Petrobank Energy and Resources Ltd and PetroBakken Energy Ltd.

Headnote

Multilateral Instrument 11-102 Passport System and National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Control distribution -- Exemption from the prospectus requirement in the context of a securities lending transaction where the control person is lending securities for the purposes of facilitating a convertible bond offering.

Applicable Legislative Provisions

Securities Act, R.S.A. 2000, c. S-4, ss. 110, 144.

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 53, 74(1).

Citation: Petrobank Energy and Resources Ltd., Re, 2009 ABASC 598

December 4, 2009

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ALBERTA AND ONTARIO

(the Jurisdictions)

AND

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF

APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

PETROBANK ENERGY AND RESOURCES LTD

(the Filer)

AND

PETROBAKKEN ENERGY LTD.

(PetroBakken)

DECISION

Background

The securities regulatory authority or regulator in each of the Jurisdictions (Decision Maker) has received an application from the Filer and PetroBakken for a decision under the securities legislation of the Jurisdictions (the Legislation) that the Filer be exempted from the requirement to file a prospectus contained in the Legislation in connection with certain loans of common shares of PetroBakken (PetroBakken Shares) made by the Filer, a control person of PetroBakken, to one or more Canadian chartered banks (the Banks) for the purposes of facilitating the Bond Offering (as that term is defined below) (the Exemption Sought).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):

(a) the Alberta Securities Commission (the Commission) is the principal regulator for this application;

(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Saskatchewan, Manitoba, Québec, Nova Scotia, New Brunswick, Newfoundland and Labrador, Prince Edward Island, the Northwest Territories, Nunavut and Yukon; and

(c) the Decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.

Interpretation

Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this Decision, unless they are otherwise defined.

Representations

This Decision is based on the following facts represented by the Filer:

1. The Filer is a corporation incorporated under the laws of the Province of Alberta.

2. The Filer is a reporting issuer or has equivalent status in each of the provinces and territories of Canada and is not in default of any of the requirements of securities legislation applicable to it.

3. The Filer's common shares are listed and posted for trading on the Toronto Stock Exchange (the TSX).

4. PetroBakken is a corporation incorporated under the laws of the Province of Alberta.

5. PetroBakken is a reporting issuer or has equivalent status in each of the provinces and territories of Canada and is not in default of any of the requirements of securities legislation applicable to it.

6. PetroBakken was incorporated as a wholly-owned subsidiary of the Filer on 30 July 2009.

7. On 30 September 2009, the Filer conveyed all of its Canadian business unit assets and liabilities to PetroBakken in exchange for PetroBakken Shares.

8. On 1 October 2009, PetroBakken completed a plan of arrangement with TriStar Oil & Gas Ltd. (TriStar) under which PetroBakken acquired all of the issued and outstanding common shares of TriStar. In exchange for their interest in TriStar, TriStar shareholders received 36% of the issued and outstanding PetroBakken Shares.

9. On 6 October 2009, PetroBakken Shares were listed and posted for trading on the TSX.

10. The Filer currently holds 64% of the issued and outstanding shares of its subsidiary, PetroBakken. As such, the Filer is a "control person" of PetroBakken, as that term is defined in the Legislation.

11. As a consequence of the Filer being a control person, the PetroBakken Shares are subject to resale restrictions. The Filer is currently unable to rely on the exemption for a trade by a control person in section 2.8 of National Instrument 45-102 Resale of Securities (NI 45-102) because the Filer has not, as of the date hereof, held the PetroBakken Shares for longer than four months.

12. PetroBakken intends to complete an offering of convertible bonds (Convertible Bonds) by private placement (the Bond Offering) expected to be sold to a limited group of large international sophisticated funds (the Bond Purchasers). The Convertible Bonds will be convertible into PetroBakken Shares.

13. By participating in the Bond Offering, the Bond Purchasers will establish a significant position in PetroBakken. In order to neutralise this position, it is expected that certain of the Bond Purchasers will borrow PetroBakken Shares in the market and sell those shares.

14. The Filer holds 64% of the issued and outstanding PetroBakken Shares. The remaining 36% are held broadly by members of the public. As such, the liquidity of PetroBakken Shares is low. Consequently, the number of PetroBakken Shares available for Bond Purchasers to borrow in accordance with their investment strategy is low.

