Japan’s material adverse change: from financings to M&A

March 23, 2011

By John Mackie

TORONTO, March 23 (Westlaw Business) – Japan’s nuclear difficulties must be mourned, without qualification. At the same time, the business and legal communities cannot stand still, as they deal with several quite-unexpected ripple effects. Both M&A and capital markets transactions have suffered, and disclosure practices are now coming under review. Set against a backdrop of plummeting stock prices, companies in nuclear-related industries are caught in their own battle to sustain themselves.

The woes of the nuclear industry are but a part of the difficulties that began for so many on March 11, 2011. On this memorable date, Japan was devastated first by a crippling earthquake, then by a massive tsunami, and then further by the threat of nuclear leak or, worse yet, meltdown at several damaged nuclear facilities.

The impact on the nuclear industry in the immediate aftermath of the Japanese crisis has been dramatic. Stock prices for uranium mining companies have plummeted. Some companies have local operations, and must confirm the well-being of colleagues and families. Others have been left without key inputs to their supply chain.

The ramifications of the situation on public issuers in the nuclear industry and their counsel are widespread. Several issues are worth considering in light of the events in Japan – the extent to which prior disclosures addressed the potential of such an event, the impact of such events on financings, the impact on M&A transactions and the prospects of further regulatory action.


Starting with the latter first – the reaction of various governments has been swift. China and Venezuela announced that they have frozen plans to build more nuclear power plants. The Canadian Nuclear Safety Commission has called for an inspection of all major facilities in Canada.

In Southeast Asia, Indonesia, Malaysia, Thailand and Vietnam have re-affirmed intentions to proceed with nuclear energy development despite recent events. In China, however, Japan’s ongoing crisis at the Fukushima Daiichi plant has had an immediate chilling effect. On March 16, China’s Environmental Protection Agency announced a nationwide suspension of nuclear plant approvals, bringing the country’s ambitious nuclear energy plans to a screeching halt. Chinese government officials have indicated that an overhaul of safety regulation for nuclear projects will be implemented before the suspension is lifted.

Home-grown Chinese power firms may imminently feel a pinch. As part of the country’s push for alternative energy developments, China’s government previously encouraged large domestic players to explore nuclear projects. Last year, China Huaneng Group, one of the leading power companies in the PRC, announced plans to operate gas-cooled nuclear reactors in eastern China. Using domestic technology, the facilities were originally scheduled to commence operation in 2013.

Similarly, plans by China National Nuclear Corporation to invest CNY 800 billion (US$120 billion) into nuclear energy projects by 2020 may also be affected by regulatory changes. While CNNC has yet to comment on potential effects of the suspension on its operations, the state-owned enterprise confirmed earlier this month that it is preparing to list its subsidiary, CNNCD Nuclear Power Co Ltd, in Hong Kong later this year.

Other significant transactions have suffered similarly swift blows. These have exposed many seemingly-unrelated companies to the risks stemming from the situation in Japan. As one example, consider those in the midst of financings.


One such company is intermediate uranium producer Denison Mines. On Feb. 23, Denison announced a $65 million bought deal financing – a transaction which was scheduled to close on March 15. The company cleared a final prospectus in respect of the transaction on March 8. Prior to closing, however, the Japanese crisis hammered Denison’s share price, which dropped nearly 25 percent from the evening of March 11 to the following day. Fortunately for Denison, the deal closed anyway, despite the fact that the underwriting agreement contained both a disaster out and a significant adverse effect clause in favour of the underwriters.

Whether the underwriters in the Denison deal concluded the Japanese crisis would only have a temporary impact, or other factors were at work, is unknown. Of interest, however, is the fact that Denison’s largest shareholder, Korea Electric Power Corporation (KEPCO) was entitled to acquire shares at the same offering price in order to maintain its existing shareholding level, but has not yet indicated whether it intends to exercise its anti-dilution right.

