A Shortfall Event is an event in the protocol which causes a state of deficit for the liquidity providers. This can be caused by a smart contract risk (bugs, hacks, etc.), liquidation risk (e.g. risk of failure of an asset that is being used as collateral), or price-oracle risk (risk of the oracle not properly updating prices).
The sequence of auctions in case of a Shortfall Event:
Staked AGF, agTokens, DEX LPs
Issuance of new AGF tokens