Directors of Oil and Gas companies are currently faced with challenging market conditions. This presentation will act as a introductory guide to directors about the options available to improve the position of their companies.

1. Corporate Governance in Challenging
Times – Practical Tips for Directors in the
Oil & Gas Sector
February 2, 2016

2. Introduction
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• Directors of oil and gas companies, or those of companies with material
exposure to the Energy sector, face unprecedented challenges as they seek to
guide their enterprises through a period of substantial market uncertainty
• While the challenges corporate directors face in the current economic
environment are significant, the duties that they owe and the standards to
which they are subject have not changed
• Directors in the energy sector should understand what their duties are in the
circumstances and the positive steps they can take to ensure that they meet
their duties and shield themselves from personal liability
• They should also understand the options that may be available for the
enterprises they manage to restructure or recapitalize to better position
themselves to survive current market conditions

3. DIRECTORS’ DUTIES IN SITUATIONS OF FINANCIAL DISTRESS
Fiduciary Duties
• Directors have fiduciary duties to act honestly and in good faith with a view to
the best interests of the corporation
• Fiduciary duties are owed to the corporation – they do not shift to creditors,
even when the corporation is in the vicinity of insolvency
• However, directors may consider the interests of various stakeholders in
determining whether they are acting in the corporation’s best interests
Affected stakeholders can include creditors, shareholders, employees,
suppliers and the environment
• Directors should not favour the interests of one group of stakeholders over
others. However,
It is recognized, as a practical matter, that creditors may have increased
leverage when a corporation is in financial distress
And may hold enhanced contractual rights if there has been an event of
default under debt instruments
What to Do
• Directors will comply with their fiduciary duties if they undertake an honest and
good faith attempt to address the corporation’s financial problems 3

4. DIRECTORS’ DUTIES IN SITUATIONS OF FINANCIAL DISTRESS (Cont.)
Duty of Care
• Directors are also subject to a duty of care
• The duty of care imposes an objective standard that requires directors to act
carefully in an informed and considered manner
• In discharging the duty of care, directors must exercise the care, diligence and
skill that a reasonably prudent person would exercise in comparable
circumstances
• What to Do
• Meeting the duty of care can be achieved by directors who:
devote reasonable time and attention to the affairs of the corporation; and
exercise informed business judgement
• Directors should review and take active steps to inform themselves of all
material information and should actively question management and advisors
with respect to the corporation’s financial viability and options to raise
additional capital or to recapitalize or restructure
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5. DIRECTORS’ DUTIES IN SITUATIONS OF FINANCIAL DISTRESS (Cont.)
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• Directors should engage independent experts when required
• The board’s decision making process should be documented in order to allow
directors to demonstrate that they have exercised care, diligence and skill, and
have acted in an informed and considered manner, in reaching their decisions

6. DIRECTORS’ DUTIES IN SITUATIONS OF FINANCIAL DISTRESS (Cont.)
The Business Judgement Rule
• The business judgement rule provides substantial protection for directors’ decisions
• In considering whether directors have complied with their duties, courts generally
apply the “business judgement rule” if the decision-making process meets certain
requirements
• Pursuant to the business judgement rule, courts defer to directors’ business decisions
so long as they lie within a range of reasonable alternatives and are taken:
in good faith, and
in the absence of a conflict of interest,
provided directors undertook a reasonable investigation, considered the alternatives
and acted fairly
• Where directors meet the requirements of the business judgement rule, courts will
not substitute their view for that of directors even if subsequent developments show
directors did not make the best decision
What to Do
• Running a thorough process, engaging the appropriate advisors and documenting the
alternatives considered and decisions taken, will be important elements in
demonstrating that the applicable duties and standards have been met and that
appropriate business judgement was brought to bear
• It will also be important to demonstrate that the board acted in an independent
manner and in the absence of any conflicts of interest 6