Macusani Yellowcake Inc (“yellowcake” being a form of uranium powder) of Toronto appears to have been less fortunate than Denison. In February, the company filed a preliminary prospectus in respect of a best efforts offering of a minimum of $10 million in units, to fund further exploration of the Company’s properties on the Macusani Plateau in southeastern Peru.

Unfortunately for Macusani, when the Japanese crisis dropped the company’s share price 23 percent overnight and it continued to decline, it apparently became necessary to re-price the deal in order to convince purchasers to buy in. As a result, on March 17, the company filed a final prospectus at the revised pricing. The new pricing contemplates as many as 4.8 million additional shares being issued in order to achieve the $10 million minimum.

Another company that has seen the Japanese crisis impact its financing efforts is Energy Fuels Inc (EFI), a uranium and vanadium development company focused on the rehabilitation of formerly producing mines in North America. On Feb. 25, the company announced it had filed a preliminary prospectus in connection with a best efforts offering of units. Like Macusani, however, the Japanese crisis hit EFI’s stock price hard, resulting in a decline of more than 40 percent by end of day on March 16. When the company priced the offering the following day, it was forced to come out well below pre-March 11 trading values.


M&A has also been dealt a blow, with a case in point being Uranium One. The company’s controlling shareholder JSC Atomredmetzoloto (ARMZ) has been seeking to acquire emerging Australian uranium miner Mantra Resources in a A$1.2 billion deal, and had entered into a put/call option agreement withUranium One which would have allowed the Canadian company to acquire Mantra at its option (see JV Watch: Uranium One and ARMZ Adopt a New Mantra).

On March 16, however, Uranium One announced that ARMZ had notified Mantra that it believed the Fukushima situation was “likely to have a material adverse effect on the business, results of operations, assets or liabilities, financial position or prospects of Mantra,” and as a result, one of the conditions precedent to their transaction was not capable of being satisfied. ARMZ further indicated that it intends to continue discussion with Mantra. Reuters reported on March 21 that the companies had reached a revised set of agreements.

Ironically, Denison Mines, which seems to have avoided being punished by the crisis in connection with its recent financing, is also in the midst of a transaction. In February, the company announced it had agreed to acquire Australian uranium producer White Canyon Uranium for $57 million. That offer includes a condition that there be “no material adverse change or prescribed occurrence in respect of White Canyon.”

With the White Canyon deal expected to be completed in the second quarter of 2011, it will be interesting to see whether the deal proceeds as is or whether Denison relies on the material adverse change (MAC) clause to walk away or to renegotiate the purchase price. If it were to succeed in the latter, after successfully avoiding a change in the offering price under its bought deal, it would be a classic case of having your cake and eating it too.

Another deal that could be impacted by the Fukushima situation has been brewing for some time – the sale by the Canadian federal government of Atomic Energy of Canada Limited (AECL). The nuclear technology and services company is the manufacturer of the CANDU product line of reactors operating in a number of countries worldwide. Most recently, a joint venture between engineering and construction firm SNC Lavalin Group and the Ontario Municipal Employees Retirement System (OMERS) pension plan has been rumoured as a purchaser, though it remains to be seen whether that has changed in light of the events in Japan.

The ripples of Fukushima extend even further. Should the potential sale of AECL be hindered or halted, it could in turn have significant implications for Ottawa-based Nordion, which offers medical isotopes, targeted therapies, and sterilization technologies. As noted in Nordion’s Annual Information Form:

Nordion’s principal source of Mo-99 is the existing NRU reactor located in Chalk River, Canada, which is owned and operated by AECL. The NRU reactor is currently licensed until 2011… While the Government of Canada has publicly stated a commitment to support license renewal, there can be no assurance of renewal, or of the time period of such a renewal. It is critical that AECL obtain an extension of the site license to maintain supply of medical isotopes.


