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Vintage Petroleum, Inc. - MRRS Decision
IN THE MATTER OF
THE SECURITIES LEGISLATION
OF ONTARIO, BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN AND MANITOBA
AND
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM FOR
EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF
VINTAGE PETROLEUM, INC., VINTAGE ACQUISITION CORP.
AND GENESIS EXPLORATION LTD.
MRRS DECISION DOCUMENT
WHEREAS the local securities regulatory authority or regulator (the "Decision Maker") in each of Ontario, BritishColumbia, Alberta, Saskatchewan and Manitoba (the "Jurisdictions") has received an application from Vintage Petroleum,Inc. ("Vintage"), Vintage Acquisition Corp. (the "Offeror") and Genesis Exploration Ltd. ("Genesis") (collectively withVintage and the Offeror, the "Filers") for a decision under the securities legislation of the Jurisdictions (the "Legislation")that agreements with certain employees of Genesis who are holders of Common Shares ("Genesis Shares") of Genesishave been made for reasons other than to increase the value of the consideration paid to such employees for theirGenesis Shares and may be entered into despite the provision contained in the Legislation which provides that if anofferor makes or intends to make a take-over bid, neither the offeror nor any person or company acting jointly or inconcert with the offeror shall enter into any collateral agreement, commitment or understanding with any holder orbeneficial owner of securities of the offeree issuer that has the effect of providing to the holder or owner a considerationof greater value than that offered to the other holders of the same class of securities (the "Prohibition on CollateralAgreements");
AND WHEREAS under the Mutual Reliance Review System for Exemptive Relief Application (the "System"),the Ontario Securities Commission is the principal Jurisdiction for this application;
AND WHEREAS the Filers have represented to the Decision Makers that:
1. Vintage is a corporation existing under the laws of the State of Delaware, the common stock of which is listedfor trading on the New York Stock Exchange and is not a reporting issuer in any jurisdiction of Canada.
2. The Offeror is a corporation incorporated under the laws of Alberta, is an indirect wholly-owned subsidiary ofVintage and is not a reporting issuer in any jurisdiction of Canada.
3. Genesis is a corporation subject to the laws of Alberta and is a reporting issuer (or the equivalent) under theLegislation of each of Alberta, British Columbia, Ontario, Saskatchewan, Manitoba and Quebec.
4. The authorized capital of Genesis consists of an unlimited number of Genesis Shares and an unlimited numberof preferred shares, issuable in series, of which 38,596,701 Genesis Shares and no preferred shares wereissued and outstanding on March 30, 2001.
5. The Genesis Shares are listed and posted for trading on The Toronto Stock Exchange.
6. Pursuant to an offer to purchase dated March 30, 2001 (the "Offer"), the Offeror made a cash take-over bid forall of the 38,596,701 outstanding Genesis Shares (and an additional 3,570,919 Genesis Shares issuable uponthe exercise of stock options).
7. Unless extended or withdrawn, the Offer is open for 21 days, with an expiry time of midnight (Vancouver time)on April 20, 2001.
8. The Offer is conditional upon, among other things, not less than 66% of the Genesis Shares, calculated ona diluted basis, being deposited under the Offer.
9. Under the Offer, $18.25 cash is being offered for each Genesis Share, which represents a 22% premium overthe closing trading price of the Genesis Shares on March 27, 2001 (the last full day on which the GenesisShares traded prior to the public announcement of the Offer) and a 32% premium over the weighted averagetrading price of the Genesis Shares for the 10 trading days preceding the public announcement of the Offeror'sintention to make the Offer.
10. Genesis has pre-existing employment contracts with all of its senior officers which provide for the payment ofvarying amounts of compensation, as may be applicable to a particular senior officer, if the officer is terminatedwithout cause or voluntarily terminates his employment with Genesis, depending on the officer, at any time from30 to 90 days following a change of control of Genesis. The aggregate obligation of Genesis pursuant to theforegoing agreements following a change of control and a termination is approximately $3.35 million. If theOffer is successful, a change of control will be considered to have occurred for the purposes of these pre-existing employment agreements.
11. The pre-existing employment agreements (the "Pre-Existing Agreements") between Genesis and the Executives(as defined in paragraph 12 below) permit the Executives to cease being involved with Genesis 30 days aftera change in control. Under the Pre-Existing Agreements, upon a change in control, the Executives will receive30 day's salary and the value of the 30 days' loss of benefits, a lump sum retiring allowance, and any unvestedstock options become vested. The Pre-Existing Agreements do not contain any express provisions prohibitingthe Executives from engaging in a business which competes with Genesis or from soliciting key employees orothers away from Genesis' business.
12. Vintage believes that the two most senior officers of Genesis, Mr. David J. Wilson, President and ChiefExecutive Officer and Donald J. Sabo, Chairman of the Board and Senior Vice President of Genesis (together,the "Executives"), have been instrumental in building Genesis into a highly successful company.
