Calfrac cancels AIMCo bonds after miscounting proxy votes crucial in its fight against Wilk Bros

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CALGARY — Calfrac Well Services Ltd. is cancelling bonds that Alberta’s pension fund manager bought in the middle of a contentious proxy fight late last year, after the oilfield services company disclosed it had miscounted votes at a special shareholders meeting six months ago.

Calgary-based fracking company Calfrac announced Monday that the Toronto Stock Exchange approved its request to cancel $1 million of bonds owned by the Alberta Investment Management Corp. (AIMCo), the province’s pension fund manager.

The Financial Post has confirmed that AIMCo bought roughly $1-million-worth of 1.5 lien notes, which are bonds eligible to be turned into shares, from Calfrac in the middle of a vigorously fought proxy fight between Calfrac and Texas-based Wilks Bros LLC, which presented what many analysts and shareholder advisory firms called a superior offer.

Other investors that bought the 1.5 lien notes include Matco Group, which was Calfrac’s largest shareholder at the time, and G2S2 Capital, led by oilpatch investor George Armoyan, who now sits on Calfrac’s board of directors. AIMCo’s ownership of the notes was not known until last month and was confirmed to the Financial Post last week.

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Both Calfrac and AIMCo has said the $1-million bond purchase was not material to the recapitalization. AIMCo was the company’s third-largest shareholder at the time and its vote in the transaction helped swing the deal in Calfrac’s favour — and helped sink Wilks’ proposal.

An information circular published in August shows AIMCo’s bond purchase should have rendered its votes ineligible for counting at a special shareholders meeting on Oct. 16. because ownership of the bonds would have rendered AIMCo a “related party,” and therefore ineligible to vote.

At that meeting, AIMCo voted in favour of Calfrac’s debt-restructuring proposal and against a proposal by Wilks Bros. The company’s votes helped push Calfrac’s proposal over the top, with 57 per cent of shareholder support.

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When AIMCo’s vote is discounted because of its bond purchase, Calfrac only received 39 per cent of eligible votes, the company disclosed in a press release March 12.

“Outside of what’s in the press release, we don’t want to get into who screwed up,” said Scott Treadwell, Calfrac vice-president, capital markets and strategy.

AIMCo pointed to Calfrac’s proxy agent as the source of the problem and said in an emailed statement to the Financial Post that it was eligible to vote in all aspects of Calfrac’s recapitalization transaction.

AIMCo spokesperson Dénes Nemeth said the pension fund’s investment was held in a custodial account, which was “regrettably overlooked by Calfrac’s proxy agent during the vote tabulation process.”

“Upon learning of the oversight and the impact on Calfrac’s shareholder voting, subject to obtaining regulatory approval, AIMCo is in agreement with the proposal to cancel the transaction to remedy the situation and in support of orderly market operations,” Nemeth said.

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The Financial Post has reviewed the term sheet of the 1.5 lien notes, which indicates each of those bonds can be converted into a share of Calfrac at a price of $1.33 per share.

Calfrac’s current share price is $3.85 per share — which means that AIMCo has agreed to give up a roughly 189 per cent return on its bond holdings at current prices.

One market observer said they have never seen a situation where a publicly traded company has had to find a way to undo a transaction completed months earlier because it miscounted votes from a special shareholders meeting.

“To me it just adds to the intrigue of a storied couple of years for Calfrac. It’s very unusual, to be honest,” said Ari Pandes, associate professor of finance at the University of Calgary Haskayne School of Business.

“I find it odd that the company didn’t know that they had purchased the notes,” Pandes said.

One Calfrac investor, who spoke on condition of anonymity given potential legal challenges over the deal, called the situation “a joke” and “complete amateur hour.”

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The person said Calfrac should have known which accounts belonged to AIMCo and said it’s incumbent on both Calfrac and AIMCo to disclose when they became aware of the problem.

AIMCo’s Nemeth said the pension fund manager became aware of the issue on Feb. 19.

“AIMCo had no prior knowledge or understanding of any error in the vote tabulation,” AIMCo’s Nemeth said. “Having been made aware of the issue, and after analysis and discussion with Calfrac, AIMCo indicated it would be agreeable to Calfrac’s proposal to cancel only AIMCo’s subscription in order to minimize disruption to shareholders and other market participants, subject to Calfrac obtaining any required approvals.”

Calfrac first made a court filing related to the problem on March 1, then announced the extent of the problem in a March 12 press release.

Calfrac’s Treadwell said the company is discussing the matter with regulators and the courts.

Wilks Bros., whose recapitalization transaction may have succeeded if AIMCo’s votes were counted properly, did not respond to multiple requests for comment on the situation. The holding company is owned by billionaire brothers Dan and Farris Wilks.

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