Ventas, Inc. v. Sunrise Senior Living Real Estate Investment Trust | 2007 ONCA 205 | March 20, 2007

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Ventas, Inc. v. Sunrise Senior Living Real Estate Investment Trust

CITATION: Ventas, Inc. v.  Sunrise Senior Living Real Estate Investment Trust,  2007 ONCA 205
DATE:  20070323
DOCKET: C46790 & C46791

COURT OF APPEAL FOR ONTARIO

BLAIR, MacFARLAND and LaFORME JJ.A.

B E T W E E N :

VENTAS, INC., 2124678 ONTARIO INC., and 2124680 ONTARIO INC.
Applicants (Respondents in Appeal)

Peter F.C. Howard and Eliot Kolers for the Appellants ( Sunrise Senior Living Real Estate Investment Trust, Sunrise REIT Trust, and Sunrise REIT GP Inc.)

- and -

SUNRISE SENIOR LIVING REAL ESTATE INVESTMENT TRUST, SUNRISE REIT TRUST, SUNRISE REIT GP, INC., SUNRISE SENIOR LIVING INC., and HEALTH CARE PROPERTY INVESTORS, INC.
Respondents (Appellants in Appeal)

Jeffrey S. Leon and Derek J. Bell, for the Appellants (Health Care Property Investors, Inc.)

A N D  B E T W E E N :

SUNRISE SENIOR LIVING REAL ESTATE INVESTMENT TRUST, SUNRISE REIT TRUST, and SUNRISE REIT GP, INC.
Applicants (Appellants in Appeal)

Mark A. Gelowitz and Laura K. Fric, for the Respondents (Ventas, Inc. and numbered companies)

- and -

VENTAS SSL ONTARIO II, INC. (FORMERLY 2124678 ONTARIO INC.), VENTAS SSL ONTARIO I, INC. (FORMERLY 2124680 ONTARIO INC.), VENTAS INC.,SUNRISE SENIOR LIVING, INC., and HEALTH CARE PROPERTY INVESTORS, INC.
Respondents (Respondents in Appeal) (Ventas Inc. and numbered companies) (Appellant by Cross-Appeal) (Health Care Property Investors, Inc.)

Luis G. Sarabia and Cynthia Spry, for the Respondent Sunrise Senior Living Inc.

Heard:  March 20, 2007

On appeal from the Order of Justice Sarah E. Pepall of the Superior Court of Justice dated March 6, 2007.

R.A. BLAIR J.A.:

            OVERVIEW

[1]               Sunrise REIT is a Canadian public real estate investment trust whose units are traded on the Toronto Stock Exchange.  It owns and invests in senior living communities in Canada and the United States .  In September 2006, Sunrise’s board of trustees determined that a strategic sale process of its assets would be beneficial to its unitholders, thus effectively putting Sunrise “in play” on the public markets.

[2]               To carry out this plan, the Trustees developed a two-stage auction process with a view to maximizing the value of Sunrise’s units.  Ventas, Inc. (“Ventas”) and Health Care Property Investors, Inc. (“HCPI”) were two of seven initially interested prospective purchasers in the auction process.  They emerged from the preliminary round as the only two potential bidders asked to participate in the final round. 

[3]               Ventas submitted a successful bid to acquire all of Sunrise’s assets for a total purchase price of $1,137,712,410 (representing a price of $15 per unit), subject to unitholder approval.  HCPI withdrew from the auction process and did not bid at that time.  Instead, it put forward a post-auction bid – after it knew what Ventas had offered – “topping up” the Ventas offer by twenty per cent to $18 per unit.  This increased offer represents an additional $227.5 million for the unitholders, who are to meet on March 30, 2007, to consider the Ventas proposal.

[4]               Hence the urgency of this appeal.

[5]               The appeal turns on the interpretation of the terms of the purchase agreement executed by Sunrise and Ventas following acceptance of the Ventas bid.  The issue is whether Sunrise is obliged to enforce the terms of a prior standstill agreement entered into between it and HCPI in the course of the auction process and which prohibits HCPI from making an offer for the Sunrise assets without Sunrise’s consent.  If the answer to that question is “Yes”, Sunrise will be precluded from considering or accepting the richer HCPI offer pending the unitholders’ meeting.

