In negotiating an agreement2 for the acquisition of a
public company, some of the most heavily negotiated terms are a
host of provisions generally referred to as "deal protection
provisions." These provisions are designed to increase the
likelihood of success for the purchaser since it is impossible for
the target board to bind the public company's shareholders and
thereby guarantee that the agreed upon transaction will close.
In a paper released today, we focus
primarily on those aspects of deal protection provisions which are
generally referred to as "fiduciary out" provisions.
These provisions allow a target board to terminate a merger
agreement with a purchaser in the event an unsolicited, bona
fide superior proposal is received from a third party after
the signing of a merger agreement. Based on our experience and a
review of various studies with respect to public company M&A
transactions,3 fiduciary out provisions are standard in
We also consider the prevailing practice in Canadian merger
agreements for deal protection provisions to provide that a board
recommendation in favour of a merger agreement cannot be withdrawn
or otherwise negatively altered unless it is in connection with a
superior proposal; this could lead to a target board agreeing to
limit disclosure and its advice to its shareholders, therefore
risking that shareholders will be making a decision that is not
Based on our review of Delaware jurisprudence, including the
much criticized decision of the Delaware Supreme Court in
Omnicare, Inc. v. NCS Healthcare, Inc.,4 and
considered from a Canadian perspective with limited Ontario
jurisprudence, we argue that a target board may, without breaching
its fiduciary duty or engaging in oppressive conduct, agree to the
demands or requests of a purchaser to not include fiduciary out
provisions in the deal protection provisions of a merger agreement
in return for appropriate consideration. We are of the view that if
a target has more freedom to negotiate deal protection provisions,
it can create greater value for the company and its shareholders.
This flexibility provides a target's board with another method
to extract additional consideration or privileges from a
prospective purchaser for the benefit of the target.
We also suggest in the paper that the duty of loyalty must, at
the very least, impose an obligation on a target board to provide
shareholders with up-to-date and truthful recommendations,
particularly as it relates to the shareholders' sacrosanct
right to vote. We therefore suggest that a broader exception to the
deal protection provisions pertaining to changing board
recommendations based on, at a minimum, material intervening events
should be a standard clause in merger agreements. Accordingly, the
current practice of limiting a board's right to change its
recommendation is highly problematic and likely to be in breach of
a board's fiduciary duty. Ultimately, a target board should
ensure that, under the terms of a merger agreement, it preserves
the right to fulfill its obligation to provide a "current,
candid and accurate merger recommendation."5
1. The views expressed in this bulletin are those of the
authors and should not be attributed to McMillan LLP.
2. In the context of a takeover bid for a Canadian
company, these are usually referred to as support agreements, and
in respect of plans of arrangement they are referred to as
arrangement agreements. In this bulletin, we will refer to all such
agreements as merger agreements.
3. Blake, Cassels & Graydon LLP, Canadian
Public M&A Deal Study, Fifth Annual Edition (2013); Blake,
Cassels & Graydon LLP, Canadian Public M&A Deal Study,
Sixth Annual Edition (2014); Blake, Cassels & Graydon LLP,
Canadian Public M&A Deal Study, Seventh Annual Edition
(2015); American Bar Association, 2013 Canadian Public Target
M&A Deal Points Study (For Transactions Announced in 2011 and
4. 818 A.2d 914 (Del. 2003).
5. In Re Complete Genomics, Inc. Shareholder
Litigation, C.A. No. 7888-VCL, 16 (Del. Ch.
The foregoing provides only an overview and does not
constitute legal advice. Readers are cautioned against making any
decisions based on this material alone. Rather, specific legal
advice should be obtained.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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