National Policy 11-207 Failure-to-File Cease Trade Orders and Revocations in Multiple Jurisdiction -- application for a partial revocation of a cease trade order -- issuer's securities cease traded due to failure to file audited annual financial statements -- issuer has applied for a partial revocation of the cease trade order to permit the issuer to amend an existing deferral agreement regarding payments owing in connection with a convertible debenture agreement -- partial revocation granted subject to conditions.
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 127 and 144.
National Policy 11-207 Failure-to-File Cease Trade Orders and Revocations in Multiple Jurisdictions.
Citation: 2020 BCSECCOM 445
SOUTHGOBI RESOURCES LTD.
PARTIAL REVOCATION ORDER
UNDER THE SECURITIES LEGISLATION OF BRITISH COLUMBIA AND ONTARIO (the Legislation)
¶ 1 SouthGobi Resources Ltd. (the Issuer) is subject to a failure-to-file cease trade order (the FFCTO) issued by the regulator of the British Columbia Securities Commission (the Principal Regulator) and Ontario (each a Decision Maker) respectively on June 19, 2020.
¶ 2 The Issuer has applied to each of the Decision Makers for a partial revocation order of the FFCTO.
¶ 3 This order is the order of the Principal Regulator and evidences the decision of the Decision Maker in Ontario.
¶ 4 Terms defined in National Instrument 14-101 Definitions or in National Policy 11-207 Failure-to-File Cease Trade Orders and Revocations in Multiple Jurisdictions have the same meaning if used in this order, unless otherwise defined.
¶ 5 This decision is based on the following facts represented by the Issuer:
1. The Issuer is a company existing under the laws of British Columbia.
2. The Issuer's head office is located in British Columbia.
3. The Issuer is currently a reporting issuer in each of the provinces of Canada (the Jurisdictions). Trading in the Issuer's securities are currently cease traded in each of the Jurisdictions.
4. The Issuer's common shares are listed for trading on the Toronto Stock Exchange (TSX) and the Hong Kong Stock Exchange (HKEX). However, trading in the Issuer's common shares is currently halted on the TSX and suspended on the HKEX.
5. On March 30, 2020, the Issuer announced that the audit of its annual consolidated financial statements for the year ended December 31, 2019 (the 2019 Financial Statements) was not completed prior to the filing deadline of March 30, 2020, due to travel restrictions in force in parts of China and Mongolia as a result of the COVID-19 pandemic.
6. Based on discussions with its auditors during the course of the audit process, the Issuer learned that its auditors were of the view that several adverse conditions and material uncertainties existed which cast doubt upon management's going concern assumptions in the 2019 Financial Statements, including the ability of the Issuer to successfully negotiate a deferral with Land Breeze II S.à.r.l (Land Breeze), a wholly-owned subsidiary of China Investment Corporation (CIC) in respect of its obligations to pay Land Breeze approximately US$74.0 million on or before June 20, 2020, under certain existing deferral agreements and its requirement to pay Land Breeze US$8.1 million of cash interest on November 19, 2020, under the Convertible Debenture (as defined below).
7. On or around May 11, 2020, the Issuer was advised by its auditors that they would not be in a position to render an unmodified audit opinion on the 2019 Financial Statements prior to the extended filing deadline of May 14, 2020, because they were not able to obtain sufficient evidence to support management's going concern assumptions. As a result, the Issuer failed to file the following disclosure documents (the Required Filings) prior to the requisite filing deadline: (i) the 2019 Financial Statements and accompanying Management Discussion & Analysis and CEO and CFO certificates prior to the filing deadline of May 14, 2020; and (ii) its interim consolidated financial statements for the three month period ended March 31, 2020 and accompanying Management Discussion & Analysis and CEO and CFO certificates prior to the filing deadline of May 15, 2020.
8. On May 13, 2020, the Company applied for a management cease trade order with the securities regulatory authorities in each of the Jurisdictions in connection with the anticipated delayed filing of the Required Filings. A management cease trade order was issued by the Principal Regulator under Section 164 of the Securities Act (British Columbia) (the Act) on May 15, 2020.
9. On June 18, 2020, the Issuer entered into a deferral agreement (the 2020 June Deferral Agreement) with Land Breeze pursuant to which Land Breeze agreed to grant the Issuer a deferral of cash interest and deferral fees of approximately US$74 million (the 2020 June Deferral Amount) which were due and payable to Land Breeze on June 20, 2020, under certain existing deferral agreements. Pursuant to the 2020 June Deferral Agreement, payment of the 2020 June Deferral Amount was deferred to September 14, 2020.
10. On June 19, 2020, the FFCTO was issued by the Principal Regulator due to the Issuer's failure to file the Required Filings.