[6]               Following an urgent application, determined on March 6, 2007, Justice Pepall answered the foregoing question in the affirmative.  Sunrise and HCPI appeal from that decision.  Ventas supports it.

[7]               For the reasons that follow, I would dismiss the appeal and uphold the decision of the application judge.

FACTS

[8]               As mentioned above, Sunrise owns and invests in senior living communities in Canada and the United States . The properties are managed by Sunrise Senior Living, Inc. (“SSL”), a U.S. public company whose shares are traded on the New York Stock Exchange.

[9]               HCPI is a self-administered real estate investment trust that also invests in healthcare facilities.  Ventas is a U.S.-based health care real estate investment trust whose shares are listed on the New York Stock Exchange.

[10]          In September 2006, after Sunrise’s board of trustees determined that a strategic sale process of the Trust’s assets would be beneficial to its unitholders, it began an auction process with a view to maximizing unitholder value.

[11]          Parties who were interested in acquiring Sunrise (including HCPI and Ventas) were required to enter into a confidentiality agreement with it in order to prevent non-public information exchanged by the parties from being publicly disclosed (the “Confidentiality Agreements”). The Confidentiality Agreements contained restrictions preventing each prospective acquiring party from attempting a hostile (unsolicited) takeover bid (the “Standstill Agreements”).

[12]          Although the parties’ Confidentiality Agreements were largely similar, Ventas’s Standstill Agreement was worded differently from HCPI’s in that the Ventas standstill ceased to apply if, among other things, Sunrise entered into an agreement to sell more than twenty per cent of its assets to a third party.  Notably, HCPI’s Standstill Agreement did not contain a similar termination clause.

[13]          On November 21, 2006, Sunrise invited potential bidders to submit bids in the non-binding preliminary round of an auction. After the first round of bids, Sunrise invited HCPI and Ventas to engage in further negotiations and on December 29, 2006, it invited them to submit final binding bids in the second round of the auction by January 8, 2007.  Sunrise waived the Standstill Agreements with those bidders for that purpose, and HCPI and Ventas were expressly told not to assume that the “winning” bid was assured of actually acquiring Sunrise at the price agreed upon or that they would be given an opportunity to rebid, renegotiate, or improve the terms of their proposal.

[14]          Ventas submitted a second bid on January 8, but HCPI withdrew from the auction and did not.

[15]          On January 14, 2007, Ventas and Sunrise signed an agreement contemplating the purchase by Ventas of all of Sunrise’s assets for a total purchase price of $1,137,712,410 (representing a price of $15.00 per Unit), subject to Unitholder approval (the “Purchase Agreement”). This price represented a 35.8% premium over the closing price of the units on January 12, 2007.  The Purchase Agreement contemplated subsequent third-party unsolicited bids and allowed Sunrise to accept such a bid if it was financially superior to Ventas’s bid.

[16]          On January 17, 2007, Sunrise notified HCPI of the agreement with Ventas and asked for the return of Sunrise’s confidential materials.  In the letter, Sunrise’s solicitor reminded HCPI of the terms of the Confidentiality Agreement it signed in November 2006.

[17]          On February 14, 2007, HCPI submitted a proposal to acquire all of Sunrise’s assets for $18.00 per unit (the “HCPI Proposal”), conditional on HCPI’s ability to reach a management agreement with SSL.   Sunrise treated the HCPI Proposal as an unsolicited third-party bid, but it concluded that it was not in a position to determine whether the bid was a superior bid because of the SSL condition.

[18]          The Confidentiality Agreements entered into in the course of the auction process contained a provision prohibiting prospective purchasers from communicating with SSL.  This was because SSL was viewed as a possible bidder.  Following the preliminary round of the auction, in late November 2006, and after realizing that SSL was not an interested purchaser, Sunrise had authorized its financial advisors to arrange to allow HCPI and Ventas to contact SSL for purposes of the second round of bidding.  On February 15, 2007, however – after learning of the HCPI Proposal – Ventas advised Sunrise that, if it permitted communications between SSL and HCPI, Sunrise would be in breach of the Purchase Agreement.  It did not assert that HCPI would be in breach of its Standstill Agreement because it apparently assumed that HCPI’s Standstill Agreement was worded similarly to the Ventas Standstill Agreement, which meant that the restraint on an unsolicited bid was no longer enforceable since Sunrise had entered into an agreement with a third party. 

