Reprinted with permission from the 2008 Canadian Legal Lexpert Directory
PRACTICE AREA DEFINITION
Corporate commercial litigation is generally understood to comprise the provision of advice and representation, whether by way of negotiation, civil proceedings, alternative dispute resolution, mediation or arbitration, in all matters relating to the breach of or disputes regarding commercial contracts; purchase and sale of assets, equipment or other lease agreements; banking and financing litigation including secured/unsecured enforcement and recovery, multi-party creditor disputes, asset recovery and tracing, and disputes regarding various security, financing or trade instruments such as guarantees, bonds and letters of credit; disputes respecting various forms of business organizations such as shareholder agreements, joint ventures, partnerships, distribution, agency and other such agreements; and other such matters. Please note that the Directory has separate sections for AVIATION, CLASS ACTION LITIGATION, COMMERCIAL INSURANCE LITIGATION, COMPETITION LAW, CONSTRUCTION LAW, SECURITIES LITIGATION and TAX LITIGATION.
RECENT DEVELOPMENTS OF IMPORTANCE
Several significant developments took place in transaction-related litigation in 2007. Contested transactions led to important decisions on the use of standstill agreements and lockup and support agreements, and clarified the scope of statutory plans of arrangement.
The Court of Appeal for Ontario confirmed in Ventas Inc. v. Sunrise Senior Living Real Estate Investment Trust1 that standstill agreements between bidders and targets should be enforced because sophisticated commercial parties should be held to their agreements. The decision should provide parties considering a potential transaction with greater certainty that a standstill agreement entered into as part of their negotiations will be strictly enforced by the courts.
The trustees of Sunrise REIT decided in September 2006 to pursue a strategic sale process. As part of that process, Sunrise REIT's financial advisors approached a number of prospective purchasers. Those interested in a possible transaction with Sunrise REIT were required to enter into standstill agreements to obtain access to non-public information. Two of the potential purchasers who signed standstill agreements were Ventas and Health Care Property Investors, Inc. (HCP). The agreements signed by Ventas and HCP limited the use of the confidential information they obtained, and restricted the potential purchaser from pursuing an acquisition of Sunrise REIT for 18 months without its prior written consent. The Ventas standstill agreement contained an exception to the prohibition – if Sunrise REIT entered into an agreement to sell more than 20 per cent of its units or assets to a third party, the Ventas standstill agreement would cease to apply. The HCP standstill agreement did not include this exception.
Of the potential bidders that signed standstill agreements, only Ventas and HCP remained interested in a possible transaction with Sunrise REIT. They both were asked to submit final binding acquisition proposals. Only Ventas did so, making an offer valued at $15 per unit. The Ventas proposal was accepted by Sunrise REIT. The Ventas purchase agreement that the parties entered into included a non-solicitation clause prohibiting Sunrise REIT from participating in further discussions about a potential transaction unless it received an unsolicited superior proposal. The purchase agreement also required Sunrise REIT to enforce any of the standstill agreements it had entered into as part of its strategic sale process.
Notwithstanding its obligations under the standstill agreement, HCP made an unsolicited proposal to acquire Sunrise REIT. HCP's offer was $18 per unit. In other respects, it was identical to the terms of the Ventas purchase agreement. Ventas demanded that Sunrise REIT enforce the HCP standstill agreement, as required by the purchase agreement. Sunrise REIT and Ventas each sought relief from the Ontario Superior Court. Sunrise REIT asked to be relieved from its obligation to enforce the HCP standstill agreement; Ventas asked the Court to require its enforcement. Ventas was successful and the Court ordered Sunrise REIT to enforce the HCP standstill agreement. HCP and Sunrise REIT appealed, and the decision was upheld.
The Court of Appeal's decision in Ventas dealt with two issues: (i) the proper interpretation of the HCP standstill agreement and the Ventas purchase agreement; and (ii) the fiduciary duties of the trustees of Sunrise REIT in dealing with potential acquirors in the sale process.
In its interpretation of the standstill and purchase agreements, the Court of Appeal agreed with the approach and conclusion of the motions judge. The Court applied well-established contract interpretation principles, and concluded that sophisticated commercial parties should be held to their agreements. The Court found that Sunrise REIT had an express and unambiguous obligation under the Ventas purchase agreement to enforce the HCP standstill agreements. The Court found that if the parties had intended an exception to the Ventas purchase agreement to address circumstances in which Sunrise REIT received a superior proposal, that intention would have been reflected in the purchase agreement.
