ROPA Payment and a portion 
    (50%) of the government loans forgiven.  The remaining balance 
    was to become due and payable (in 99 years) on December 31, 
    2095, thereby diminishing its NPV to a negligible amount.



                                                                  25
Offer, cont’d
• Voysey instructed its lawyer to prepare a draft Loan 
  Agreement on the basis of the terms set out in the LOI.

• Donna Cooke circulated the first draft on November 19th, 
  which draft contained a series of complex definitions, 
  which explained how net revenues and ROPA Payment to 
  be calculated:




                                                            26
Offer, cont’d
  – “‘Net Resort EBITDA’ means, in respect of the Resort 
    Operation Payment Calculation Period, the amount, if any, 
    by which EBITDA during the Resort Operation Payment 
    Period exceeds the aggregate of:
     • (a) $2,000,000;
     • (b) the amount equal to 18%, calculated daily and compounded 
       annually, of Intrawest Resort Operation Loans, if any, from time to 
       time outstanding during the Resort Operation Payment Calculation 
       Period; and 
       (c) payments made by the Borrower during the Resort Operation 
       Payment Calculation Period on account of interest, standby fees, 
       accommodation fees, commitment fees, agency fees, contingency 
       fees, premiums, bonuses and penalties in respect of any financing 
       or other credit accommodation made available to the Borrower by 
       any Person (other than any Affiliated Entity) for the purpose of 
       financing Resort Operation Capital Costs”.
  – “‘Resort Operation Payment Amount’ means the amount, 
    if any, equal to 4.8 EBITDA during the Resort Operation 
    Payment Calculation Period”.
                                                                          27
Offer, cont’d
• Subsequent draft circulated on November 25, 1996:  
  Cooke circulated revised draft that meant to clarify some 
  things, but instead confused matters‐ definitions of “Net 
  Resort EBITDA” and “Resort Operation Payment Amount” 
  were inadvertently changed from what was reflected in 
  the LOI.




                                                           28
Revised Draft
  – “‘Net Resort EBITDA’ means in respect of the Resort Operation 
    Payment Calculation Period, the amount, if any, by which 
    EBITDA in respect of the Resort Operation Payment Calculation 
    exceeds the aggregate of:
     • (a) the amount equal to the interest that would be earned at the 
       rate of 18%, calculated daily and compounded annually, on the 
       Intrawest Resort Operation Loans, if any, from time to time 
       outstanding during the Resort Payment Calculation Period; and
     • (b) all payments made by the Borrower during the Resort 
       Operation Payment Calculation Period on account of interest, 
       standby fees, accommodation fees, commitment fees, agency fees, 
       contingency fees, premiums, bonuses and penalties in respect of 
       any financing or other credit accommodation made available to the 
       Borrower by any Person (other than any Affiliated Entity) for the 
       purposes of financing Resort Operation Capital Costs”.

                                                                        29
Revised Draft, cont’d
  – “’Resort Operation Payment Amount’ means the amount, if any, 
    equal to the amount by which (a) 4.8 times Net Resort EBITDA 
    during the Resort Operation Payment Calculation Period exceeds 
    (b) $2,000,000”.




                                                                  30
Revised Draft ‐ Error
• The error was material:
  – The ROPA Payment calculated, on the basis of net revenues of 
    $1,709,090 as per the words used in Section 1(e) of the LOI 
    yields no value as the following calculation shows:
    4.8 x [cumulative EBITDA ‐$2M] = 4.8 x [$1,709,090 ‐$2M] = 4.8 
    x $0 = $0;
  – The ROPA Payment calculated as per the Loan Agreement yields 
    a value of $6,203,632 as the following calculation shows:
    [4.8 x cumulative EBITDA] ‐ $2M = [4.8 x $1,709,090] = 
    $8,203,632 ‐ $2M = $6,203,632;
  – The difference between the two calculations is $6,203,632.



                                                                  31
Issues




         32
Issues Considered by the Court
1) Does “Complete Agreement” clause in Loan Agreement 
   preclude court from examining certain evidence which 
   would help it determine whether an error occurred in 
   the drafting of the Loan Agreement?

2) Is there a drafting error?




