Sunrise, sunset. Perhaps a matchmaker would have helped. The
saga of the dispute between Ventas, Inc. and Health Care Property
Investors, Inc. arose five years ago when Sunrise Senior Living
Real Estate Investment Trust's "board of trustees
determined that a strategic sale process of its assets would be
beneficial to its unitholders, thus effectively putting Sunrise
'in play' on the public markets" (per Blair J.A. for
the Ontario Court of Appeal) in Ventas, Inc. v. Sunrise Senior Living
Real Estate Investment Trust, 2007 ONCA 205 (CanLII) at
para. 2. The Court of Appeal upheld the decision of Pepall J. given
two weeks earlier (2007 CanLII 8934 (ONSC)) that Sunrise was
obligated to enforce the Standstill Agreement which was entered
into by HCP (the unsuccessful auction participant) with the result
that HCP was disqualified from pursuing a topping bid that it had
announced in a press release.
This was not the end of the story. As a result of the release of
the United States Court of Appeal's decision affirming the
Kentucky jury award of $101 million dollars to Ventas for tortious
interference with a prospective advantage in Ventas, Inc. v. HCP, Inc.
(6th Cir, May 17, 2011), a little more light has been
shed on this battle. This compensatory award was effectively the
difference between Ventas' original bid in the auction based on
$15/unit and what it felt it had to increase it by $1.50 to
overcome the uncertainty as to approval by the Sunrise unitholder
vote created by HCP's proposed conditional offer of $18. As the
sun starts to set, this epic is approaching
Götterdämmerung for HCP because the litigation continues
and is coming to a crescendo. It is still now just twilight, rather
than darkness. But surely there will be darkness once these gods
and giants have finished fighting each other.
The reader may wish to refer to my reflections: "
Does the Left Hand Know What the Right Hand is Doing?" in
Volume 4, Issue 3 of McCarthy Tétrault's Litigation
Co-Counsel May 20, 2011 as to the elements of the Canadian
tort of unlawful interference with economic relations (in that
article I observed that two panels of the Ontario Court of Appeal
had mysteriously come out with different standards for this tort
within 10 days of the release of their reasons, with the two panels
sharing a common member). The U.S. Appeal Court reviewed the law of
Kentucky in this regard and determined that there had been express
adoption of certain sections of the Restatement (Second) of Torts
issued by the American Law Institute.
Section 766B: Intentional
Interference With Prospective Contractual Relation
One who intentionally and improperly
interferes with another's prospective contractual relation...is
subject to liability to the other for the pecuniary harm resulting
from loss of the benefits of the relation, whether the interference
consists of (a) inducing or otherwise causing a third person not to
enter into or continue the prospective relation or (b) preventing
the other from acquiring or continuing the prospective
Section 767: Factors in Determining
Whether Interference is Improper
In determining whether an actor's
conduct in intentionally interfering with a contract or a
prospective contractual relation of another is improper or not,
consideration is given to the following factors:
a. the nature of the actor's conduct;
b. the actor's motive;
c. the interests of the other with which the actor's conduct
d. the interests sought to be advanced by the actor;
e. the social interests in protecting the freedom of action of
the actor and the contractual interests of the other;
f. the proximity or remoteness of the actor's conduct to the
g. the relations between the parties.
It was observed that improper interference under Section 766B
requires the plaintiff to "show malice or some significantly
wrongful conduct" with unlawful means being defined as
including fraud, deceit or coercion. Relying on Section 768, the
U.S. Appeal Court noted that in the case of a tortious interference
claim between competitors, plaintiffs are held to a more exacting
standard as competition is not an improper basis for interference.
The U.S. Appeal Court stated:
As the district court observed, to
ignore HCP's breach of its contract with Sunrise would
"create an artificial reality within the case."
