Canada: Recent Court Decisions Of Interest: TD Banknorth And Lapoint

Recent Court Decisions Of Interest: Td Banknorth And Lapoint

Proposed Settlement Of Class Action Relating To Minority Buyout Fails To Win The Approval Of The Delaware Court Of Chancery

Exploratory negotiations toward a going private transaction may well have violated a shareholders' agreement provision barring such discussions unless the Special Committee invited them - ruling suggests that such an invitation may need to be formally issued before negotiations begin, not merely at the point where the price settled on is to be voted on.

In re TD Banknorth Shareholders Litigation

Court of Chancery (Delaware)

July 19, 2007 . C.A. No. 2557-VCL

Lamb V.C.

Delaware's Court of Chancery has refused to approve a proposed settlement of a class action brought by minority shareholders of TD Banknorth, Inc. with respect to majority shareholder Toronto-Dominion Bank's $3.19 billion acquisition of the shares of the U.S. financial institution that it did not already own. Several TD Banknorth shareholders had balked at the deal, arguing that the representative plaintiffs in the class action had negotiated away "viable contractual and entire fairness claims in return for insubstantial consideration". The court agreed.


In March 2005, TD Bank acquired a 51% interest in Banknorth in a $3.8 billion cash and stock deal. A stockholders' agreement was then put in place that restricted any attempt by TD to increase its ownership above 66.7%, as follows:

2.2(b) Until March 1, 2007, TD "shall not.propose or initiate any Going Private Tran¬saction unless invited to do so by a majority of the [Special Committee]. Any Going Private Transaction effected during this period shall also be subject to the requirements of Section 2.2(c)."
2.2(c) March 1, 2007 - March 1, 2010: (i) TD "may initiate and hold discussions regarding a Going Private Transaction with the Board on a confidential basis that would not reasonably be expected to require either [Banknorth or TD] to make any public disclosure thereof [as required by applicable securities laws].. If a majority of the [Special Committee] approves such a transaction, [TD] may publicly announce, commence and effect such Going Private Transaction.."
2.2(d) After March 1, 2010: TD "may propose, initiate or effect a Going Private Transaction, provided that such Going Private Transaction is either approved by a majority of the [Special Committee] or by Unaffiliated Stockholder Approval and further provided that [TD] shall not propose, publicly announce or initiate a Going Private Transaction.without providing prior notice to the [Special Committee] and offering to first discuss and negotiate confidentially the terms [of] such proposed Going Private Transaction with the Special Committee."
The Process

The version of events accepted by Lamb V.C. for the purpose of the order was as follows. In December 2005, the TD board of directors discussed a buyout of Banknorth's minority shareholders. In January 2006, a meeting of Banknorth's Strategic Planning Committee was attended by several senior representatives of TD (including two TD directors who were also on Banknorth's board). One attendee, the COO of Banknorth, met the next day with Banknorth's Special Committee to discuss a possible going private transaction. The Special Committee appointed its chair, Condron, to study the issue. In April, Condron wrote a letter suggesting that the committee meet in May or June to discuss possible financial and legal advisors.

Before any meeting took place, however, Condron met with Ryan, then the president and CEO of Banknorth and a member of both boards. Ryan raised the possibility of a TD buyout at that meeting and again at a meeting of the Special Committee on May 8. On May 9, Ryan and TD's president and CEO, Clark, attended a meeting of the Banknorth board's Executive Committee. Clark was said to have indicated that TD "might be interested in pursuing exploratory discussions if invited to do so" by the Special Committee. Negotiations continued and on November 15, Condron and Clark arrived at a figure of $32.33 per share (all cash).

It was only on November 18 that, following a presentation regarding the offer, the Special Committee formally issued an invitation to TD to submit a proposal according to the negotiated terms. Two days later, both boards had approved the transaction and the deal was publicly announced.

Class Actions

Within days, six class action lawsuits had been commenced in Delaware. These were consolidated by court order on November 29. The class plaintiffs agreed to settle for 3 cents per share, some new disclosure and the exclusion of a few officer-owned shares (about 0.1% of those eligible) from the majority of-minority vote.

In a vote held April 18, 2007, almost 95% of the minority investors favoured the deal. But the settlement still had to be approved, and the objecting shareholders continued to press their case before Vice Chancellor Lamb.

Did The Process Violate s. 2.2(b)?

The plaintiffs and defendants (who were allied in this hearing against the objectors) argued that the process had been completely normal and proper, with a disinterested committee of directors bargaining in an entirely fair way. The 3 cents per share and improved disclosure were evidence of this. Extracting more would have been difficult, because (in their view) s. 2.2(b) had been complied with - in the world of M&A, they claimed, the "initiation" or "proposal" of a transaction occurs only when it is "formally proffered for consideration by the board of directors". They maintained that s. 2.2(b) was understood by all sides as merely preventing TD from bypassing the Special Committee altogether and making a public tender offer or from attempting the sort of tender/short-form merger offer that was at issue in Pure Resources.1

The court agreed with the objectors that the s. 2.2(b) argument was much stronger than the plaintiffs had concluded. While this hearing was not the place to determine the underlying claim, the plain language of s. 2.2(b) clearly gave substantial support to the objectors' position:

...a plain reading of section 2.2(b) supports a robust argument that, because there was no preceding invitation from the Special Committee, Toronto-Dominion's prompting of exploratory negotiations or discussions as to a going private transaction, regardless of how skeletal, amounted to a breach of section 2.2(b)'s prohibition.

