As discussed in our post last week, the American Bar Association (ABA) recently came out with its 2015 Canadian Public Target M&A Deal Points Study (the Study), tracking variations in the common terms and conditions found across acquisition agreements regarding companies listed on Canadian exchanges. The Study draws upon 88 acquisition agreements for the acquisition of Canadian publicly-traded targets announced between the years of 2013 and 2014 (the Agreements).
Last week's post summarized the Study's key findings with respect to the target's representations and warranties and conditions to closing. This week's post will highlight key takeaways with respect to deal protection provisions and remedies.
1) Deal protection provisions
- Fiduciary out: Generally speaking, a "fiduciary out" provision grants a target-board the right to solicit a superior proposal (Fiduciary Exception to No-Shop) or change its recommendation to accept an offer (Fiduciary Exception to Target-Board Recommendation Covenant), in the exercise of its fiduciary duties. The provisions, however, are inconsistent as to when exactly these "fiduciary-out" rights may be exercised. With respect to a Fiduciary Exception to No-Shop, 85% of the Agreements, (representing a 13% increase from the results of the ABA's 2013 Canadian Public Target M&A Deal Points Study), allowed this right to be exercised in response to an acquisition proposal that is reasonably likely to result in a superior proposal, whereas 14% permitted this right to be exercised solely in response to an actual superior proposal. With respect to a Fiduciary Exception to Target-Board Recommendation Covenant, 82% of the Agreements, (representing a 27% increase from the results of the ABA's 2013 Canadian Public Target M&A Deal Points Study), permitted this right to be exercised once the target-board has received both a superior proposal, and has in good faith determined that the exercise of the right is required to comply with its fiduciary duties, whereas 16% of the Agreements permitted this right to be exercised once the target-board has determined that the exercise of the right is required to comply with its fiduciary duties alone.
- Break fee: A break fee represents a fee paid by the target to the buyer in the event it either backs out of a deal or terminates the agreement by way of a breach. The chart below highlights the situations in which a break fee is triggered and the percentage of deals that included such a trigger:
- Specific performance: Specific performance is an equitable remedy given upon a breach whereby the court requires, in contrast to the payment of damages, that a breaching party perform its contractual obligation. Out of the Agreements that included a remedy of specific performance, 74% of those Agreements provided that a party "shall be entitled" to a remedy of specific performance upon a breach, whereas 26% of the Agreements merely provided that a party "may seek" specific performance upon a breach. A remedy of specific performance, however, did not necessarily apply to all breaches. 36% of Agreements that included a remedy of specific performance provided that a party could either seek or be entitled to a remedy of specific performance only in the event of a breach for which a termination fee (meaning either a break fee or a reverse break-fee) is not payable by the innocent party.
- Survival of representations, warranties and covenants: The Study found that 80% of the Agreements provided that the representations, warranties and covenants of the agreement survive termination. The standard, however, differed as to when a party will be held liable for breaching a representation, warranty or covenant following termination. Out of those Agreements that included surviving representations, warranties and covenants, 44% of those Agreements provided that liability was only triggered upon a "wilful, knowing, intentional or material" breach whereas 56% of those Agreements provided that liability was triggered upon a lower standard of "any" breach.
For more details please visit the Mergers and Acquisitions Market Trends Subcommittee webpage where a copy of the Study is available to all ABA members.
The author would like to thank Michael Viner, articling student, for his assistance in preparing this legal update.
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