                                                           33
Decision




           34
Complete Agreement Clause
• “‘Complete Agreement’:  There are no representations, 
  warranties, covenants or agreements between the parties in 
  connection with the subject matter hereof other than those 
  expressed herein”.
• Generally the purpose of the Complete Agreement clause is to 
  set out all possible obligations and responsibilities between 
  the contracting parties.  “They are often included in 
  commercial contracts to avoid claims of implicit contractual 
  obligations, to limit the parties’ recourse to documents or 
  discussions that occurred during negotiations and to prevent 
  claims of error or lack of common intention”.

                                                               35
Complete Agreement Clause, cont’d
• Often these clauses are considered to be boilerplate clauses, 
  added without much thought; yet Courts often recognize the 
  validity of such clauses.
• In this case, the Court decided not to apply the Complete 
  Agreement clause in the Loan Agreement for the following 
  reasons:  
   – The Court has an obligation to find the common intention of the 
     parties if it is not reflected in the Loan Agreement;
   – The rules of good faith allow a Court to set aside a Complete 
     Agreement clause if necessary:  Courts have the right to review 
     the behaviour of the parties to a commercial contract beyond 
     the words, phrases and expressions used by the parties.

                                                                    36
Drafting Error
• While the ROPA Payment concept was never questioned 
  since it was first introduced on September 13, 1996, 
  reliance on the ROPA Payment language in the Loan 
  Agreement would result in an unreasonable commercial 
  transaction.
• The error was overlooked by all parties.
• If one added $6,200,000 sought by IHAG for the ROPA 
  Payment to the purchase price of $3,200,000, an EBITDA 
  multiple of approximately 11 would be achieved, which is 
  an unreasonable multiple in this type of a commercial 
  transaction.

                                                          37
Drafting Error, cont’d
• IHAG would obtain an undue and unfair advantage in the 
  event that restitution was imposed‐ the result would not 
  be equitable: “the most equitable solution in the 
  circumstances is to enforce the common intention of the 
  parties with respect to the ROPA Payment which is 
  reflected in Section 1(e) of the LOI and to declare that the 
  correct definition of ‘Resort Operation Payment Amount’ 
  in the Loan Agreement should be as follows:
   – ‘Resort Operation Payment Amount' means the amount, if any, 
     equal to 4.8 times the amount by which (a) Net Resort EBITDA 
     during the Resort Operation Payment Calculation Period exceeds 
     (b) $2,000,000”.
                                                                   38
Drafting Error, cont’d
• While the LOI was set out to be a non‐binding 
  commitment that does not create legal obligations, it 
  does however evidence a meeting of the minds which 
  reflects the business terms agreed to by the parties. “To 
  ignore same because it is not a binding agreement would 
  lead to an unjust result”.




                                                               39
Lessons/Application




                      40
Appeal Decision
• It should be noted that this decision was appealed to the 
  Quebec Court of Appeal, and in a decision released 
  October 28, 2011, it was found that the ratio prescribed 
  in the trial judge's decision with respect to the Complete 
  Agreement clause and the Drafting Error was sound‐ the 
  appeal was dismissed, as there was no palpable error of 
  law.
• Therefore, it is appropriate to consider a non‐binding 
  letter of intent to help ascertain the true intention of the 
  parties.


                                                              41
Lessons
• The case law establishes that Courts will review signed 
  documentation between the parties to ascertain the 
  common intention of the parties where it may be unclear.  
  Courts will look for evidence of the parties' intention, 
  including ancillary documents other than the main 
  transaction document to understand the intention, even 
  if the main transaction document supercedes the ancillary 
  documents, if the main transaction document does not 
  ultimately reflect the common intention of the parties.



                                                          42
Application
• Ensure that the transaction document, particularly complex and 
  intricate definitions that forms the basis of the commercial deal 
  between the parties are thoroughly reviewed by all parties prior 
  to execution of the document, to ensure that the intention of the 
  parties, with respect to calculation of bonuses, earn‐outs etc. is 
  accurate.  
• Use the LOI as a checklist to compare the final draft of the main 
  transaction document to cross‐reference that the intentions of 
  the parties have been properly reflected in the final draft.
• For any transaction that requires financial calculations moving 
  forward, ensure that accounting advice has been solicited to 
  ensure accuracy in translating the formulae into words in the 
  draft.