The court also observed that the plaintiffs' interpretation left little to distinguish subsection (b) from subsection (c).

The court concluded that the "near-constant series of discussions and negotiations" between Clark and Condron from June to November 2006 - prior the Special Committee's "invitation" - constituted "substantial evidence to support a claim that the merger agreement is the product of the defendants' violation of the stockholders' agreement".

Entire Fairness

Having concluded that there was "substantial evidence" that the going private transaction was "the product of the defendants' violation of the stockholders' agreement", the court turned to the plaintiffs' argument that the minority had suffered no harm.

The court disagreed with the plaintiffs' claim that any financial harm was suffered by Banknorth rather than individual shareholders. Moreover, under the "entire fairness" doctrine in Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983), a court faced with a minority freeze-out must conclude that there was not only a fair price but fair dealing. That meant that objectors' claim could not be defeated by showing that the TD offer was within "the range of fairness at the time the merger agreement was executed or completed". As the italics suggest, an entire fairness analysis would also have had to consider the timing of the offer, since s. 2.2(b) could also be seen as an attempt to prevent the controlling shareholder from making oppor¬tunistic buyout offers during economic downswings etc. A finding that s. 2.2(b) had been breached would therefore lend even more credibility to the argument that the transaction failed the entire fairness test.


The court concluded that:

...the plaintiffs unreasonably chose not to pursue viable claims based upon a violation of section 2.2(b) of the stockholders' agreement and any resultant inequitable timing of the transaction. While expressing no opinion as to the ultimate merits of these causes of action, the court must conclude that, according to established principles of contract interpretation and Delaware case law, these claims have some substantial strength. A reasonable class representative in the plaintiffs' position certainly would have tried to extract substantial consideration for the settlement of these claims. That plainly did not happen here.

Even though the court did not decide the underlying issues here, the lesson of the case is to consider the risk that a court would hold that exploratory discussions about the possibility of a going private transaction constitute the "initiation" or "proposal" of such a transaction, and that if there are restrictions on the initiation of such transactions they may need to be dealt with at a very early stage rather than when the deal is essentially done. While this was an application for the approval of a settlement, Lamb V.C. quite clearly considered the process to have been flawed, even though both TD and Banknorth had evidently made conscientious efforts to live up to the terms of s. 2.2(b).

Acquiror Pays A Heavy Price For Poorly Drafted Earn-Out When Its Relationship With Its New Subsidiary Quickly Degenerates Post-Closing

Acquiror fails to live up to commitment to "actively and exclusively" promote target's products after merger, in violation of key earn-out commitment; also found to have miscalculated the earn-out

LaPoint v. AmerisourceBergen Corp.

Court of Chancery (Delaware)

September 4, 2007 . Civil Action No. 327-CC

Chancellor Chandler

While earn-out arrangements can help get deals done, they often create "enforcement" issues after the merger. Ideally, earn-outs would be structured so that the new owner can't avoid the payments by artificially suppressing the business but at the same time is able to make ordinary business decisions even if they might reduce the value of the earn out. This Delaware decision shows some of the pitfalls of a poorly drafted earn-out.

Chancellor Chandler described the case as falling "into an archetypal pattern of doomed corporate romances". AmerisourceBergen Corp. ("ABC") merged with Bridge Medical, Inc., a start-up that had not yet turned a profit. An earn-out seemed a good way of compensating the selling shareholders fairly in the event that Bridge's business finally took off in the two-year period post-closing. The deal was accordingly structured as a $27 million up-front payment and an earn-out of anything from nothing to $55 million, based on EBITA.

The Key Provisions

Two provisions were central to the case:

[ABC] agrees to (and shall cause each of its subsidiaries to) exclusively and actively promote [Bridge's] current line of products and services for point of care medication safety. [ABC] shall not (and shall cause each of its subsidiaries to not) promote, market or acquire any products, services or companies that compete either directly or indirectly with [Bridge's] current line of products and services.
[ABC] will act in good faith during the Earnout Period and will not undertake any actions during the Earnout Period any purpose of which is to impede the ability of the [Bridge] Stockholders to earn the Earnout Payments.

Unimpressed with this type of drafting, the court condemned the agreement's "gossamer definitions" and "aspirational statements" as "too fragile to prevent the parties from devolving into the present dispute".