15. Unless there are shares of PetroBakken available in the market for Bond Purchasers to borrow, PetroBakken will not be able to pursue the Bond Offering, as potential Bond Purchasers will be unwilling to acquire the Convertible Bonds unless they can also borrow PetroBakken Shares to establish a hedged position.

16. The Filer has been asked, and has agreed in principal, to lend to the Banks approximately 11% of its PetroBakken Shares, representing approximately 7.5% of issued and outstanding PetroBakken Shares, in order to increase the liquidity of PetroBakken Shares and facilitate the Bond Offering. These loans will be in the form of standard securities lending agreements (SLAs).

17. The SLAs will contain a term that provides that the Filer will transfer absolute title to and ownership of the PetroBakken Shares that are the subject of the loans to the Banks for the duration of the loans and that the Banks will be entitled to deal with such securities without restriction. The SLAs will contain a term that the Banks must return equivalent PetroBakken Shares to the Filer after a period of time, not expected to exceed three years.

18. The Filer will have the ability to call back from the Banks its PetroBakken Shares on three days' notice to exercise voting rights and in certain other circumstances, all of which will be set forth in the SLAs. Further, the SLAs will provide a method to ensure that amounts equivalent to all dividend amounts received by the Banks in connection with the loaned PetroBakken Shares are paid to the Filer. PetroBakken will publicly announce the Bond Offering and, at the same time, the Filer and PetroBakken will disclose information regarding the SLAs.

19. Should the Filer be able to lend 11% of its PetroBakken Shares, the Filer expects to receive annual fees ranging from approximately 0.005% to 0.0125% of the value of the PetroBakken Shares lent, for the duration of the time the PetroBakken Shares remain loaned.

20. Pursuant to the Legislation, the lending of the Filer's PetroBakken Shares as proposed herein requires a prospectus or an exemption from the prospectus requirement.

21. Because the Filer has not held its PetroBakken Shares in excess of four months and is not able to file a Form 45-102F1 at least seven days before the distribution, the Filer cannot rely on the exemption from the prospectus requirement available under section 2.8 of NI 45-102, which provides that the prospectus requirement does not apply to a control distribution if the conditions in subsection 2.8(2) are satisfied.

22. A prospectus would be impracticable and inapplicable to the circumstances as PetroBakken Shares are being loaned to a Bank who will then lend PetroBakken Shares to various other sophisticated entities, depending on demand. The parties borrowing PetroBakken Shares in the market are large sophisticated international funds and banks who, on a routine basis, undertake the hedging strategies described herein in connection with their investments.

23. The participation by the Filer in the SLAs will benefit PetroBakken and all of its shareholders since it will allow PetroBakken to complete the Bond Offering on more favourable terms than would otherwise be available.

24. If the Exemption Sought is granted, the existence and material terms of the Filer's involvement in the Bond Offering and the transfers of securities pursuant to the SLAs will be fully transparent to investors since:

(a) the Filer will, at least 24 hours prior to the transfer of PetroBakken Shares to the Banks, file a completed and signed Form 45-102F1 in relation to the transfer;

(b) PetroBakken will, in accordance with the requirements of the Legislation, file a news release and material change report in relation to the Bond Offering;

(c) the Filer will, in accordance with the requirements of the Legislation, file insider reports disclosing the transfers of PetroBakken Shares under the SLAs and the existence and material terms of the SLAs; and

(d) the Filer will, if required, file separate reports in relation to the transfers of PetroBakken Shares under the early warning requirements set out in subsections 5.2(1) and (2) of MI 62-104 Take-Over Bids and Issuer Bids and, in Ontario, subsections 102.1(1) and (2) of the Securities Act (Ontario).

Decision

Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.

The Decision of the Decision Makers under the Legislation is that the Exemption Sought is granted to the Filer provided that:

(a) the Filer satisfies the conditions set forth in subsection 2.8(2) of NI 45-102, with the exception of paragraph 2.8(2)2, of NI 45-102; and

(b) the Filer and PetroBakken comply with the representations in paragraph 24 hereof.

Furthermore, the decision of the principal regulator and the securities regulatory authority or regulator in Ontario is that the application and this Decision be kept confidential and not be made public until the earlier of:

(a) the date on which PetroBakken publicly announces the Bond Offering;

(b) the date the Filer advises the principal regulator that there is no longer any need for the application and this Decision to remain confidential; and

(c) the date that is 90 days after the date of this Decision.