[19]          On February 18, 2007, Sunrise served application materials upon Ventas, HCPI and SSL indicating its intention to seek the court’s interpretation of the Purchase Agreement, specifically on the issue of communications between HCPI and SSL. It is at this point that Ventas learned of the specific terms of HCPI’s Confidentiality Agreement and realized that HCPI’s Standstill Agreement did not contain the same termination clause as Ventas’s Standstill Agreement. On February 21, 2007, Ventas brought the within Application seeking a declaration that Sunrise was required to enforce its Standstill Agreement with HCPI, thereby preventing it from considering the HCPI Proposal.

[20]          The application judge found that Sunrise had agreed with Ventas that it would enforce existing Standstill Agreements and that any bid made in breach of an existing Standstill Agreement would not be bona fide.  She then concluded that Sunrise was required to enforce the Standstill Agreement with HCPI and that HCPI did not have prior written consent to submit its bid.  She dismissed Sunrise’s application on the grounds that the issue was moot in light of her earlier conclusion.

THE PROVISIONS OF THE AGREEMENT

[21]          Section 4 of the Purchase Agreement deals generally with the covenants of the parties.  Section 4.4 deals with Sunrise’s “Covenants Regarding Non-Solicitation”.  Because of their importance, I reproduce the provisions of section 4.4 in their entirety (the underlining is mine):

4.4(1)   Following the date hereof, Sunrise REIT shall not, directly or indirectly, through any trustee, officer, director, agent or Representative of Sunrise REIT or any of its Subsidiaries, and shall not permit any such Person to,

(i)        solicit, initiate, encourage or otherwise facilitate (including by way of furnishing information or entering into any form of agreement, arrangement or understanding or providing any other form of assistance) the initiation of any inquiries or proposals regarding, or other action that constitutes, or may reasonably be expected to lead to, an actual or potential Acquisition Proposal,

(ii)       participate in any discussions or negotiations in furtherance of such inquiries or proposals or regarding an actual potential Acquisition Proposal or release any Person from, or fail to enforce, any confidentiality or standstill agreement or similar obligations to Sunrise REIT or any of its Subsidiaries,

(iii)     approve, recommend or remain neutral with respect to, or propose publicly to approve, recommend or remain neutral with respect to, any Acquisition Proposal,

(iv)            accept or enter into any agreement, arrangement or understanding, related to any Acquisition Proposal (other than a confidentiality agreement contemplated in Section 4.4(2)), or

(v)       withdraw, modify or qualify, or publicly propose to withdraw, modify or qualify, in any manner adverse to the Purchasers, the approval or recommendation of the Board (including any committee thereof) of this Agreement or the transactions contemplated hereby.

(2)         Notwithstanding anything contained in Section 4.4(1), until the Unitholder Approval, nothing shall prevent the Board from complying with Sunrise REIT’s disclosure obligations under applicable Laws with regard to a bona fide written, unsolicited Acquisition Proposal or, following the receipt of any such Acquisition Proposal from a third party (that did not result from a breach of this Section 4.4), from furnishing or disclosing non-public information to such Person if and only to the extent that:

(i)        the Board believes in good faith (after consultation with its financial advisor and legal counsel) that such Acquisition Proposal if consummated could reasonably be expected to result in a Superior Proposal; and

(ii)       such third party has entered into a confidentiality agreement containing terms in the aggregate no more favourable to such third party than those in the Confidentiality Agreement as are then in effect in accordance with its terms.