7. DIRECTORS’ DUTIES IN SITUATIONS OF FINANCIAL DISTRESS (Cont.)
Failure to Meet Duties
• Directors that fail to meet the duties to which they are subject (fiduciary
duties and the duty of care) risk exposure to material and negative
consequences including:
Loss of recourse to indemnification
Derivative actions brought by shareholders for breach of duty
Personal liability for debts or obligations of the corporation
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8. DIRECTORS’ DUTIES IN SITUATIONS OF FINANCIAL DISTRESS (Cont.)
Oppression
• Persons and entities that believe they have been unfairly dealt with by a corporation
may claim for oppression
• Creditors, shareholders or other parties may bring a claim for oppression if directors
act in a manner that:
is oppressive;
is unfairly prejudicial to the complainant; or
unfairly disregards their interests
• A court may find oppression even in circumstances where directors have complied
with their fiduciary duties
• As a practical matter, when a corporation is in the “vicinity of insolvency”, the
potential for unfair prejudice or unfair disregard for the interests of creditors is
enhanced
• If a court finds oppression, it may make any order it considers appropriate
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9. DIRECTORS’ DUTIES IN SITUATIONS OF FINANCIAL DISTRESS (Cont.)
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What to Do
• The oppression remedy is very broad and equitable in nature. It allows the
court to enforce not just what is legal, but also what is “fair”.
• Much of the guidance as to the types of actions that constitute oppression
comes from caselaw.
• Directors may wish to obtain advice from counsel as to whether an action
that is being contemplated could be viewed as oppression prior to making
the decision to take such action
• In considering actions that are in the best interest of the corporation, the
rights and reasonable expectations of creditors should be averted to and the
board’s deliberations in this regard should be documented

10. DIRECTORS’ DUTIES IN SITUATIONS OF FINANCIAL DISTRESS (Cont.)
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Independent or Special Committees
• Directors owe their duties to the corporation as a whole, and not to any particular
stakeholder
• Accordingly, where directors or members of management are substantial shareholders
or creditors of the corporation, the board should give due consideration to
establishing an independent or special committee
• An independent or special committee can help demonstrate that decisions were taken
“in the absence of a conflict of interest” which is an integral component of the
business judgement rule
• Independence from management may result in greater credibility with creditors
where management actions are viewed as having contributed to financial distress
• A subset of the board may be better positioned to act quickly when circumstances
require
• A subset of the board also allows those directors with experience and expertise in
dealing with financial difficulties to focus on financial issues and restructuring options
• Establishing a restructuring committee facilitates the goals of minimizing disruption to
the business and containing costs while identifying the available strategic options

11. PERSONAL LIABILITY OF DIRECTORS
Directors can be personally liable for damages when duties are breached or for certain
corporate liabilities when the corporation does not pay or perform
Statutory Liabilities
• Statutory liabilities for which directors are, or can be, personally responsible include:
Environmental liabilities
Failure to make contributions to pension plans when due
Obligations to pay wages to employees and to withhold and remit source deductions
(income tax, CPP, EI)
Obligations relating to vacation pay
Obligations to pay GST
• Some of these liabilities (such as wage and vacation pay liability) are strict and others (such
as source deductions and GST liability) are subject to a due diligence defence
• Diligence requires directors to take steps that reasonably prudent persons would take in
comparable circumstances
• Directors are only liable for amounts accrued during the time that they were actually
directors
Other Liabilities
• Directors can also be exposed to personal liability in connection with derivative actions or
claims of oppression 11

12. PERSONAL LIABILITY OF DIRECTORS (CONT’D)
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Environmental Liabilities of Directors
• Directors can become liable for environmental offences and other liabilities of the
corporations they supervise
• In People’s Department Store v. Wise, the Supreme Court of Canada held that directors
of a corporation owe a duty of care to its stakeholders which includes the environment
• In Alberta, directors can be personally liable for offences committed by the corporation
under the Environmental Protection and Enhancement Act and the Water Act
o Personal liability can be imposed where the director (or officer or agent)
“directed, authorized, assented to, acquiesced in or participated in the
commission of the offence
• To date, we are not aware of any instance where a Canadian court has imposed
environmental liability based on the duty of care set out in the Wise decision, however,
in Alberta directors have been found liable for environmental offences of the
corporations they supervise (generally in circumstances where they are also a principal
of the corporation).