The Court of Appeal also considered and rejected HCP's argument regarding the fiduciary duties of Sunrise REIT's trustees. HCP argued that the interpretation of the agreements required that the Court consider in particular the trustees' fiduciary duty to maximize value for unitholders. In effect, HCP argued that the Ventas purchase agreement should not be interpreted in a way that eliminated the trustees' "fiduciary out" – their ability to entertain a superior proposal. In rejecting HCP's argument, the Court of Appeal found that the trustees had complied with their fiduciary duty to maximize value in establishing the process that led to the Ventas purchase agreement:
The Trustees did not contract away their fiduciary obligations. Rather, they complied with them by setting up an auction process, in consultation with their professional advisers, that was designed to maximize the unit price obtained for Sunrise's assets, in a fashion resembling a "shotgun" clause, by requiring bidders to come up with their best price in the second round, subject to a fiduciary out clause that allowed them to consider superior offers from anyone save only those who had bound themselves by a Standstill Agreement in the auction process not to make such a bid. In this case, that turned out to be only [HCP].2
The Court of Appeal further held that the trustees' decisions regarding the sale process were entitled to deference because (i) Ontario corporate law afforded them considerable flexibility in maximizing value in a change of control transaction; (ii) the trustees established a process to maximize unitholder value on the basis of professional advice; and (iii) the process led to a premium offer from Ventas. On the basis of all these factors, Justice Blair, on behalf of the Court of Appeal, wrote:
I do not think the Trustees can be said to have failed in the exercise of their fiduciary obligations to their unitholders in these circumstances simply by agreeing in the Purchase Agreement to preclude earlier bidders, who had bound themselves under Standstill Agreements not to do so, from coming in after the auction was concluded and the "successful" bidder had showed its cards and attempting to "top up" that bid.3
Shortly after the Court of Appeal's decision in Ventas, a further dispute arose in Ontario concerning the interpretation and enforcement of standstill agreements. In Québecor Media Inc. v. Osprey Media Investment Fund,4 the Superior Court was asked by Québecor to apply Ventas and enforce a standstill agreement between Osprey and Black Press Ltd. Québecor and Black Press were competing bidders for Osprey. Québecor submitted an offer that was accepted after the first round of an auction process, but Black Press later submitted a superior proposal. The Superior Court in QMI found that Ventas did not apply, on the basis of three factual distinctions:
- In Ventas, there was no "spring"
provision in the standstill clause binding on the competing
bidder (HCP). Accordingly, HCP was still bound by its
standstill agreement at the time it made its competing bid.
In QMI, Black Press was "sprung" from the
standstill agreement when it made its first proposal to
- In Ventas, Sunrise REIT remained bound to
enforce the standstill agreement against HCP. Osprey was
under no such restriction in its dealings with Black
- In Ventas, Sunrise REIT did not provide explicit
prior written consent to HCP for its proposal, as required by
the standstill clause in that case. In QMI, Osprey
provided Black Press with the prior written consent required
by the standstill agreement.
In the result, there was no impediment to Black Press's offer. Following the Court's decision, Québecor made a further proposal and acquired Osprey.
Lockup And Support Agreements
In Sterling Centrecorp Inc.,5 the Ontario Securities Commission dealt in detail for the first time with support agreements, lockup agreements and the "joint actor" rule under Ontario securities law. The OSC concluded that an irrevocable lockup or support agreement alone cannot raise a presumption that a shareholder is a joint actor with a bidder, regardless of how tightly constrained the shareholder's ability may be under the agreement to act independently of the bidder.
Sterling announced on February 8, 2007 that it had entered into an arrangement agreement with SCI Acquisition Inc., a vehicle owned by four management insiders of Sterling who together controlled approximately 35 per cent of Sterling's common shares. SCI Acquisition proposed acquiring the remaining shares at $1.26. Before the special committee recommended the transaction and the board entered into an arrangement agreement, SCI Acquisition had advised the board that it intended to enter into support agreements that would ensure shareholder approval for the going-private transaction, restricting the possibility of a superior proposal being successful.
The arrangement was subject to the approval of two-thirds of Sterling's shareholders. Because the going-private transaction was an acquisition by insiders, the provisions of OSC Rule 61-501 applied, and therefore the transaction also had to be approved by a majority of Sterling's minority shareholders. The arrangement also was subject to court approval.
By the time Sterling shareholders voted on the arrangement, shareholders controlling 60.3 per cent of the shares not owned or controlled by SCI Acquisition had entered into support agreements. The shareholders who signed support agreements included Sterling's co–chief executive officer (who had initially been part of the insider group comprising SCI Acquisition but had withdrawn from the group), some senior Sterling employees and business partners.
The support agreements were "hard" or irrevocable agreements in that they prevented the shareholders from supporting a superior competing transaction unless SCI Acquisition elected to do so. The agreements required the shareholders not only to vote in favour of the SCI Acquisition transaction but also to vote against any proposal made in opposition to or in competition with that transaction, whether or not the agreement with SCI Acquisition had been terminated.