(...HCP's breach of its Standstill Agreement with Sunrise
illuminates the anti-competitive activities in which HCP engaged
and is central to an understanding of Ventas' allegations of
fraud and deception. As Ventas argued at trial, HCP misled the
market by making public statements that were contrary to its
obligations under the Standstill Agreement without disclosing the
existence of the agreement or other relevant information. See,
e.g., Hornung, 754 S.W.2d at 859 ("[M]alice may be
inferred in an interference action by proof of lack of
There was a "Comedy of Errors," not restricted to
HCP's activities, but also reaching over to those of Sunrise
and of Ventas. They include the following:
(a) An auction process would
ordinarily suggest that the rules of the game are the same for all
bidders as set out in Maple Leaf Foods. Blair J.A. in
Ventas noted at para. 56:
An auction process is well-accepted
as being one — although only one —
"appropriate mechanism to ensure that the board of a target
company acts in a neutral manner to achieve the best value
reasonably available to shareholders in the circumstances";
Maple Leaf Foods Inc. v. Schneider Corp. 1998 CanLII 5121
(ONCA), 1998 CanLII 5121 (ONCA), (1999), 42 O.R. (3d) 177 at 200
(b) However, in this case as set out
at page 3 of the U.S. Appeal Court reasons:
The auction procedures required each
participant to sign a confidentiality agreement, which included a
standstill provision ("Standstill Agreement") that would,
among other things, prohibit the participant from making or
announcing any bid outside of the auction process for a period of
18 months following the conclusion of the auction. The Standstill
Agreement also proscribed any actions that would require Sunrise to
publicly announce a bid outside of the auction process.
As invitees to the preliminary stages
of the auction, both Ventas and HCP independently negotiated and
entered into Standstill Agreements with Sunrise. Neither was a
party to the other's Standstill Agreement. HCP's Standstill
Agreement permitted HCP to make only one final bid, but Ventas'
Standstill Agreement permitted Ventas to make a second final bid if
Sunrise accepted a competing offer after Ventas made its initial
Thus there would not appear to have
been a level playing field for these two bidders. While Ventas knew
rules applicable to Ventas and while HCP knew the rules applicable
to HCP, it appears that neither knew the rules applicable to the
other. So possibly Ventas had a handicap advantage even if it were
not aware of that advantage until much later in the game.
(c) Ventas assumed when it negotiated
the purchase agreement with Sunset to acquire the assets of Sunrise
that HCP's standstill obligations would also fall away. If that
had been the case, then HCP would have been permitted to make a
topping bid with Ventas having the comfort of a break fee in the
event HCP was eventually successful in a bidding war.
(d) If the auction were designed to
maximize value for the equity holders, why did Sunrise agree in
Section 4.4 of the Ventas Purchase Agreement to enforce any
standstill obligations then remaining outstanding, particularly
when it seems that Ventas assumed that HCP had a standstill
obligation that was identical to that of Ventas's and that
would fall away on the conclusion of an agreement by someone to buy
the assets of Sunrise? This seems contrary to a fiduciary out
condition situation that is so valuable to the beneficiaries of an
enterprise that has put itself into play.
(e) SSL was an operator of many
retirement facilities, including those of Sunrise and some of HCP.
Perhaps HCP picked an unnecessary fight with SSL (or at least was
attempting to wage war on two fronts) that prevented it from making
an unconditional offer. Coming to a deal with SSL was essential to
success on the part of any bidder. The HCP CEO had to acknowledge
he was playing hardball with SSL.
(f) Once it had a signed deal with
Ventas which was publicly disclosed, Sunrise advised HCP that HCP
must still honour its standstill obligations. However, some weeks
after that caution, Sunrise suggested to HCP that it might want to
make a bid. This strikes me as remarkably peculiar behaviour.
However Ventas did not take Sunrise to task in any litigation. It
therefore seems that Ventas did not want to fight a two enemy war,
particularly when such a fight would likely have alienated the
Sunrise unitholders who had yet had to approve the deal.
(g) HCP jumped in with both feet
(perhaps positioning one of those appendages in its mouth) with a
public announcement that it was making an $18 bid without
mentioning that it would be conditional on reaching a deal with
SSL. The press release advised of a proposed "acquisition that
reflects its significantly higher price and is otherwise identical
to the agreement between Sunrise and Ventas." Subsequently the
condition was disclosed.
(h) HCP indicated in a press release
that it had sent a signed unconditional offer to Sunrise. However,
its CEO had to admit in testimony that a signed offer had never
been sent nor had he been authorized to send one.
(i) HCP's CEO also had to admit
that HCP had wanted to hurt Ventas by making it pay more than the
$15/unit Ventas had signed up for. No doubt this was a
"Eureka!" moment for Ventas's counsel in
(j) Sunrise issued a press release
that Sunrise would not consider HCP's offer until "such
time as it receives a confirmation from HCP that their proposal is
not conditional on [HCP] reaching an agreement with [SSL]."