13. PERSONAL LIABILITY OF DIRECTORS (CONT’D)
13
• We believe that in the current economic climate and in light of the change in
government at the federal and provincial level, the potential that directors could
become personally liable for environmental offences and other liabilities of the
corporations they supervise has increased.
• Total reclamation and abandonment liabilities related to oil and gas activities of the 811
operators registered under Alberta’s Licensee’s Liability Rating Program (“LLR”) are
estimated to be $36.4 billion as of December 2015 (being a present value estimate of
future obligations)
• Such obligations represent the industry’s second largest liability (after secured and
unsecured debt)
• In the event that a substantial number of provincial oil and gas companies were to
become insolvent, the potential for significant unfunded liabilities would exist

14. LICENSEE LIABILITY RATING (LLR) PROGRAM
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• The operation of the LLR program may limit the options available to boards to sell assets
and raise additional capital on a going concern basis
• The LLR program is administered by the Alberta Energy Regulator (“AER”) to reduce the
likelihood that costs to suspend, abandon, remediate and reclaim a well, facility or
pipeline will be borne by the public of Alberta should an operator become defunct
• For every licensee regulated by the AER, a Liability Management Rating (“LMR”) is
calculated every month by comparing the licensee’s eligible deemed assets to its
deemed liabilities.
• If deemed liabilities exceed the licensee’s deemed assets, the licensee must provide the
AER with a security deposit covering the difference
• An LMR assessment is also conducted on receipt of a license transfer application
• Transfers that result in a licensee’s LLR rating falling below one will not be approved
unless additional security is provided

15. LESSONS FROM REDWATER INSOLVENCY PROCEEDINGS
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• There is an important case working its way through the Alberta courts that will
determine the rights of the Province relative to those of secured creditors in connection
with the transfer of licenses and reclamation and abandonment costs.
• Redwater Energy Corp. (“Redwater”) is an insolvent oil and gas company with 127 AER
licenced assets that is subject to proceedings under the Bankruptcy and Insolvency Act
(Canada) (“BIA”)
• ATB is a secured creditor of Redwater and Grant Thornton Limited (“Receiver”) has been
appointed as the court-appointed receiver and trustee in bankruptcy over the assets of
Redwater
• Only some of Redwater’s assets are considered to be marketable
o 20 valuable wells out of 127 licensed assets
o Bad assets have abandonment costs approx. ten time their asset value
• Receiver disclaimed the bad assets, and sought to sell goods assets to maximize
proceeds to ATB, as secured creditor;
o bad assets would be orphaned with no provisions made by Redwater or the
Receiver for reclamation
• AER issued abandonment order for the bad assets, and has claimed that
Receiver/Redwater is statutorily liable for end of life obligation on licensed assets and
should either package the asset sale to maintain its LLR rating to meet those obligations,
or post cash security to AER

16. LESSONS FROM REDWATER INSOLVENCY PROCEEDINGS (Cont.)
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Competing Legislation
• The BIA empowers a receiver appointed under such statute to conduct a sales process to
maximize proceeds to creditors
• Under the Oil and Gas Conservation Act (Alberta) (“OGCA”) – A licensee has abandonment and
reclamation obligations for licensed oil and gas assets at end of life, as a public and statutory
duty inherent in a license to drill
• Receiver and ATB argue:
o BIA is paramount to OGCA because it is federal legislation
o AER’s claims against Redwater are financial in nature (posting security), not regulatory or
in furtherance of a public duty
o AER is an unsecured creditor ranking behind ATB in accordance with BIA priority scheme,
and the OGCA does not grant AER a priority claim over proceeds from sale of good assets
• AER, the Orphan Well Association and CAPP argue:
o Receiver is included in OGCA definition of “licensee”, and therefore subject to same
abandonment obligations as Redwater (may not disclaim bad assets)
o Licensee’s obligations are a public duty inherent in license to drill and must be enforced
to protect the oil and gas industry and Alberta’s public interest
o Receivership should not give a company more favourable abandonment obligations than
it had when it was solvent
o AER’s claim is not a claim to be proved in bankruptcy