                                                                    43
Application, cont’d
 Consider using a hybrid form of LOI‐ separating those terms and
  conditions which are meant to survive (bind the parties), and those
  that are not meant to be binding on the parties post‐closing.
 Consider survivability of the following provisions: confidentiality;
  standstill; non‐solicitation; exclusivity; non‐competition, etc.
 This approach can allow the parties to perform effective due
  diligence to determine whether they wish to complete the
  transaction contemplated in the manner contemplated, while
  providing the target company some assurance that the sensitive
  business information learnt through the due diligence process will
  be protected.



                                                                     44
Application, cont’d
• In Alberta, the courts have regularly held that a LOI will not
  create a legally binding relationship if it “merely records a 
  future intent to enter into a contract”; however, if the terms of 
  the LOI specifically demonstrate an intention to create a 
  binding relationship, then the LOI will be held to be a binding 
  agreement.
• Agreements to agree are not enforceable; mainly because 
  important elements of the contract are left still to be 
  determined.
• Common interpretation is that under an LOI, the parties are 
  bound temporarily by the preliminary agreement which is to 
  be replaced by the more detailed formal agreement which it 
  contemplates.
                                                                   45
Application, cont’d
 Consider adding a clause to the LOI (which will be binding) that the
  substantive terms of the LOI will not be renegotiated by professional
  advisers, but instead by the business clients themselves.
 Example: The parties agree not to use their respective legal counsel as a
  means to renegotiate the terms set forth herein or to add any material
  rights or obligations among the participants without discussion between
  the parties and the consent of the parties to such additional terms. In this
  regard, each party will instruct its respective legal counsel to prepare draft
  definitive agreements that accurately reflect the business terms set forth in
  this letter and that neither materially expand nor materially restrict the
  legal rights and obligations of either party to the other unless expressly
  instructed to do so by their respective clients. For their part, each of the
  respective parties hereto agree not to instruct their respective legal
  counsel to prepare any draft terms which materially expand or restrict the
  legal rights and obligations of either party unless such new terms have first
  been discussed by the respective business people and substantially agreed
  by them.

                                                                               46
Questions?
Heather Barnhouse
780 423 7215
heather.barnhouse@fmc‐law.com

Fraser Milner Casgrain LLP
2900 Manulife Place
10180 – 101 Street
Edmonton, AB T5J 3V5
The preceding presentation contains examples of the 
kinds of issues Commercial Lawyers could face. If you 
are faced with one of these issues, please retain 
professional assistance as each situation is unique. 

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Letters of Intent - Tips and Traps for Commercial Lawyers