First Capital,6 a minority shareholder of Sterling, opposed the transaction both before the OSC and in court at the final "fairness" hearing for the arrangement. With respect to the OSC, First Capital requested a hearing to consider whether the parties to the support agreements were joint actors and therefore had to be excluded from the minority for the purpose of majority-of-the-minority approval required by Rule 61-501.
At the shareholders' meeting, the going-private transaction was approved. Just prior to the Sterling shareholders' meeting, First Capital announced its intention to make a take-over bid for Sterling, offering $1.62 per common share.
At the hearing, First Capital and OSC staff argued that Rule 61-501 creates a limited safe harbour for support agreements and lockup agreements provided that the agreements do no more than oblige shareholder counterparties to vote in favour of the transaction (in the case of support agreements) or tender to a bid (in the case of lockup agreements). First Capital and OSC staff argued that if the terms of a support agreement or lockup agreement go beyond simply an obligation to vote for or tender to a transaction, the limited safe harbour is inapplicable and there is a rebuttable presumption under the Securities Act (Ontario) that the parties to the agreement are joint actors. First Capital and OSC staff argued that the support agreements in the Sterling case were not protected by the safe harbour provision.
The OSC held, on the basis of Rule 61-501, that the terms of a support agreement or lockup agreement alone, whether "hard" or "soft," will not determine whether the parties are, or are presumed to be, joint actors. The OSC held that whether parties to a support agreement or lockup agreement are joint actors is a question of fact that requires consideration, not only of the terms of the agreement but also of the circumstances surrounding the making of the agreement and the relationship between the parties.
The OSC concluded that to be a joint actor, a party must have had a role in structuring, planning or promoting the transaction, be receiving different consideration from other shareholders or be receiving an interest in a different security of the corporation after the transaction closes.
In this case, the OSC found that Sterling's co-CEO was a joint actor because he had been part of the original insiders' acquisition group, and in that capacity had negotiated the offer price with certain shareholders and taken other steps to structure, plan and promote the going-private transaction. These were, the OSC concluded, the touchstones of joint actorship. The OSC ordered that his shares could not be voted with the minority. The OSC held that there was insufficient evidence to find that other shareholders who had signed support agreements were joint actors, and ordered no relief in respect of First Capital's application.
The effect of the OSC decision is to (i) allow parties more latitude in support and lockup agreements than a narrow reading of the joint actor provision of Rule 61-501 would permit; and (ii) make it easier for parties signing support and lockup agreements to resist being characterized as joint actors. Even if the terms of the agreement go beyond voting in favour of the transaction or tendering to a bid, this will not trigger a presumption that the parties to the agreement are joint actors with the burden of rebutting this presumption. Rather, minority shareholders who allege that parties who sign support or lockup agreements are joint actors have the burden of establishing this, whatever the terms of the agreements may provide.7
Plans Of Arrangement: Compromising Contractual Rights
The British Columbia Court of Appeal recently clarified an important aspect of the scope of the arrangement provisions in corporate statutes. In Protiva Biotherapeutics Inc. v. Inex Pharmaceuticals Corporation,8 the Court of Appeal considered whether the arrangement provisions of British Columbia's Business Corporations Act (BCBCA) allowed the court to compromise a third party's contractual rights. The Court of Appeal concluded that contractual rights could be compromised in an arrangement, and that the degree to which those rights were affected would be a relevant consideration when the arrangement was brought before the court for approval.
Inex proposed a plan of arrangement by which its assets and liabilities would be transferred to Tekmira Pharmaceuticals Corporation, and holders of Inex's common shares would ultimately receive new common shares of Inex and preferred shares of Inex that would be surrendered for Tekmira common shares. The arrangement was approved by Inex's shareholders and by the Supreme Court at the fairness hearing. Protiva opposed the arrangement, and appealed the decision approving it.
Protiva and Inex were parties to a series of agreements, which were not assignable other than with Protiva's consent. Protiva objected to Inex's plan of arrangement on the basis that it involved an assignment of the contracts to Tekmira, and that this would be commercially prejudicial to Protiva. Protiva argued that the arrangement provisions in the BCBCA did not allow the court to interfere with contractual rights.
The Court of Appeal rejected this argument and found that s. 291(4)(c) of the BCBCA authorized the Court to approve the transfer of the Inex-Protiva agreements to Tekmira. This provision allows the Court to make orders in respect of arrangements including "any incidental, consequential and supplemental orders necessary to ensure that the arrangement is fully and effectively carried out." The Court of Appeal held that this allowed the judge approving an arrangement to make an order that would result in the "displacement of contractual rights," and granted the power to the judge to "adjust contracts" in order to "achieve a workable plan of arrangement." The Court of Appeal noted that the greater the effect an arrangement has on contractual rights, the more restraint a court should show in exercising its discretionary power. The Court of Appeal rejected the argument that the discretion to compromise contractual rights should only be exercised where the arrangement is proposed out of necessity – for example, in the case of financial distress.