17. LESSONS FROM REDWATER INSOLVENCY PROCEEDINGS (Cont.)
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• The case was heard on December 16-17 before Justice Wittman of the Alberta Court of
Queen’s Bench but as of December 20, 2015, no decision has been issued
• The decision in Redwater will have significant implications for directors of oil and gas
companies that are in the vicinity of insolvency
• If the court finds in favour of the AEU, boards will need to ensure that abandonment
obligations in respect of all of a corporation’s licensed assets are provided for when
structuring an asset sale transaction
• Moreover, in the event that the court concludes that a licensee has a “public duty” to
meet abandonment and reclamation obligations, we believe that directors could be
exposed to liability in circumstances where the corporation did not meet that duty and
directors acquiesced or participated in decisions that resulted in such outcome

18. PROTECTING THE BOARD
• Directors should take certain steps to mitigate personal liability when the corporation
is experiencing financial distress
• The best defence is the implementation of procedures and the retention of
independent advisors to ensure that directors’ duties are met and their decisions are
protected by the business judgement rule
• However, there are a number of practical steps that can be undertaken to mitigate
directors’ personal liability
Existing D&O insurance should be reviewed to ensure that there are no gaps in
coverage and that coverage is in place for a reasonable period of time
Existing indemnification arrangements between the corporation and its directors
should be reviewed to ensure they are “state of the art”
If such arrangements do not meet this standard, new indemnification
agreements should be put in place
• Consideration should be given to segregating corporate funds to pay for
renewals/extensions of D&O insurance or run-off as well as to satisfy other liabilities
for which directors can be personally liable
• Obtaining director protections and court-ordered charges in any court supervised
restructuring process also provides substantial protection
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19. RECAPITALIZATION AND RESTRUCTURING
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• The current low price environment for hydrocarbon products will cause many
companies in the Canadian Oil and Gas sector to experience significant financial
pressure
• Some companies in the sector will likely have to undertake some form of
recapitalization or restructuring to continue as a going concern
• Options exist under different statutes to effect a recapitalization or restructuring
Recapitalization
• A recapitalization involves restructuring the enterprise’s mix of equity and debt to
create a capital structure that is more viable for the long term. It can involve
different components such as issuance of additional equity, swapping debt for
equity, issuance of additional debt, reducing interest rates or extending maturities.
It typically involves a negotiated process with creditors by which an enterprise
seeks to reduce its aggregate obligations in respect of outstanding indebtedness
• A recapitalization can be undertaken on a going concern basis or where the
enterprise is insolvent. Recapitalizations of solvent enterprises can be undertaken
as a plan of arrangement under applicable corporate statutes or as part of a CCAA
process where there are questions as to the enterprise’s solvency. In certain
circumstances a recapitalization can takes place under the corporate statute even
when the entity is insolvent.

20. RECAPITALIZATION AND RESTRUCTURING (Cont.)
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• Usually limited to a balance sheet restructuring and not to minimize or
eliminate obligations relating to unfavourable contracts
Restructuring
• Restructuring in the context of financially distressed enterprises can be
undertaken through a variety of techniques that are similar to a
recapitalization
• A restructuring is often pursued as an alternative to bankruptcy and can be
undertaken with or without court protection although in our experience, it is
often pursued within the context of the Companies’ Creditors Arrangement
Act (“CCAA”)
• A CCAA restructuring provides the enterprise with the ability to stay actions
by creditors while it pursues a restructuring and provides flexibility to deal
with unfavourable contracts or other obligations such as employee or lease
matters

21. RECAPITALIZATION AND RESTRUCTURING (Cont.)
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Strategic Considerations
• Electing to pursue a restructuring or recapitalization gives rise to a host of strategic
considerations and professional advisors should be engaged early in the process
• Companies considering a recapitalization or restructuring will need to be proactive
in identifying available options, and engaging with their stakeholders if they wish to
retain control over their assets and be the sponsor of the solution
• In addition, any recapitalization or restructuring requires capital to fund the
process and different options exist to secure the required funds
• The appropriate strategy will be highly dependent on the corporation’s particular
circumstances
• A successful recapitalization or restructuring is dependent on obtaining the
requisite level of affected stakeholder support