  • 3. Background • Business deals take on different structures, but in  many situations begins with a letter of intent ("LOI"). • LOIs often set out the general intention of the parties  with respect to a particular transaction, including the  conditions of a deal (due diligence, financing etc.) and  summarize in a general way what the transaction  should look like; often leaving the specific details to be  further negotiated at a later stage. 3
  • 5. Purpose of a LOI • sets out the proposed parties to a commercial  transaction’s intentions to allow them to move  forward with a commercial transaction. • establishes the ground rules between the parties‐ process for detailed negotiations; what each party’s  responsibilities will be; approximate timelines moving  forward; etc. 5
  • 6. Purpose of a LOI, cont’d • identifies other requirements to the transaction: – ex: third party consents required, such as TSX  approval; landlord consent; board of director and/or  shareholder approval; financing. • LOI needs enough certainty with respect to the  fundamental business terms in order to be effective:   need certainty with respect to parties, price, property  subject to the transaction. 6
  • 8. Issues with LOI • Often when the main deal is done, the transaction document  looks nothing like the LOI, as the deal may have morphed or  been further negotiated since the time of execution of the LOI. • The process of due diligence (legal, financial) may uncover  issues that could not possibly be contemplated at the stage  that the LOI was drafted, which requires resolution in order for  the transaction to close.  This may require a modification from  the terms of the LOI (ex: share deal vs. asset deal), or a shift  from the terms contemplated in the LOI. • LOIs often take one of two forms: either (1) a non‐binding  expression of interest in a particular transaction; or (2) a  binding expression of interest in a particular transaction. 8
  • 9. Issues with LOI, cont’d • Non‐binding LOIs are often used to present an "offer" to  complete a transaction in a particular manner, with no  "penalty" or consequence if the transaction is not  completed in the specific manner contemplated‐ the  parties may walk away with no further commitments to  each other in the event that the deal is not completed as  contemplated. • Recent case law establishes that non‐binding letters of  intent may be relevant and enforced in certain  circumstances:  IHAG‐Holding, A.G. c. Intrawest  Corporation, 2009 QCCS 2699. 9
  • 11. The Parties • Intrawest Corporation (“Intrawest”) was a developer  and manager of a world class destination ski and golf  resort, headquartered in Vancouver, BC. • IHAG was a Swiss holding company that owned 100%  of the shares in Mont Ste. Marie (1994) Inc. (“MSM”). 11
  • 12. Background ‐ MSM • MSM is a 4 seasons mountain resort situated 80 Km North of  Ottawa in the Gatineau area of the Province of Quebec.  The  resort is comprised of the following:  (a) ski centre with 13 km  of downhill trails over 2 communicating mountains (55,000  skiers per year); (b) 18 hole, par 72 championship golf course  on 317 acres (18,000 rounds of golf per year); and (c)  architectural award winning 54 room inn and conference  centre, which was built in 1974 but closed in 1991 because of  losses‐ it was not heated or maintained, so subsequently  suffered water, ice and mould damage, in addition to  vandalism. • MSM and IHAG had invested approximately $35,000,000 in the  development of the resort. 12
  • 13. Facts 13
  • 14. Facts • In 1995, IHAG decided that it wanted to sell MSM. • It retained Mazarin Financial Inc. (“Mazarin”) in February  1996 to act as the exclusive financial advisor to explore  alternatives to sell shares or assets. • Pierre Mantha was the principal of Mazarin. His  credentials include an MBA degree; he was trained as an  accountant; was the former managing partner of PWC;  had acted as a consultant in respect of numerous  mergers, acquisitions, privatisations, dispositions during  which it organized and conducted due diligence  studies/exercises on a regular basis. 14
  • 15. Facts, cont’d • Mantha prepared a confidential information  memorandum (CIM) dated May 2, 1996, which set out a  two stage process for those expressing an interest in  purchasing MSM: 1. Submission of a letter of intent (LOI) on or before June 30,  1996; and  2. A limited group of qualified purchasers were then to be  invited to conduct further due diligence and shortly  thereafter, submit a final binding offer. • A significant advantage was the availability of  approximately $25,000,000 worth of tax losses available  in Ste. Marie for a qualified purchaser. 15
  • 16. Facts, cont’d • Mantha identified Intrawest as a potential interested buyer,  and in June 1996 sent CIM to Andrew Voysey, Director of  Finance and Acquisition. Voysey’s credentials include an  accounting designation and senior manager of KPMG,  specializing in taxation, estate planning and some corporate  reorganization work. • Voysey indicated that despite some initial reservations (ie:   MSM was “small and tired resort”), there was “some” interest  in MSM, as Intrawest believed it may act as a feeder to  another resort it owned, Tremblant. Intrawest also had some  interest in the tax losses. 16