11. The Issuer is seeking a partial revocation of the FFCTO for the purpose of taking the following corporate actions (the Corporate Actions):
a. entering into a new deferral agreement (the Deferral Agreement) with Land Breeze and Fullbloom Investment Corporation (Fullbloom), an affiliate of CIC, the material terms of which are as follows:
i. Land Breeze would agree to grant the Issuer a deferral of: (I) the 2020 June Deferral Amount and deferral fees of approximately US$75.2 million which were due and payable to Land Breeze on September 14, 2020, under the 2020 June Deferral Agreement; (II) the half-year cash interest of approximately US$8.0 million which is due and payable to Land Breeze on November 19, 2020, under a convertible debenture issued on October 26, 2009, in the current principal amount of US$250 million (the Convertible Debenture); (III) PIK interest of US$4.0 million which is due and payable to Land Breeze on November 19, 2020 (2020 November PIK Interest) under the Convertible Debenture; and (IV) the half-year cash interest of approximately US$8.0 million which is due and payable to Land Breeze on May 19, 2021, under the Convertible Debenture, and Fullbloom would agree to grant the Issuer a deferral of certain management fees payable to Fullbloom in 2020 and 2021 under an amended and restated cooperation agreement dated April 23, 2019 (Amended and Restated Cooperation Agreement). Pursuant to the Deferral Agreement, payment of the aforementioned amounts would be deferred until August 31, 2023;
ii. as consideration for granting the aforementioned deferrals, the Issuer would agree to: (I) pay Land Breeze a deferral fee equal to 6.4% per annum on the deferred amounts payable under the Convertible Debenture and the 2020 June Deferral Agreement, commencing on the date on which each such deferred amount would otherwise have been due and payable under the Convertible Debenture or the June 2020 Deferral Agreement, as applicable; and (ii) pay Fullbloom a deferral fee equal to 2.5% per annum on the deferred amounts payable under the Amended and Restated Cooperation Agreement, commencing on the date on which each such deferred amount would otherwise have been due and payable under the Amended and Restated Cooperation Agreement;
iii. commencing as of November 19, 2020, and until such time as the 2020 November PIK Interest is fully repaid, Land Breeze reserves the right to require the Issuer to pay and satisfy the amount of the 2020 November PIK Interest, either in full or in part, by way of issuing and delivering common shares from treasury in accordance with the procedures set out in the Convertible Debenture, provided that, on the date of issuance of 2020 November PIK Interest shares, the Issuer's common shares are listed and trading on at least one stock exchange.
iv. the Deferral Agreement would not contemplate a fixed repayment schedule for the deferred amounts and related deferral fees. Instead, the Issuer and Land Breeze would agree to assess in good faith the Issuer's financial condition and working capital position on a monthly basis and determine the amount, if any, of the deferred amounts and related deferral fees payable under the Convertible Debenture, the June 2020 Deferral Agreement or the Amended and Restated Cooperation Agreement that the Issuer is able to repay, having regard to the working capital requirements of the Issuer's operations and business at such time and with the view of ensuring that the Issuer's operations and business would not be materially prejudiced as a result of any repayment;
v. Land Breeze would agree to waive its rights arising from any default or event of default under the Convertible Debenture as a result of trading in the Issuer's common shares being halted on the TSX beginning as of June 19, 2020, and suspended on the HKEX beginning as of August 17, 2020, in each case for a period of more than five trading days;
vi. the effectiveness of the Deferral Agreement and the respective covenants, agreements and obligations of each party under the Deferral Agreement would be subject to the Issuer obtaining acceptance of the Deferral Agreement from the TSX (TSX Acceptance) and the Issuer obtaining approval of the Deferral Agreement from disinterested shareholders (Shareholder Approval) at a shareholders meeting. If the Issuer does not obtain TSX Acceptance and Shareholder Approval on or before February 26, 2021, or such later date as may be agreed to by the parties in writing, the Deferral Agreement shall automatically terminate and cease to be of any force and effect; and
vii. if at any time before the aforementioned deferred amounts and related deferral fees are fully repaid, the Issuer proposes to appoint, replace or terminate one or more of its Chief Executive Officer, its Chief Financial Officer or any other senior executive(s) in charge of its principal business function or its principal subsidiary, the Issuer will first consult with, and obtain written consent from Land Breeze prior to effecting such appointment, replacement or termination.
b. consummating the transactions contemplated by the Deferral Agreement, including the potential issuance of common shares by the Issuer in satisfaction of the 2020 November PIK Interest payable under the Convertible Debenture;
c. applying for TSX Acceptance of the Deferral Agreement as required by Section 501 of the TSX Company Manual; and
d. convening a shareholders meeting in order to obtain Shareholder Approval of the Deferral Agreement as required by Section 501 of the TSX Company Manual.
12. Each of the Corporate Actions would involve either a trade in securities of the Issuer or an act in furtherance of a trade in securities of the Issuer and cannot be completed without a partial revocation of the FFCTO.
13. The Issuer is of the view that the Deferral Agreement will: (i) enhance the Issuer's ability to continue as a going concern; (ii) address one of the material uncertainties and concerns that the Issuer's auditors have raised with respect to management's going concern assumptions in its 2019 Financial Statements; (iii) provide the Issuer with time to consider and explore measures to secure additional capital or to pursue other avenues of support with its major shareholders (including CIC); and (iv) allow the Issuer to continue working with its auditors to provide them with sufficient audit evidence to support its going concern assumptions in its 2019 Financial Statements and the issuance of an unmodified audit opinion in relation thereto and thereby allowing the Issuer to remedy its filing defaults and apply for a full revocation of the FFCTO at the earliest date possible.
14. Upon obtaining an unmodified audit opinion on the 2019 Financial Statements, the Issuer intends to apply to the Principal Regulator and the other securities regulatory authorities where cease trade orders are in effect for a full revocation of the FFCTO.
15. The Issuer will rely on the exemption contained in Section 2.37 of National Instrument 45-106 -- Prospectus Exemptions to enter into the Deferral Agreement with Land Breeze and Fullbloom.
¶ 6 Before entering into the Deferral Agreement with Land Breeze and Fullbloom, the Issuer will:
1. provide each of Land Breeze and Fullbloom with a copy of the FFCTO;
2. provide each of Land Breeze and Fullbloom with a copy of this Partial Revocation Order; and
3. obtain a signed and dated acknowledgement from each of Land Breeze and Fullbloom, which clearly states that the issuance of a partial revocation order does not guarantee the issuance of a full revocation order in the future.
¶ 7 Each of the Decision Makers is satisfied that a partial revocation order of the FFCTO meets the test set out in the Legislation for the Decision Maker to make the decision.
¶ 8 The decision of the Decision Makers under the Legislation is that the FFCTO is partially revoked solely to permit completion of the Corporate Actions.
¶ 9 October 29, 2020