Even for those not in the middle of a significant deal, Fukushima’s lessons must be learned, as disclosure issues remain for all public companies. While all power plants carry some risk of harm to persons or property, nuclear power plants are viewed as unique due to the potential for exposure to radiation. Three nuclear power plant accidents in particular have drawn global attention to the risks of nuclear power — the partial meltdown in 1979 at the Three Mile Island generating station in Pennsylvania, the Chernobyl disaster in 1986, and now the incidents at several generating stations in Japan.

For issuers in the industry, it is worth examining current disclosures to ensure appropriate cautions have been provided to investors regarding the risks of an accident at a nuclear facility. As an example, consider Uranium Participation Corp of Toronto (UPC).

A somewhat unique version of the commodities stockpiling model, UPC invests directly in uranium, which it acquires and stores at licensed uranium conversion or enrichment facilities in Canada, France and the United States. As of Jan. 31, the company held approximately $1 billion in uranium. In reviewing the risk factors to which its operations are subject, UPC addresses the potential of an accident directly:

An accident at a nuclear reactor anywhere in the world could impact on the continued acceptance by the public and regulatory authorities of nuclear energy and the future prospects for nuclear generators, which could have a material adverse effect on Uranium Participation Corp.

Certainly UPC recognizes the potential impact an accident could have on its prospects. The same holds true for Cameco of Saskatchewan, one of the world’s largest uranium producers, which supplies product to nuclear energy plants worldwide.

As Cameco notes in its Annual Information Form, “Although the safety record of nuclear reactors has generally been very good, there have been accidents and other unforeseen problems in the former USSR, the United States and in other countries.” In addition to “loss of life, property damage and environmental damage,” an accident or other significant event “could result in increased regulation, less public support for nuclear fueled energy, lower demand for uranium and lower uranium prices.”

Indeed, the potential impact of the events in Japan on uranium prices and demand has already been noted by U.S.-based Uranium Energy Corp. The company notes that the spot market for uranium has seen “seesaw movement,” with a current downward trend as a result of several factors, including the “unforeseen developments at the Fukushima Nuclear Power Plant”.

Another company which directly addressed the Fukushima situation in recent disclosures is uranium production company Paladin Energy of Perth, Australia. Responding to “numerous enquiries” regarding the impact of the events in Fukushima and its business in Japan, Paladin commented as follows:

Paladin continues to believe that the medium and long-term outlook for nuclear power remains positive and that recent events could further exacerbate the supply situation, ironically putting Paladin in an even better position with respect to global demand. There are more than 440 nuclear reactors operating safely around the world and growth of the fleet is assured with the 62 reactors currently under construction, with further expansion forecast from the emerging nuclear economies.

As Japan recovers from the devastation of March 11 and the days that have followed, businesses worldwide will be faced with new challenges. For those in the nuclear power industry, a careful examination of public disclosures and the terms associated with any financings or M&A transactions is certainly something to prioritize.

Finally, regulators’ steps matter tremendously. According to the World Nuclear Association, nuclear power represents 20 percent of all power generation in the U.S. In France, the number is 75 percent, while Canada is at 15 percent, and both Russia and the U.K. are at 18 percent. The European Nuclear Society reports that, as of Jan. 19, there were 442 nuclear reactors in operation worldwide, with another 65 under construction. The U.S. has the largest number of reactors of any country by far, at 104, with France and Japan next on the list, at 58 and 54 respectively. China presently has 19 reactors in operation, but is by far the most active adopter, with 29 under construction. As a result, both the moves of regulators and those of private sector actors, globally, much be watched with close attention.

(This article was first published by ThomsonReuters’ Westlaw Business Currents, a leading provider of legal analysis and news on governance, transactions and legal risk. Visit Westlaw Business Currents online at http://currents.westlawbusiness.com.)

(This article was first published by ThomsonReuters’ Westlaw Business Currents, a leading provider of legal analysis and news on governance, transactions and legal risk. Visit Westlaw Business Currents online at http://currents.westlawbusiness.com.)

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