Change of Control Notices Under Subsection 15.6(b)(iii) of the Ontario Power Authority's Feed-in (FIT) Contract: New Requirements for Meeting the Economic Interest Test
Jan 23, 2012
Section 15.6 of the Ontario Power Authority’s (OPA) FIT Contract deals with changes of control. As a general rule, the OPA must provide its prior written consent to any change of control that occurs before the project achieves commercial operation. Subsection 15.6(b)(iii) of the OPA's FIT Contract provides an exception to this general rule. This subsection allows a purchaser to acquire an economic interest of up to 75% in a renewable energy project without the consent of OPA provided:
- the OPA is notified of the change of control; and
- the original supplier to the OPA maintains an economic interest of at least 25% until the OPA either consents to a 100% change of control or the renewable energy project achieves commercial operation.
For most of 2011, the compliance process under Subsection 15.6(b)(iii) of the FIT Contract was straightforward. Within 10 business days of the change of control (i.e. the acquisition), the purchaser would complete and submit the OPA's prescribed Notice of Change of Control form for the purpose of notifying the OPA of the change of control. The purchaser would often also include an organizational chart with the notice setting out the structure before and after the closing of the transaction.
As of 2012, the OPA has now started to review some transactions that were completed in late 2011 with a much higher level scrutiny. The purpose of this review is to ensure that the acquisition structures do, in fact, satisfy subsection 15.6(b)(iii) of the FIT Contract and that the original supplier (i.e. the vendor) continues to maintain an economic interest of at least 25%. Failure to meet the economic interest requirement may lead to a reversal of the transaction (which has happened according to senior personnel at the OPA) and the termination of the FIT Contract by the OPA in a worst case scenario.
Below is a list of the new information that purchasers have recently been asked to provide to the OPA in addition to the documentation and information described above. These questions are generally posed after the OPA receives the Notice of Change of Control from the purchaser. However, there is nothing preventing a purchaser from addressing these requirements at the time the Notice of Change of Control form is submitted to the OPA. The applicant must provide the requested information before consent is granted. The OPA has reserved the right to add questions to the list and solicit more information from the developer.
Thus, although subsection 15.6(b)(iii) allows the purchaser to acquire an economic interest of up to 75% in a renewable energy project prior to commercial operation being achieved without the OPA's prior written consent, the OPA is now ruling as to whether consent should have been required, which is a disturbing new development that could put many past and future transactions at risk of being reversed.
The following is a list of the specific information that the OPA is now asking new suppliers to provide:
Description of the Interest in the Supplier:
The OPA requires that the nature of the interest in the supplier be disclosed along with a description of when the interest was created and when it will be terminated. Developers are to list any and all conditions that apply to the interest.
Description of Rights Associated With the Interest in the Supplier:
The OPA requires an explanation of how the interest gives the original supplier the right to receive or the opportunity to participate in any payments arising out the business activities of supplier. Furthermore, the applicant must indicate the timing of these payments and what conditions might attach to the payments.
Description of Business Risk Exposure:
The OPA requires an explanation of how the interest in the Supplier exposes the Original Controlling Person to a loss or a risk of loss.
Retained Interest Until Commercial Operation:
The OPA requires the applicant to describe how the interest that is retained by the Original Controlling Person, until Commercial Operation is achieved, amounts to at least a 25 % interest in the Supplier.
Ownership of the Supplier:
The applicant must provide a detailed analysis in the form of a diagram indicating the ownership of the supplier both pre and post transaction. This diagram must give a breakdown of all the entities that own an interest in the supplier and represent that ownership in percentage form.
Consideration of Acquired Interest:
The applicant must list amount, timing and any conditions relating to the payment by the new Control party to the Original Controlling Person or other relevant holder of an interest in the Supplier for the interest(s) in the Supplier being acquired by the new Control party, including without limitation whether, when and on what terms the Original Controlling Person will sell its retained interest of at least 25 percent.
For investors or developers who are seeking to structure and realize their transactions so that they meet the economic interest requirements of subsection 15.6(b)(iii) of the FIT Contract, it is strongly advisable to retain qualified legal counsel with transaction experience under the OPA’s FIT Program. We have this experience and were involved in 16 renewable energy acquisitions, financings and divestures under the FIT Program in 2011.
Sven Walker is a Partner at Dale & Lessmann LLP, a Toronto, Ontario, Canada-based full service law firm with specific focus on renewable energy law and in particular solar, wind and biogas energy law. Sven is legal counsel to a number of industry leading equipment and technology manufacturers, suppliers and installers, as well as investors, developers, purchasers, contractors, consultants and financing entities. To speak with Sven, please call 416-369-7848 or e-mail him at firstname.lastname@example.org