The Court of Appeal further held that it was important not to give a third party a veto in respect of an arrangement:
Third party rights must be considered and accommodated within the discretionary analysis but they cannot be erected as an impermeable barrier to an arrangement. Were it otherwise, the third party could exercise powerful leverage wholly out of proportion to the value of the rights compromised by the arrangement, or the party could simply act as a spoiler for purposes unrelated to those rights.9
Although the language in the BCBCA arrangement provisions is not identical to that found in other Canadian corporate statutes, similar language in the Canada Business Corporations Act (CBCA) and the Business Corporations Act (Ontario) (OBCA) arguably leads to the same result. The statutory arrangement provisions in those corporate statutes allow the court to make "any interim or final order it thinks fit" (s. 192 of the CBCA) or "such order as it considers appropriate" (s. 182 of the OBCA).
The recognition of the power of the court to compromise contractual rights in approving an arrangement is an important development. It provides explicit support for the practice in arrangements of adjusting or compromising the rights of holders of employee stock options or other incentive rights, and limits the ability of stakeholders with a proportionately small economic interest in a corporation – for example, debtholders – to block an arrangement that is otherwise in the best interests of shareholders.
Plans Of Arrangement: Voting Requirements
In McEwen v. Goldcorp Inc.,10 Ontario courts considered a challenge to the voting requirements for shareholder approval of plans of arrangement. Glamis Gold Inc. proposed an arrangement to its shareholders involving its acquisition by Goldcorp, to be effected by an exchange of Glamis shares for Goldcorp shares plus a cash payment. Robert McEwen was the former chief executive officer of Goldcorp and was its largest shareholder at the time the transaction was announced. McEwen opposed the Glamis transaction and brought proceedings alleging, among other things, that the OBCA required the arrangement to be put to the Goldcorp shareholders for approval. Justice Pepall of the Superior Court rejected McEwen's argument. The Divisional Court upheld that decision.
McEwen argued unsuccessfully that the share acquisition of Glamis was an "arrangement" of Goldcorp within the meaning of the OBCA, and therefore approval of the transaction by Goldcorp's shareholders (and the Court) was required. The motions judge confirmed the long-standing understanding and practice that shareholder approval of an arrangement is required only with respect to the corporation being arranged – in this case, Glamis. A corporation is only required to seek shareholder approval if it "proposes" an arrangement to its shareholders. In this case, Goldcorp was not proposing an arrangement and so shareholder approval was not required. Justice Pepall observed that a corporation should not find itself subject to the arrangement provisions of the OBCA by inadvertence, but rather only when it actively proposes an arrangement to its shareholders.
Justice Pepall also refused to exercise her discretion under the OBCA to order a shareholders' meeting and declined to find that the transaction was oppressive on the basis that McEwen had a reasonable expectation as a shareholder that he would be entitled to vote on a transaction such as the arrangement. The Court found that any expectation that Goldcorp would seek shareholder approval in the circumstances was not reasonable, and that in any event the Goldcorp directors' decision to proceed with the transaction in this form was the result of a good faith exercise of their business judgment and was entitled to deference.
1. 2007), 85 O.R. (3d) 254 (C.A.), affirming 29 B.L.R. (4th) 183 (Ont. S.C.J.) [Ventas].
2. C.A., ibid. at para. 55.
3. Ibid. at para. 56. The British Columbia Court of Appeal considered the enforceability of standstill agreements in 2006 in Aurizon Mines Inc. v. Northgate Minerals Corp. (2006), 55 B.C.L.R. (4th) 203 (C.A.). In upholding the decision enforcing a standstill agreement against a bidder, the Court recognized that enforcing standstill agreements is in the public interest. The Court found that the purpose of standstill agreements is to facilitate the merger and acquisition process by permitting parties to enter into strategic dialogue and exchange non-public information cooperatively, without the bidder incurring the risk of a hostile takeover bid.
4.  O.J. No. 3070 (S.C.J.) [QMI].
5. (2007), 30 O.S.C.B. 6683 [Sterling].
6. For whom Torys LLP acted.
7. After the OSC released its decision, the Court approved the plan of arrangement as fair and reasonable to Sterling's shareholders.
8. (2007), 280 D.L.R. (4th) 704 (B.C.C.A.), affirming 2006 BCSC 1729 (S.C.).
9. B.C.C.A., ibid. at para. 21.
10. (2006), 21 B.L.R. (4th) 262 (Ont. S.C.J.), affirmed 21 B.L.R. (4th) 306 (Ont. Div. Ct.).
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.