(3)         Notwithstanding anything, contained in Section 4.4(1), until the Unitholder Approval, nothing shall prevent the Board from withdrawing or modifying, or proposing publicly to withdraw or modify its approval and recommendation of the transactions contemplated by this Agreement, or accepting, approving or recommending or entering into any agreement, understanding or arrangement providing for a bona fide written, unsolicited Acquisition Proposal (that did not result from a breach of this Section 4.4) (“Proposed Agreement”) if and only to the extent that:

(i)        it has provided the Purchasers with a copy of all of the documents relating to the Acquisition Proposal,

(ii)       the Board, believes in good faith (after consultation with its financial advisor and legal counsel) that such Acquisition Proposal constitutes a Superior Proposal and has promptly notified the Purchasers of such determination,

(iii)           a period of at least five Business Days (the “Matching Period”) has elapsed following the later of (x) the date the Purchasers received written notice advising the Purchasers that the Board has resolved, subject to compliance with this Section 4.4(3), to withdraw, modify its approval and recommendation of the transactions contemplated by this Agreement or accept, approve or recommend or enter into a Proposed Agreement in respect of such Superior Proposal and (y) the date the Purchasers received a copy of the documentation related to such Superior Proposal pursuant to Section 4.4(3)(i),

(iv)      if the Purchasers have proposed to amend the transactions contemplated under this Agreement in accordance with Section 4.4(6), the Board has again made the determination in Section 4.4(3)(ii) taking into account such proposed amendments; and

(v)       if Sunrise REIT proposes to enter into a Proposed Agreement (other than a confidentiality agreement referred to in Section 4.4(2)) after complying with this Section 4.4(3), Sunrise REIT shall have complied with Section 5.2 and 5.3. For the purposes of this Section 4.4(3) the preparation and delivery of a directors’ circular pursuant to Section 99 of the Securities Act relating to an Acquisition Proposal shall be deemed to be a qualification, withdrawal or modification, of the Board’s recommendation of the transactions contemplated hereby unless the Board expressly, and without qualification, reaffirms its recommendation of the transactions contemplated hereby in such disclosure.

(4)         If the expiry of the Matching Period referred to in Section 4.4(3)(iii) falls on a date which is less than five Business Days prior to the Unitholder Meeting, Sunrise REIT shall, at the request of the Purchasers, adjourn the Unitholder Meeting to a date that is not more than 10 Business Days following such expiry date.

(5)         Sunrise REIT acknowledges and agrees that each successive amendment to any Acquisition Proposal shall constitute a new Acquisition Proposal for purposes of section 4.4.

(6)         During the Matching Period, the Purchasers shall have the right, but not the obligation, to propose to amend the terms of this Agreement. The Trustees will review any proposal by the Purchasers to amend the terms of this Agreement in good faith in order to determine (after consultation with their financial advisor and legal counsel) whether the transactions contemplated by this Agreement, taking into account the Purchasers’ proposed amendments would, if consummated in accordance with its terms, result in the Superior Proposal ceasing to be a Superior Proposal. If the Trustees so determine, Sunrise REIT will enter into an amending agreement with the Purchasers reflecting such proposed amendment.

(7)                  Sunrise REIT shall, as promptly as practicable, notify the Purchasers of any relevant details relating to any Acquisition Proposal, or inquiry that could reasonably be expected to lead to any Acquisition Proposal, or any amendments to any Acquisition Proposal (including the identity of the parties and all material terms thereof), or any request for non-public information relating to Sunrise REIT or any of its Subsidiaries in connection with an Acquisition Proposal or inquiry that could reasonably be expected to lead to any Acquisition Proposal, or for access to the properties, books or records of Sunrise REIT or any of its Subsidiaries by any Person that informs Sunrise REIT or such Subsidiary that it is considering making, or has made, an Acquisition Proposal, or inquiry that could reasonably be expected to lead to any Acquisition Proposal, in each case which any of Sunrise REIT, any of its Subsidiaries or any officer, trustee, director, employee or Representative may receive after the date hereof relating to an Acquisition Proposal. Sunrise REIT shall promptly and fully keep the Purchasers informed of the status on a current basis, including any change to any of the terms, of any such Acquisition Proposal.

