The recent battle for Prime Restaurants Inc. (PRI) between Cara Operations Limited (Cara) and Fairfax Financial Holdings Limited (Fairfax) settled, which allowed PRI to sign a new acquisition agreement with Fairfax. Before the parties had agreed to settle, PRI asked the court to determine whether the Fairfax proposal was in fact a "superior proposal" to the Cara offer. At this point, the prospect of litigation and its outcome raised some interesting questions.
Cara's position was that the Fairfax proposal treated some PRI shareholders differently than other shareholders because certain senior executives of PRI would reinvest a portion of the proceeds they receive in PRI after closing. To fit within the definition of "superior proposal" in the acquisition agreement between PRI and Cara (and thus entitle PRI to terminate the agreement upon payment of a break-fee), the Fairfax offer would have had to be made to all shareholders of PRI on the same terms and conditions. Cara informed PRI that in the event PRI terminated its agreement with Cara and entered into an acquisition agreement with Fairfax, Cara would consider PRI to be in breach of its agreement and would pursue all remedies available to it.
This raises several interesting legal and strategic questions that M&A lawyers may want to consider going forward:
- Why did PRI agree to the requirement in the definition of superior proposal that any other proposed offer for the shares of PRI be made to all shareholders on the same terms and conditions? Some would say that this is unusual as it could preclude any private equity acquisition where management retains an ownership interest.
- Even if the court had ruled in favour of Cara, would it not have been destined to have its offer voted down by the PRI shareholders unless Cara chose to match or exceed the Fairfax proposal? It is difficult to see how Cara's lower offer would have been approved by PRI shareholders unless either Fairfax walked away or a court enjoined Fairfax from proceeding with its proposal.
- If PRI had entered into an agreement with Fairfax, and Cara sued PRI for breach of contract, would Cara have been entitled to specific performance as a remedy? Further, the acquisition agreement contained a provision stating that the termination fees represented a genuine pre-estimate of damages. Would this provision have precluded the availability of specific performance?
- Further to the previous point, if the court had concluded that the remedy for breach of contract was damages, would the court have construed the $1 million termination fee as a cap on those damages?
- If Cara's offer did go to a shareholder vote, would Fairfax have just sat back quietly to see how the situation between Cara and PRI played out? Or would Fairfax have taken action to let shareholders know that it would be prepared to make an offer regardless of the outcome? This would undoubtedly depend on the terms and conditions of any standstill provision contained in the confidentiality agreement between PRI and Fairfax (the terms of which were not publicly available). The agreement between PRI and Cara would likely have precluded PRI from waiving any standstill provision in respect of actions proposed to be taken by Fairfax.
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