  • 17. Facts, cont’d • Intrawest visited the resort, and decided not to  participate in the bid process, therefore did not submit a  LOI by June 30 as required. • No LOIs were received by IHAG by the June 30 deadline. • Mantha continues to shop MSM, and in late summer 1996  contacted Voysey again. • Ultimately IHAG and Intrawest signed a share purchase  agreement in respect of the purchase of MSM, on January  29, 1997. 17
  • 19. Offer/Process • September 3, 1996:  Voysey wrote a letter to Mantha  outlining the approach to purchase MSM: – Purchase price of a resort is generally established on the basis of  a multiple of net earnings.  The average multiple for North  American ski resorts at the time was 4.8 times EBITDA, over the  prior three year period. • Voysey’s proposal for Intrawest’s acquisition: • (a) Shares of Ste. Marie Inc. were to be acquired for $1.00; • (b) Intrawest would assume outstanding third party debt  (approximately $2.3M of government loans with a net present  value of $1.5M); and • (c) Intrawest to provide IHAG with an ongoing 50% participation  interest in the sale of MSM’s undeveloped real estate. 19
  • 20. Negotiations • September 9, 1996:  IHAG counter‐offered as follows: – (a) minimum purchase price of $6M:  $2M paid on closing and  the balance over time; such payment to be reduced by the cost  incurred to restore the inn and conference centre up to a  maximum of $3M; and – (b) 50% participation interest in (i) the sale of all MSM assets  within 7 years of closing; and (ii) the forgiveness of any  government loans. 20
  • 21. Negotiations, cont’d • Intrawest’s response to counter‐offer: (i) Intrawest to pay  $1,000,000 for shares of MSM; and (ii) Resort Operation  Payment Amount (“ROPA”) Payment. • ROPA was a purchase price adjustment clause: for Intrawest to  justify a $2,500,000 investment ($1,000,000 cash for shares  and $1,500,000 for value of the government debt it is  assuming), it needed to generate a minimum of $500,000 of  net revenue from MSM operations a year over a three year  period – Should Intrawest earn $500,000 of net revenues a year from the  resort, it would have paid a “fair” price for MSM; however, if  Intrawest earned more than $500,000 of net revenues a year  over a 3 year period, it would be willing to pay IHAG an amount  which would compensate it for having underpaid for the resort. 21
  • 22. Negotiations, cont’d • September 30, 1996:  Intrawest offers IHAG a ROPA at the  end of the third year of operations, which was equal to  4.8 times the average annual EBITDA for resort operations  over the said period “in excess of $500,000 annually”. • IHAG basically agreed with the September 13 proposal,  subject to two changes: – (a) ROPA Payment be calculated over a period of 4 years, not 3;  and  – (b) $1,000,000 payment be paid to IHAG in the form of a partial  repayment of debt owing to it by MSM. 22
  • 23. Offer • Voysey agreed and drafted a non‐binding letter of intent.   The important provision from the non‐binding LOI was as  follows: – “ROPA Payment would be equal to 4.8 times the amount by  which Earnings Before Interest, Taxes, Depreciation and  Amortization (“EBITDA”) for the Resort’s Operations less a  Prescribed Interest Amount during the period between the first  anniversary of the Closing Date and the fifth anniversary of the  Closing Date exceeds $2,000,000.” 23
  • 24. Offer, cont’d • LOI was forwarded to Mantha on September 23, 1996. • IHAG agreed to LOI, sent to Desjardins Ducharme to  examine and provide comments on the LOI‐ lawyer  reviewed and sent comments to Intrawest on October 9,  1996 – No changes were proposed to the formula set out to calculate  the ROPA payment. 24
  • 25. Offer, cont’d • Non‐binding LOI signed by both parties on October 18th and 21st, 1996, setting forth the following terms: – (a) Intrawest to purchase IHAG’s shares in MSM for $1.00; – (b) Intrawest to advance $1,000,000 to MSM, which would repay  a portion of the debt owing by the company to IHAG;  – (c) the terms of $12,000,000 debt in MSM (repayable on  demand to IHAG) were changed; debt was not to be repaid by  the Real Estate Participation, the ROPA Payment and a portion  (50%) of the government loans forgiven.  The remaining balance  was to become due and payable (in 99 years) on December 31,  2095, thereby diminishing its NPV to a negligible amount. 25
  • 26. Offer, cont’d • Voysey instructed its lawyer to prepare a draft Loan  Agreement on the basis of the terms set out in the LOI. • Donna Cooke circulated the first draft on November 19th,  which draft contained a series of complex definitions,  which explained how net revenues and ROPA Payment to  be calculated: 26
