Overview
A termination fee clause was intended to apply broadly, but the M&A agreement was drafted such that it only applied in narrow circumstances. What happens?
Chemtrade Electrochem Inc v Superior Plus Corporation, 2025 ABCA 31 is an important reminder about the need for precision in M&A agreements. Evidence of the parties' subjective understanding of M&A terms during the negotiations cannot overwhelm the text of the agreement.
Facts
Superior Plus Corporation ("Superior") agreed to acquire all of the shares in Chemtrade Electrochem Inc. (formerly known as Canexus Corporation) ("Canexus") by way of a plan of arrangement (the "Agreement") with an outside date of June 29, 2016 (the "Outside Date"). From the onset of their negotiations, the parties fully appreciated the need for Canadian and American competition and anti-trust regulatory approval.
The Agreement provided for a reverse termination fee of $25 million payable by Superior to Canexus (the "Reverse Termination Fee") if, among other things, "HSR Approval [was] not obtained on or prior to the Outside Date." HSR Approval was defined as:
"the expiration or early termination of any waiting period, and any extension thereof, applicable to the completion of the transactions contemplated by this Agreement under the [United States Hart-Scott-Rodino Antitrust Improvements Act of 1976]."
The parties tried to address the U.S. government's concerns for over 8 months and entered into a standstill agreement with the U.S. government after the statutory waiting periods had expired.1 Nevertheless, they did not obtain the necessary U.S. government approval to complete the Arrangement before the Outside Date.
Both parties terminated the agreement on June 30, 2016. Canexus sought the Reverse Termination Fee, claiming that HSR Approval had not been obtained by the Outside Date.2
The Decisions
The key issue was whether HSR Approval — as defined in the Agreement — was obtained by the Outside Date. Clearly, the parties had not obtained the necessary U.S. regulatory approvals before the Outside Date.
Superior's defence relied on two arguments.
First, Superior argued that HSR Approval was obtained after the statutory waiting periods had expired. The trial judge rejected this argument because it did not give effect to the words "and any extension thereof" in the definition of HSR Approval. The Court of Appeal found no error in the trial judge's finding that the standstill agreement had the effect of delaying the expiry of the waiting period "for the purposes of the definition of HSR Approval", even though the statutory waiting period was not extended.3
Second, Superior argued that HSR Approval was obtained when the standstill agreement with the U.S. government expired. The trial judge rejected this argument finding that "HSR Approval meant that the parties would have the necessary U.S. government approval to complete the Arrangement", which plainly did not occur.4
The Court of Appeal disagreed, finding that the trial judge erred by allowing the parties' "subjective intentions" during their negotiation to overwhelm the words in the Agreement.5 HSR Approval, as defined, only required that the parties wait through the statutorily required waiting periods outlined in the HSR Act or any extension thereof. Significantly, the definition did not require that the parties actually obtain regulatory approval. If the parties wanted the Reverse Termination Fee payable from lack of regulatory approval, they should have expressly noted the need for regulatory approval in the definition.6 In other words, the trial judge thus effectively re-wrote the narrow definition of HSR Approval to read in regulatory approval. There was commercial logic to Superior's position: while regulatory approval was clearly required before closing (such approval being a condition precedent to closing), it was irrelevant to the reverse termination fee (triggered by failure to obtain HSR Approval as defined).
Takeaways
Chemtrade is a stark reminder of the importance of precision in M&A agreements. Subjective intentions cannot trump wording in an agreement.
Here, there was ample evidence that the parties' business principals discussed Superior paying a reverse termination fee if the necessary regulatory approvals were not obtained, including from non-binding proposals made by Superior. Moreover, Superior's board of directors was even advised that the proposed transaction included the Reverse Termination Fee payable by Superior to Canexus "in the event the transaction fails to receive regulatory approval."7 However, the formulation of the trigger for the Reverse Termination Fee and related definitions were left to counsel, who negotiated and exchanged a number of drafts. The Court was bound to interpret the Agreement in its final form, not as the parties' principals may have intended or understood it.
For example, in order to reflect the intent of the parties and protect a target issuer, it may be necessary, depending on the parties' intent, for the formulation of the triggers for the Reverse Termination Fee to include a broad "Illegality" closing condition not being satisfied by the Outside Date as triggering the Reverse Termination Fee.
Footnotes
1. A high level chronology:
- On October 21, 2015, the parties submitted the necessary documentation to the DOJ and FTC to trigger the first 30 day review and waiting period.
- On November 20, 2015, the FTC asked for additional information (the "Second Request"), which triggered a second mandatory 30 day review period.
- On January 14, 2016, the parties entered into a standstill agreement with the FTC in which they agreed, among other things, to provide at least 10 days notice to the FTC before consummating the transaction.
- On February 12, 2016, both parties certified substantial compliance with the Second Request and the FTC did not take issue with their certifications.
- On June 9, 2016, the parties gave notice to the FTC that their commitment under the timing agreement not to close the transaction would expire on June 28, 2016. After months of back and forth, the parties had been unable to resolve the FTC's concerns.
- On June 28, 2016, the FTC obtained a temporary restraining order and preliminary injunction preventing the parties from closing the transaction.
2. Superior sought a termination fee at trial but abandoned its claim for a terminate fee on appeal.
3. Chemtrade Electrochem Inc v Superior Plus Corporation, 2025 ABCA 31 ¶29-30.
4. Chemtrade Electrochem Inc v Superior Plus Corporation, 2025 ABCA 31 ¶31.
5. Chemtrade Electrochem Inc v Superior Plus Corporation, 2025 ABCA 31 ¶37.
6. Chemtrade Electrochem Inc v Superior Plus Corporation, 2025 ABCA 31 ¶38.
7. Chemtrade Electrochem Inc v Superior Plus Corporation, 2022 ABKB 858 ¶31.
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