However, there was nothing said about this being a breach of the
Standstill and Section 4.4 of the Ventas Purchase Agreement, which
required Sunrise to enforce any continuing standstill obligations
of any party.
(k) It was not until five days after
Sunrise's initial press release, and once Ventas had stumbled
(like the derelict seaman blessing unawares the water serpents in
the Rime of the Ancient Mariner) across the fact that
HCP's standstill obligations did not drop away, that Ventas
appreciated that it had to take further remedial action. It issued
a press release that Ventas would increase its offer to $16.50 in
recognition that in the events leading up to unitholders'
approval vote sufficient proxies had been deposited to defeat the
Ventas deal (notwithstanding the Pepall J. and Ontario Court of
Appeal decisions that Sunrise had to enforce the HCP standstill
obligations and that a bid from HCP would not be allowed). Ventas
felt that this bump was needed to salvage the Sunrise deal and to
protect its own reputation. Clearly, it was the good fortune of
Ventas to have put that boilerplate into the purchase agreement
even if it had assumed HCP's standstill obligations would have
The end result was that the vote turned around in favour of
Ventas' $16.50 bid. Litigation proceeded in Kentucky with
Ventas suing HCP. The U.S. Appeal Court is not the final chapter;
this court allowed the cross-appeal of Ventas ruling that there was
sufficient evidence of fraud to submit the issue of punitive
damages to the jury. This issue was remitted back for trial. Given
the admissions made in the earlier trial, one may anticipate that
HCP may well have serious concern about a very substantial award.
One may recall that a Mississippi jury in a breach of contract
concerning a single funeral home (where the compensatory damages
were assessed at $6 Million) awarded $500 Million of punitive
damages, thereby forcing Loewen Group Inc., a Canadian company,
into protracted insolvency protection. So it will be awhile yet
before the twilight after sunset turns to darkness and all one will
hear are the cries of the dying gods and giants. At that stage one
may recall the sign off of the radio commentator Paul Harvey:
"And now you know the rest of the story."
Lessons to be learned
i) Ventas is now frequently
cited as guiding authority as to commercial contract
interpretation. Blair J.A. at para. 24 agreed with the view of
Pepall J. as to how a commercial contract is to be
- as a whole, in a manner that gives meaning to all of its terms
and avoids an interpretation that would render one or more of its
- by determining the intention of the parties in accordance with
the language they have used in the written document and based upon
the "cardinal presumption" that they have intended what
they have said;
- with regard to objective evidence of the factual matrix
underlying the negotiation of the contract, but without reference
to the subjective intention of the parties; and
- (to the extent there is any ambiguity in the contract)in a
fashion that accords with sound commercial principles and good
business sense, and that avoids a commercial absurdity.
However, one may wrestle with the point of intention in the case
of Section 4.4 of the Ventas Purchase Agreement in light of the
assumption of Ventas about HCP's standstill obligations falling
ii) Meaningless redundant boilerplate
may not be meaningless. While reading page after page of
mind-numbing prose may be a cure for insomnia, parties should be
grateful for their commercial counsel being awake and careful in
discovering hidden traps/treasures.
(iii) Participants in an auction
should ensure that the rules of the game are the same for all
— or at least have disclosure that a rival may have a
lower hurdle to jump.
(iv) In turn, where a fiduciary out
is negotiated, the company in play should avoid putting in
artificial/unnecessary barriers that may discourage or prevent
others from making a topping offer that would enhance value.
(v) Having agreed to a certain course
of action, a party should carry out its obligations under that
agreement in good faith or face the consequences of breach. Under
other fact circumstances Ventas may have determined that it would
have been in its interests to sue Sunrise and its management for
encouraging HCP to make a bid notwithstanding HCP's continuing
(vi) One should avoid U.S. jury
trials, particularly if one is a foreign defendant.
(vii) One should not play unnecessary
hardball with a party whose support one needs; nor should one make
promises one cannot keep; nor should one make untrue statements.
These actions can come back to haunt the actor.
(viii) Consider the consequences
pursuant to securities legislation of making a press release
containing material misinformation.
Perhaps an admonition for HCP and anyone else who wants to play
hardball by interfering with economic relations is that which
Shakespeare wrote, not in Julius Caesar: "Cry 'Havoc',
and let slip the dogs of war", but rather his view in
Cariolanus: "Do not cry havoc, when you should but hunt with
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