Canada: Enforceability Of A Standstill Agreement Not Contingent On Sharing Of Confidential Information

Aurizon Mines Ltd. v. Northgate Minerals Corp. (2006), 19 B.L.R. (4th) 171 (B.C. Court of Appeal) – July 14, 2006

Aurizon Mines Ltd. and Northgate Minerals Corp. had entered into a reciprocal confidentiality and standstill agreement ("the Agreement") as a first step to determining the feasibility of a business combination. A standstill period of one year was agreed to, the terms of which included a mutual restriction against the acquisition of one another’s voting shares during that time.

Having entered into the Agreement, the parties initiated discussions, but never advanced to the stage of actually exchanging or even giving access to confidential information. Aurizon informed Northgate in December 2005 that it was not interested in pursuing a business combination, at least not for a couple of years. Northgate shot back a few days later with a phone call and letter advising Aurizon that it no longer considered itself bound by the terms of the Agreement. Aurizon made no response until Northgate launched a hostile takeover bid of Aurizon about five months later (three months shy of the expiration date of the standstill period provided in the Agreements), when it filed an application in the B.C. Supreme Court seeking a declaration that the Agreements remained in full force and effect, as well as an injunction preventing Northgate from completing its takeover bid until after expiry of the standstill period in the Agreement.

In defending the action, Northgate argued, inter alia, that the restrictions in the Northgate Agreement only kicked in once Aurizon had provided confidential information to Northgate. Since no confidential information had been provided (and none was forthcoming, as Aurizon had already voiced its intention not to pursue a business combination), Northgate’s position was that it was entitled to rescind the Agreement for fundamental breach, or alternatively, complete failure of consideration.

The trial judge rejected Northgate’s arguments, holding that the standstill provisions were enforceable and binding. She noted, first, that Northgate had voluntarily entered into the agreement, which was clear and unambiguous. Secondly, the trial judge held that Northgate had had no legal basis to consider the Agreement terminated. In particular, Aurizon’s silence in the face of the December letter, which had not requested a reply, could not be construed as a form of waiver or acquiescence. Cutting the standstill period short required the consent of both parties in writing. Finally, the chambers judge found that as a matter of contractual interpretation, enforceability of the standstill provision had not been linked to disclosure of confidential information. At the Court of Appeal – where the chambers judge’s ruling was unanimously upheld – Madam Justice Rowles rejected the argument that the "commercial context" of the agreement could somehow vitiate its plain words.

The chambers judge commented that, although confidentiality and standstill provisions are typically bundled into one agreement, if it is intended that the standstill apply only in the event that confidential information is provided, this must be stated explicitly or (at least) be demonstrably an implied term of the contract. Because that had not happened in this case, there was no need for the court to consider the difficult questions of "whether information has been requested, whether information that has been exchanged is confidential at all, or that non-public information has been misused in connection with a takeover bid or other conduct." The chambers judge also rejected Northgate’s interpretation of the 1989 Ontario ruling in Corona Minerals Corp. v. CSA Management Ltd. as virtually precluding injunctions against active take-over bids.

In upholding the ruling, the Court of Appeal agreed that the case turned on contractual interpretation. The appellate ruling affirms that part of the purpose of a standstill agreement is essentially to allow parties to retreat from the negotiating table without fear that their efforts at negotiation will leave them vulnerable to a hostile takeover bid. In drafting a confidentiality and standstill agreement, therefore, any intention to make a standstill conditional on the exchange or provision of confidential information should be stated in black and white.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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