TURNING TO HIGH COURT
Wilks-Calfrac battle heats up
Saying it's not trying to “unscramble the egg” and undo Calfrac Well Services Ltd.'s restructuring deal from 2020, Wilks Bros LLC is asking the Supreme Court of Canada to hear its case against the Calgary-based oilfield services company.
The Financial Post has learned that the Cisco, Texas-based investment management firm, run by billionaire brothers Dan and Farris Wilks, is awaiting a decision from the Supreme Court of Canada on whether it will be granted leave to appeal its case against Calfrac, which it has been fighting for the past six months after losing a controversial proxy contest over how the company's debts should be restructured.
In its filing, Wilks argues that Calfrac should have entered a Companies' Creditors Arrangement Act (CCAA) bankruptcy proceeding last year when it missed an $18.3-million debt payment in June 2020. Instead, the fracking company entered a Canada Business Corporations Act (CBCA) proceeding, which Wilks argues was inappropriate and also infringed on its rights as a bondholder.
In a Jan. 29 filing, Wilks states the CBCA “allows only solvent corporations to make such fundamental changes by way of a corporate arrangement,” but in the past lower courts have allowed companies to use the CBCA process even in cases where they have missed debt payments.
“The result is a judicially created insolvency regime that is unpredictable, unbalanced and seemingly unconstrained,” Wilks argues, adding “the arrangement provisions of the CBCA are being used to avoid the substantive and procedural protections accorded to creditors under the CCAA.”
As a result, the CBCA process “allows an insolvent corporation to restructure without meaningful scrutiny or the application of consistent rules and principles.”
On Oct. 16, Calfrac shareholders approved the debt-restructuring deal proposed by Calfrac management, rejecting an alternative proposal by Wilks, which kicked off a series of challenges by the family owned entity. Last month, Calfrac disclosed that it miscounted votes at its special shareholders' meeting and, upon further review, it did not have sufficient shareholder support for the deal.
Alberta's pension fund manager Alberta Investment Management Corp. (AIMCo) voted on the transaction but its votes should not have been counted because it was deemed a related party for participating in a convertible bond fundraising effort. Without AIMCo's vote, Calfrac did not have enough shareholder support to close its transaction, meaning that Wilks's alternative proposal to restructure the company may have proceeded.
In an effort to fix the issue, Calfrac applied to the Toronto Stock Exchange to have AIMCo's bonds cancelled. The exchange granted Calfrac's request on March 29.
Wilks and Calfrac are now waiting on the Supreme Court to decide whether it will allow a hearing of the case; the filing was made Jan. 29 and the court generally takes up to three months for such reviews. Wilks declined to comment on whether the March 12 disclosure that Calfrac miscounted votes at its shareholders meeting would affect its legal case. Documents from the Supreme Court indicate the company has not tried to amend its Jan. 29 application.
Scott Treadwell, Calfrac senior vice-president capital markets and strategy, declined to comment on the Supreme Court challenge.
Legal experts say the case is unusual because it raises issues of consistency in bankruptcy and corporate law and involves a highly public and a vigorous proxy fight for control of a company.
“In general, the Supreme Court doesn't tend to do a lot in corporate law,” said Bryce Tingle, the N. Murray Edwards Chair of Business Law at the University of Calgary, adding that he believes the court should review this case as “the CBCA is being used in ways that weren't anticipated when it was enacted.”