West Fraser Timber Co. Ltd.'s attempt to recover a $500,000 deposit following a failed attempt to buy Stuart Lake Lumber Co. Ltd. has been rebuffed by a B.C. Supreme Court Justice.
In a reasons for judgment issued last week, Justice Robert Punnett ruled Stuart Lake Lumber's owners were entitled to retain the deposit even though they ended up selling the sawmill and forest licence to Dunkley Lumber.
West Fraser came close enough to making the purchase that in Sept. 2009, they said publicly they had reached an agreement but eventually backed away once the sides bogged down in the details.
According to Punnett's ruling, shortly after the Stuart Lake Lumber sawmill in Fort St. James was shut down, West Fraser began negotiations in late 2007 to buy the company's forest licence to strengthen its long term log supply.
West Fraser remained interested when, in March 2008, the company's owners decided to sell the shares of the company instead of just the forest licence and drafted a letter of intent, which was eventually deemed to be the agreement, generally complying with Stuart Lake Lumber's list of "deal points."
They included West Fraser paying a purchase price of $13.5 million for the assets plus an amount equal to the net working capital and to make a $500,000 deposit, representing the "liquidated damages" Stuart Lake Lumber's owners would suffer if a sale did not go through.
But a dispute arose over how outstanding owner receivables of $1.1 million and $4.1 million worth of receivables from Columbine Investments Ltd. a real estate holding company owned by some of Stuart Lake Lumber's owners, should be treated in the deal.
West Fraser maintained they should be included as part of the $13.5 million in assets and asserted Stuart Lake Lumber's position that they should be part of the working capital was a breach of the agreement.
In deciding in favour of Stuart Lake Lumber, Punnett noted West Fraser was seeking a "clean" company with all non-essential assets stripped out prior to closing, including the sawmill, since it was seeking only the timber licence.
In that vein, Punnett found the funds invested in Columbine had no connection to the company's operations and similarly, the owner receivables were not assets used in the company.
"They were to become cash on hand and as a result part of working capital and to have increased the purchase price accordingly," Punnett wrote.
Punnett also found a letter of advice to Stuart Lake Lumber from accounting firm Deloitte and Touche did not amount to any material change to the agreement.
"It is West Fraser that is proposing a material change, not the defendants," Punnett said. "In my opinion, the Deloitte letter simply sets out normal closing mechanics that implement the terms of the letter of the agreement."
If the deal had closed in accordance with the agreement, the Columbine and owner receivables would have been paid out of the purchase price, "such that the net working capital was restored and the shares transferred to West Fraser unencumbered by any loans to the previous shareholders or other receivable assets," said Punnett. "In other words, West Fraser would have received what it bargained for."
Punnett also dismissed West Fraser's argument that its liability exposure would have been increased because the deal, as proposed, would be on the hope it would receive payment from Columbine and the shareholders.
Punnett found the risk to not have been "commercially unreasonable."
"A single factor mitigating the risk is the fact that the receivables in question were all owed by parties related to the transaction," Punnett continued. "No independent third parties were involved."
In ruling in favour of Stuart Lake Lumber, Punnett also found the owners were entitled to the accrued interest from the $500,000.
In its statement of claim, West Fraser also argued the agreement was breached because Stuart Lake Lumber failed to meet an Oct. 31, 2008 deadline for providing the information to close the deal but abandoned that position at the beginning of the hearing.
In November 2009, Dunkley Lumber, based in Strathnaver, about 70 kilometres south of Prince George, announced it bought Stuart Lake Lumber for an undisclosed amount and with no intention to re-open the mill. Up to that point, Stuart Lake Lumber, which traces its roots back to the 1940s, was owned by the Goodwin family.
At the time of the transaction, the licence held 202,000 cubic metres of annual long-term timber rights, about 4,500 logging truck loads of timber.