  • 27. Offer, cont’d – “‘Net Resort EBITDA’ means, in respect of the Resort  Operation Payment Calculation Period, the amount, if any,  by which EBITDA during the Resort Operation Payment  Period exceeds the aggregate of: • (a) $2,000,000; • (b) the amount equal to 18%, calculated daily and compounded  annually, of Intrawest Resort Operation Loans, if any, from time to  time outstanding during the Resort Operation Payment Calculation  Period; and  (c) payments made by the Borrower during the Resort Operation  Payment Calculation Period on account of interest, standby fees,  accommodation fees, commitment fees, agency fees, contingency  fees, premiums, bonuses and penalties in respect of any financing  or other credit accommodation made available to the Borrower by  any Person (other than any Affiliated Entity) for the purpose of  financing Resort Operation Capital Costs”. – “‘Resort Operation Payment Amount’ means the amount,  if any, equal to 4.8 EBITDA during the Resort Operation  Payment Calculation Period”. 27
  • 28. Offer, cont’d • Subsequent draft circulated on November 25, 1996:   Cooke circulated revised draft that meant to clarify some  things, but instead confused matters‐ definitions of “Net  Resort EBITDA” and “Resort Operation Payment Amount”  were inadvertently changed from what was reflected in  the LOI. 28
  • 29. Revised Draft – “‘Net Resort EBITDA’ means in respect of the Resort Operation  Payment Calculation Period, the amount, if any, by which  EBITDA in respect of the Resort Operation Payment Calculation  exceeds the aggregate of: • (a) the amount equal to the interest that would be earned at the  rate of 18%, calculated daily and compounded annually, on the  Intrawest Resort Operation Loans, if any, from time to time  outstanding during the Resort Payment Calculation Period; and • (b) all payments made by the Borrower during the Resort  Operation Payment Calculation Period on account of interest,  standby fees, accommodation fees, commitment fees, agency fees,  contingency fees, premiums, bonuses and penalties in respect of  any financing or other credit accommodation made available to the  Borrower by any Person (other than any Affiliated Entity) for the  purposes of financing Resort Operation Capital Costs”. 29
  • 30. Revised Draft, cont’d – “’Resort Operation Payment Amount’ means the amount, if any,  equal to the amount by which (a) 4.8 times Net Resort EBITDA  during the Resort Operation Payment Calculation Period exceeds  (b) $2,000,000”. 30
  • 31. Revised Draft ‐ Error • The error was material: – The ROPA Payment calculated, on the basis of net revenues of  $1,709,090 as per the words used in Section 1(e) of the LOI  yields no value as the following calculation shows: 4.8 x [cumulative EBITDA ‐$2M] = 4.8 x [$1,709,090 ‐$2M] = 4.8  x $0 = $0; – The ROPA Payment calculated as per the Loan Agreement yields  a value of $6,203,632 as the following calculation shows: [4.8 x cumulative EBITDA] ‐ $2M = [4.8 x $1,709,090] =  $8,203,632 ‐ $2M = $6,203,632; – The difference between the two calculations is $6,203,632. 31
  • 32. Issues 32
  • 33. Issues Considered by the Court 1) Does “Complete Agreement” clause in Loan Agreement  preclude court from examining certain evidence which  would help it determine whether an error occurred in  the drafting of the Loan Agreement? 2) Is there a drafting error? 33
  • 34. Decision 34
  • 35. Complete Agreement Clause • “‘Complete Agreement’:  There are no representations,  warranties, covenants or agreements between the parties in  connection with the subject matter hereof other than those  expressed herein”. • Generally the purpose of the Complete Agreement clause is to  set out all possible obligations and responsibilities between  the contracting parties.  “They are often included in  commercial contracts to avoid claims of implicit contractual  obligations, to limit the parties’ recourse to documents or  discussions that occurred during negotiations and to prevent  claims of error or lack of common intention”. 35
  • 36. Complete Agreement Clause, cont’d • Often these clauses are considered to be boilerplate clauses,  added without much thought; yet Courts often recognize the  validity of such clauses. • In this case, the Court decided not to apply the Complete  Agreement clause in the Loan Agreement for the following  reasons:   – The Court has an obligation to find the common intention of the  parties if it is not reflected in the Loan Agreement; – The rules of good faith allow a Court to set aside a Complete  Agreement clause if necessary:  Courts have the right to review  the behaviour of the parties to a commercial contract beyond  the words, phrases and expressions used by the parties. 36
  • 37. Drafting Error • While the ROPA Payment concept was never questioned  since it was first introduced on September 13, 1996,  reliance on the ROPA Payment language in the Loan  Agreement would result in an unreasonable commercial  transaction. • The error was overlooked by all parties. • If one added $6,200,000 sought by IHAG for the ROPA  Payment to the purchase price of $3,200,000, an EBITDA  multiple of approximately 11 would be achieved, which is  an unreasonable multiple in this type of a commercial  transaction. 37