22. RECAPITALIZATION AND RESTRUCTURING (Cont.)
• Accordingly, a pro active and well timed engagement strategy should form part of
any plan
• Corporations seeking stakeholder support for a plan should be able to
demonstrate that it will yield a better result than the alternatives
Secured creditors may wish to avoid receivership and/or bankruptcy if they
believe such a process could erode their security position
Stakeholders who are confident in the management team, business plan and
long term value of a corporation’s assets are much more likely to support a
recapitalization or restructuring as opposed to seeking liquidation and
winding-up
• Corporations that have a well developed plan, sufficient capital to fund a
recapitalization or restructuring and who proactively engage their stakeholders at
the appropriate time have a much better chance of achieving the desired result
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23. OSLER’S MARKET LEADING EXPERTISE
23
Osler, Hoskin & Harcourt LLP (“Osler”) is one of Canada’s leading business law
firms and we have a large team of highly experienced legal professionals that
are able to assist on corporate governance matters or restructuringand
insolvency mandates. We also have senior practitioners in the areas of
Energy, Commercial Lending, Litigationand Taxationthat work with our other
experts to provide our clients with integratedand multidisciplinary solutions.
Osler succeeds for several reasons:
• Diverse Clientele and Wide-Ranging Scope – We act for all types of
clients dealing with challenging business circumstances and deliver expert
and innovative advice in complex matters. We are relied upon as trusted
advisors to directors, senior executives, in-house counsel, credit and
investmentofficers and fund managers, as well as other professional
advisors, court-appointedofficers and regulators.
• Multi-Disciplinary Approach– Solving complex challenges requires an
integrated approach across many different disciplines. We deliver a
multi-disciplinary approach that draws upon market leading resources
throughoutthe Firm to deliver integratedsolutions seamlessly and
effectively.
• Cross-BorderStrength – We have extensive relationships with U.S.
based advisors and have earned a leadership positionin crafting
comprehensive cross-border solutions in North America. We were
among the first counsel globally to structure cross border protocols
governing administrative process, substantive treatment and court-to-
court communications in international restructurings.
• Rapid Response – We engage quickly, efficiently and effectively to meet
the needs of any business-critical situation, regardless of the level of
complexity.
RECOGNITION
Both IFLR 1000: The Guide to the
World’s Leading Financial Law Firms
and Chambers Global: The World’s
Leading Lawyers for Business rank
Osler among the leading law firms in
Canada for Insolvency &
Restructuring.
IFLR notes that ”Osler’s
restructuringand insolvency team
has a reputationfor its depth of
experience and integratedapproach
across offices,” while Chambers
Global says that sources declare
Osler ”is one of the best Canadian
firms we work with.”

24. OUR PEOPLE
Osler has a large team of highly experienced legal professionals that are able to
assist on corporate governance issues or restructuring and insolvency matters,
augmented by our market leading Energy and Litigation teams. Please feel free to
contact any of our legal professionals should you wish to discuss your legal needs or
hear more about how we can help you achieve your objectives.
Lorne Carson
Partner, Commercial
Lending and
Restructuring
Calgary
lcarson@osler.com
403.260.7083
Robert Anderson, Q.C.
Partner, Insolvency &
Restructuring, Litigation
Calgary
randerson@osler.com
403.260.7004
Janice Buckingham
Partner, Energy
Calgary
jbuckingham@osler.com
403.260.7006
Frank Turner
Partner, Corporate -
Corporate Governance
Calgary
fturner@osler.com
403.260.7017
Robert Desbarats, Q.C.
Partner, Energy
Calgary
rdesbarats@osler.com
403.260.7015
Marc Wasserman
Partner, National Chair,
Insolvency & Restructuring
Toronto
mwasserman@osler.com
416.862.4908
24

25. OUR PEOPLE
25
Maureen Killoran, Q.C.
Litigation
Calgary
mkilloran@osler.com
403.260.7003
Andrea Whyte Partner,
Corporate, Corporate
Governance Calgary
awhyte@osler.com
403.260.7035
Thomas Gelbman
Partner, Litigation
Calgary
tgelbman@osler.com
403.260.7073