A recent decision by a Master in Alberta confirms the principle that in selling an interest which is subject to a right of first refusal (ROFR), a vendor must act in good faith and avoid taking actions which cause the rights of the ROFR-holder to become meaningless.


ConocoPhillips Western Canada Partnership (CP) decided to sell various petroleum and natural gas assets including some lands which were subject to a ROFR in favour of Bearspaw Petroleum Ltd. (Bearspaw). Pengrowth Corporation was the successful bidder at a price of approximately $1 billion. The transaction was structured such that CP conveyed the assets to four subsidiaries of CP, whose shares were then purchased by Pengrowth.

On the agreed closing date CP issued Notices of Disposition of Interests to Bearspaw in respect of the ROFR lands. The notices did not include values for the interests transferred and did not refer to Bearspaw's ROFR rights. Bearspaw requested ROFR notices from CP but none were issued. CP took the position that the transaction fell within an exception to the ROFR clause because the sale of the ROFR lands was between affiliated companies.

Bearspaw commenced an action seeking to set aside the transfers or an order directing that ROFR notices be provided to it in accordance with the agreements.

Pengrowth then sent Bearspaw a "business settlement proposal" that was described as a ROFR notice but which contained a statement that, in Pengrowth's view, the ROFR had not been triggered by the transaction. The proposal included a purchase price for each of the particular interests that made up the ROFR lands based on values determined by Pengrowth after the closing. Subsequently, Bearspaw requested the basis of the allocation of value set forth in the notices and filed a notice of motion requesting disclosure by Pengrowth of specific valuation information. 13 Pengrowth cross-applied for summary dismissal arguing that a ROFR notice had already been issued.


Master Hanebury reviewed the case law on summary dismissal applications and stated that if Pengrowth could demonstrate that the "business settlement proposal" included notices which complied with the ROFR clause of the agreements between Bearspaw and CP, the relief sought by Bearspaw would have been already provided, leaving its claim with no prospect of success.

The agreements between Bearspaw and CP provided that the price in the ROFR notice would be the price offered by the third party purchaser. They did not however expressly contemplate a situation where the ROFR lands made up only a portion of a package sale, sold by a transfer of shares, with a sale price that did not break out the value of the ROFR lands.

Master Hanebury reviewed prior case law, including the Ontario decision in GATX Corp. v. Hawker Siddeley Canada Inc.14 and the Alberta Court of Appeal's decision inChase Manhattan Bank of Canada v. Sunoma Energy Corp. 15("Chase"), the latter of which concerned the enforceability and pricing of a ROFR in the context of a package sale.

As summarized by Master Hanebury, the principles which emerged from Chase are as follows:

  1. A package sale will trigger ROFR rights even when the ROFR agreement does not contemplate such a sale.
  2. With a package sale, the vendor owes a duty of good faith to the ROFR holder in setting a bona fide estimate of the value of the portion of the package subject to the ROFR.
  3. It is not obvious that a duty of good faith is owed by the purchaser in a package sale to the holder of a ROFR over a portion of the package subject to the ROFR.
  4. Regardless, the ROFR-holder challenging the issuance of proper ROFR notices must establish that the purchase price allocated to the part of the parcel subject to the ROFR is not a bona fide estimate of their value. 16

Based on these principles and the factual situation before her, Master Hanebury held that Pengrowth had to satisfy the court that it had offered the ROFR lands at the price at which they would have been offered originally under the ROFRs. However, evidence was presented that Pengrowth had bumped up the purchase price contained in the notices to Bearspaw in order to keep Pengrowth "whole" in respect of a potential tax loss faced by Pengrowth. Therefore, as the evidence was insufficient to show that Pengrowth's settlement offer was in accordance with what would have been offered had the ROFR notice been provided at the time of the sale by CP, there was a genuine issue to go to trial.


This decision confirms that a vendor must act in good faith and proceed in a manner which ensures that the rights of the ROFR-holder are not left meaningless. It will often be appropriate for the vendor of a land package to use the price which the purchaser has allocated to the ROFR lands as the price included in the ROFR notice. However, any adjustment to the valuation which is made post-closing may be suspect. As Bearspaw v. Conoco-Phillips is only a master's decision dismissing a summary judgment application, it remains to be decided whether a vendor may in good faith depend upon a valuation done by a purchaser after a transaction has closed, particularly where the values are adjusted in order to hold the purchaser "whole".