  • 38. Drafting Error, cont’d • IHAG would obtain an undue and unfair advantage in the  event that restitution was imposed‐ the result would not  be equitable: “the most equitable solution in the  circumstances is to enforce the common intention of the  parties with respect to the ROPA Payment which is  reflected in Section 1(e) of the LOI and to declare that the  correct definition of ‘Resort Operation Payment Amount’  in the Loan Agreement should be as follows: – ‘Resort Operation Payment Amount' means the amount, if any,  equal to 4.8 times the amount by which (a) Net Resort EBITDA  during the Resort Operation Payment Calculation Period exceeds  (b) $2,000,000”. 38
  • 39. Drafting Error, cont’d • While the LOI was set out to be a non‐binding  commitment that does not create legal obligations, it  does however evidence a meeting of the minds which  reflects the business terms agreed to by the parties. “To  ignore same because it is not a binding agreement would  lead to an unjust result”. 39
  • 41. Appeal Decision • It should be noted that this decision was appealed to the  Quebec Court of Appeal, and in a decision released  October 28, 2011, it was found that the ratio prescribed  in the trial judge's decision with respect to the Complete  Agreement clause and the Drafting Error was sound‐ the  appeal was dismissed, as there was no palpable error of  law. • Therefore, it is appropriate to consider a non‐binding  letter of intent to help ascertain the true intention of the  parties. 41
  • 42. Lessons • The case law establishes that Courts will review signed  documentation between the parties to ascertain the  common intention of the parties where it may be unclear.   Courts will look for evidence of the parties' intention,  including ancillary documents other than the main  transaction document to understand the intention, even  if the main transaction document supercedes the ancillary  documents, if the main transaction document does not  ultimately reflect the common intention of the parties. 42
  • 43. Application • Ensure that the transaction document, particularly complex and  intricate definitions that forms the basis of the commercial deal  between the parties are thoroughly reviewed by all parties prior  to execution of the document, to ensure that the intention of the  parties, with respect to calculation of bonuses, earn‐outs etc. is  accurate.   • Use the LOI as a checklist to compare the final draft of the main  transaction document to cross‐reference that the intentions of  the parties have been properly reflected in the final draft. • For any transaction that requires financial calculations moving  forward, ensure that accounting advice has been solicited to  ensure accuracy in translating the formulae into words in the  draft. 43
  • 44. Application, cont’d  Consider using a hybrid form of LOI‐ separating those terms and conditions which are meant to survive (bind the parties), and those that are not meant to be binding on the parties post‐closing.  Consider survivability of the following provisions: confidentiality; standstill; non‐solicitation; exclusivity; non‐competition, etc.  This approach can allow the parties to perform effective due diligence to determine whether they wish to complete the transaction contemplated in the manner contemplated, while providing the target company some assurance that the sensitive business information learnt through the due diligence process will be protected. 44
  • 45. Application, cont’d • In Alberta, the courts have regularly held that a LOI will not create a legally binding relationship if it “merely records a  future intent to enter into a contract”; however, if the terms of  the LOI specifically demonstrate an intention to create a  binding relationship, then the LOI will be held to be a binding  agreement. • Agreements to agree are not enforceable; mainly because  important elements of the contract are left still to be  determined. • Common interpretation is that under an LOI, the parties are  bound temporarily by the preliminary agreement which is to  be replaced by the more detailed formal agreement which it  contemplates. 45
  • 46. Application, cont’d  Consider adding a clause to the LOI (which will be binding) that the substantive terms of the LOI will not be renegotiated by professional advisers, but instead by the business clients themselves.  Example: The parties agree not to use their respective legal counsel as a means to renegotiate the terms set forth herein or to add any material rights or obligations among the participants without discussion between the parties and the consent of the parties to such additional terms. In this regard, each party will instruct its respective legal counsel to prepare draft definitive agreements that accurately reflect the business terms set forth in this letter and that neither materially expand nor materially restrict the legal rights and obligations of either party to the other unless expressly instructed to do so by their respective clients. For their part, each of the respective parties hereto agree not to instruct their respective legal counsel to prepare any draft terms which materially expand or restrict the legal rights and obligations of either party unless such new terms have first been discussed by the respective business people and substantially agreed by them. 46