Failure To Promote Bridge Products

The plaintiffs argued that ABC had not "exclusively and actively" promoted Bridge products to its hospital customers. Particularly damning, in the court's view, was an email from an ABC vice-president advising an employee that if a certain customer were to insist that it didn't want the Bridge product, it would then be fine to sell them a rival product that "we want to use". The employee was then asked to consider whether it "is too risky" to contact "someone at [the customer] and ask them for some assistance". In addition to this, ABC essentially prohibited the Bridge division from sending out press releases that it had relied on as a form of promotion. And finally, ABC turned down a merger agreement with a third company that would have been very favourable to Bridge.

The court accepted the Bridge shareholders' version of events as well as its conclusion that ABC had neither exclusively nor actively promoted Bridge. The main exception was the aborted merger - Chancellor Chandler held that ABC was not obliged to proceed with a merger that would not have been profitable because of the earn-out payments it might have triggered (or, more precisely, because of the cost of buying out the earn-out rights of the Bridge shareholders as ABC's proposed merger partner appears to have required).

Damages Of Six Cents

In spite of its general finding against ABC, the court held that there was no evidence that the ABC's failure to promote Bridge had made a difference in a market that was moving away from Bridge's type of product. Damages were thus only nominal, which in Delaware turns out to mean six cents.

The 2003 Earn-Out

The Bridge shareholders also asked the court to rule that ABC's calculations relating to the 2003 earn-out had deprived it of millions. The court agreed, finding that ABC's proposed interpretation of the earn-out amounted to a request for the court to re-draft it. This it would not do, even though Chancellor Chandler agreed that that the plaintiffs were "craftily" taking advantage of some very bad drafting.

R&D expenditures

The first drafting mistake was an R&D clause providing that Bridge must remain within 80% of a projected figure ("X"). When actual R&D expenditures did not meet this target, and in fact fell $1.25 million short of X, ABC deducted that amount from EBITA, affecting the earn-out. The plaintiffs argued, and the court agreed, that nothing in the provision stated that the remedy for an R&D shortfall was an adjustment to EBITA. ABC's only remedy - which it had not pursued here - would be to sue "appropriate defendants" for the shortfall. Because the earn-out rose exponentially (more or less) as EBITA increased, restoring the $1.25 million to the EBITA increased the potential earn-out by far more than that amount.

Weighted averages

Failing to distinguish between an "average" and a "weighted average" cost ABC even more dearly. The crucial paragraph 34 of Annex I of the merger agreement provided:

When [Bridge's] products or services are bundled with other products or services of [ABC] or any of [ABC]'s other subsidiaries in a sale to a customer, [Bridge] will receive revenue credit for such bundled sale at [Bridge]'s list price for such products and services (less normal discounting of 20%; provided, however, that where products and services are discounted by more than 20%, the discount to be applied for purposes hereof shall be the average amount of the discount in the last (5) unbundled contracts executed prior to the execution of the subject contract) for determining Adjusted EBITA attainment each year for comparison to the Earnout Payment objectives of each year.

Discount rates in the comparison contracts ranged from 0 to 51.2%. ABC argued that "average" meant "weighted average" - the difference being an increase in the discount from 27.9% (unweighted) to 46.8% (weighted). While Chancellor Chandler agreed that a weighted average might make business sense, he saw no reason that an unweighted average might not also make business sense, as might a time-weighted average (with more recent contracts weighted more heavily) or any number of other conceivable formulas. ABC's lengthy argument on the "law of averages" - which ranged as far afield as Ty Cobb's batting average - failed to budge the court from its view that "absent explicit instruction to the contrary, the term 'average' implies a simple arithmetic mean".

Conflict with GAAP

Paragraph 34 of Annex I concluded as follows:

The credit for bundled sales will be added to revenues for determining Adjusted EBITA attainment in the year that the software is delivered to the customer and for services in the year in which the services are provided to the customer.

ABC argued that this had to be taken in the context of paragraph 4 of Annex I, which stated:

The term "Adjusted EBITA" means the earnings of the Surviving Corporation before interest, taxes and amortization, as determined in accordance with GAAP applied on a consistent basis, as adjusted pursuant to and in accordance with this Annex I...

Because GAAP precluded the attribution of the entire bundled sales credit to the year 2003, ABC argued, Adjusted EBITA had to be reduced accordingly. The court disagreed: the words "as adjusted pursuant to and in accordance with this Annex I" made it "perfectly explicit" that the adjustments in the Annex "took precedence over GAAP accounting". Chancellor Chandler went on to note that, had ABC wished to tie the bundled sales credit to principles of recognition under GAAP, "it would have been easy to draft such a contract".

The cost of bad drafting

All told, the cost of omitting the word "weighted", failing to make the sales credit calculation subject to GAAP recognition rules and failing to make R&D expenditure shortfalls count against EBITA was an upward adjustment to Adjusted EBITA of about $7.4 million, giving Bridge a positive Adjusted EBITA for 2003 of about $4.9 million. The earn-out, which ABC's negative EBITA calculation had set at $0, was accordingly increased by the revised EBITA calculation to the maximum amount the contract envisaged for 2003: $21 million.


1 In re Pure Resources, Inc., Shareholders Litigation, 808 A.2d 421 (Del. Ch. 2002).

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.