13. At the time that the acquisition agreement dated March 27, 2001 (the "Acquisition Agreement") was beingnegotiated between Vintage and Genesis, Vintage requested that the Executives agree to remain employedby Genesis. Vintage wished to secure such an agreement because of the integral role of the Executives indeveloping Genesis' business and their substantial and valuable experience and expertise in exploring for,developing and producing oil and gas in Western Canada.
14. The Executives' role with Genesis following completion of the Offer is critical to Vintage in ensuring a successfultransition of Genesis following completion of the Offer. In addition, Vintage believed that if it was able to securethe services of the Executives, the rest of the management team would be more likely to remain with Genesisfollowing completion of the Offer.
15. Two contracts of employment (the "Employment Agreements") were agreed to among each of the Executives,Vintage and Genesis.
16. The Employment Agreements recognize the Executives' entitlements upon a change in control under the Pre-Existing Agreements and provide that each of the Executives will remain employed by Genesis for a period ofone year following completion of the Offer at a salary equal to the salary to be paid to him by Genesis in the2001 fiscal year. We understand that such terms of employment are consistent with the remuneration of thoseoccupying comparable positions within the industry.
17. In addition, in order to encourage the Executives to remain with Genesis beyond the one year term envisionedby the Employment Agreements, Vintage has agreed to issue to each Executive 25,000 shares of Vintagecommon stock (the "Restricted Stock") under the Vintage 1990 Stock Plan (the "1990 Plan"), as amended. TheRestricted Stock will be issued in accordance with, and subject to the terms of, the 1990 Plan and the furtherterms, restrictions and conditions set forth in the Employment Agreements. The material terms of the RestrictedStock include the following:
(a) Subject to certain limited exceptions, all shares of Restricted Stock are subject to forfeiture (i.e. all ofthe Executive's right, title and interest in such shares ceases and such shares will be returned toVintage with no compensation of any nature to the Executive), if the Executive's employment withGenesis is terminated for cause or if he resigns from his employment prior to the three yearscommencing on the date of the grant of the Restricted Stock.
(b) Certificates representing shares of Restricted Stock issued to the Executives will remain in thephysical custody of Vintage (in escrow) until all restrictions are removed or expire. Certificatesrepresenting the Restricted Stock will be delivered to the Executive when such restrictions lapse.
(c) Each certificate representing shares of Restricted Stock issued to the Executives will bear a legendmaking appropriate reference to the terms, conditions and restrictions imposed on such shares. Anyattempt by the Executive to dispose of Restricted Stock in contravention of such terms, conditions andrestrictions, irrespective of whether the certificate contains such a legend, will be ineffective and anydisposition purported to be effected thereby shall be void.
(d) Any shares or other securities received by the Executive as a stock dividend on, or as a result of stocksplits, combinations, exchanges of shares, reorganizations, mergers, consolidations or otherwise withrespect to shares of Restricted Stock shall be subject to the same terms, conditions and restrictionsand bear the same legend as the Restricted Stock.
18. The Employment Agreements contemplate that a bonus may be paid to the Executives, although any bonuseswill be within the discretion of Genesis. The Employment Agreements also provide for fewer holidays than theExecutives would have been entitled to under the Pre-Existing Agreements and do not recognize anyentitlement of the Executives under their present arrangements to stock options. Further, the EmploymentAgreements contain non-competition and non-solicitation provisions applicable to the Executives.
19. The Employment Agreements were negotiated on an arm's length basis, are on commercially reasonable terms,are consistent with current industry practice and Vintage's compensation arrangements for new executives andare intended to provide an incentive for the Executives to continue in the employment of Genesis for more thanone year following completion of the Offer.
20. Vintage would not have entered into the Acquisition Agreement if the Executives had not entered into theEmployment Agreements. Vintage believes that if it were to acquire only Genesis' assets and not the servicesof its key personnel, there would be a material reduction in likelihood of a successful transition of Genesisfollowing completion of the Offer and a corresponding reduction in the value of Genesis to Vintage and itsstockholders.
21. Mr. David J. Wilson holds an aggregate of 1,542,593 Genesis Shares and options to purchase 325,000 GenesisShares and Mr. Donald J. Sabo holds an aggregate of 1,121,977 Genesis Shares and options to purchase325,000 Genesis Shares. Neither of the Executives are related to Vintage or the Offeror.
22. The Employment Agreements were entered into for valid business reasons unrelated to the Executives'holdings of Genesis Shares and not for the purpose of conferring a collateral benefit on the Executives notenjoyed by the other holders of Genesis Shares.
AND WHEREAS under the System, this MRRS Decision Document evidences the decision of each DecisionMaker (collectively, the "Decision");
AND WHEREAS each of the Decision Makers is satisfied that the test contained in the legislation that providesthe Decision Maker with the jurisdiction to make the Decision has been met;
THE DECISION of the Decision Makers under the Legislation is that the Employment Agreements are beingmade for reasons other than to increase the value of the consideration to be paid to the Executives for their GenesisShares under the Offer, and that the Employment Agreements may be entered into notwithstanding the Prohibition onCollateral Agreements.
April 25, 2001.
"Paul M. Moore" "Robert W. Korthals"