(8)         Sunrise REIT shall

(i)        ensure that its officers and Trustees and its Subsidiaries and their respective officers and directors and any Representatives retained by it or its Subsidiaries in connection herewith are aware of the provisions of this Section 4.4, and Sunrise REIT shall be responsible for any breach of this Section 4.4 by its and its Subsidiaries’ officers, directors, trustees or representatives;

(ii)       immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted heretofore with respect to any Acquisition Proposal;

(iii)           require all Persons other than the Purchasers who have been furnished with confidential information regarding Sunrise REIT or its Subsidiaries in connection with the solicitation of or discussion regarding any Acquisition Proposal within 12 months prior to the date hereof promptly to return or destroy such information, in accordance with and subject to the terms of the confidentiality agreement entered into with such Persons;

(iv)      terminate access for all Persons (other than the Purchasers and its Representatives) of the electronic dataroom accessible through Merrill Datasite’s website; and

(v)                not amend, modify, waive or fail to enforce any of the standstill terms or other conditions included in any of the confidentiality agreements between Sunrise REIT and any third parties.

[22]          The Purchase Agreement defines “Acquisition Proposal” and “Superior Proposal” as follows:

“Acquisition Proposal” means any proposal or offer made by any Person other than the Purchasers (or any affiliate of the Purchasers or any Person acting jointly and/or in concert with the Purchasers or any affiliate of the Purchasers) with respect to the acquisition, directly or indirectly, of assets, securities or ownership interests of or in Sunrise REIT or any of its Subsidiaries representing 20% or more of the consolidated assets of Sunrise REIT and its Subsidiaries taken as a whole, in a single transaction or a series of transactions, or, of equity interests representing a 20% or greater economic interest in Sunrise REIT or such Subsidiaries taken as a whole, in a single transaction or a series of transactions pursuant to any merger, amalgamation, tender offer, share exchange, business combination, liquidation, dissolution, recapitalization, take-over or non-exempt issuer bid, amendment to the Declaration of Trust, redemption of units, extraordinary distribution, sale, lease, exchange, mortgage, pledge, transfer, purchase, or issuance as consideration or similar transaction or series of transactions involving Sunrise REIT or any of such Subsidiaries or any other transaction the consummation of which would reasonably expected to impede, interfere with, prevent or materially delay the transactions contemplated hereby.

“Superior Proposal” means any unsolicited bona fide written Acquisition Proposal made by a third party that in the good faith determination of the Trustees, after consultation with its financial advisors and with outside counsel:

(a)       is reasonably capable of being completed without undue delay having regard to financial, legal, regulatory and other matters;

(b)       in respect of which adequate arrangements have been made to ensure that the required funds will be available to effect payment in full of the consideration; and

(c)              would, if consummated in accordance with its terms, result in a transaction more favourable to Unitholders from a financial point of view (including financing terms, any termination fee or expenses reimbursement payable under this Agreement, any conditions to the consummation thereof) than the transactions contemplated by this Agreement; provided, however, that for purposes of this definition the references in the definition of Acquisition Proposal to “20%” shall be deemed to be references to “100%”.

ANALYSIS

[23]           The central issue on this appeal, as it was before the application judge, is whether the provisions of section 4.4 of the Purchase Agreement impose an obligation on Sunrise to enforce the Standstill Agreement between it and HCPI, thus precluding it from considering the Acquisition Proposal submitted by HCPI following the close of the auction and after the Ventas bid had been accepted.  In my view, they do.

[24]          Counsel accept that the application judge correctly outlined the principles of contractual interpretation applicable in the circumstances of this case.  I agree.  Broadly stated – without reproducing in full the relevant passages from her reasons (paras. 29-34) in full  – she held that a commercial contract is to be interpreted,

(a)  as a whole, in a manner that gives meaning to all of its terms and avoids an interpretation that would render one or more of its terms ineffective;[1]

(b)  by determining the intention of the parties in accordance with the language they have used in the written document and based upon the “cardinal presumption” that they have intended what they have said;[2]

(c)  with regard to objective evidence of the factual matrix underlying the negotiation of the contract, but without reference to the subjective intention of the parties;[3] and (to the extent there is any ambiguity in the contract),

(d)  in a fashion that accords with sound commercial principles and good business sense, and that avoid a commercial absurdity.[4]

[25]          The appellants assert, however, that the application judge misapplied the principles of contractual interpretation that she had properly enunciated.  They say she did so essentially,

a)      by misapprehending the interplay between sections 4.4(1), 4.4(2), 4.4(3) and 4.4(8)(v) of the Purchase Agreement and, in particular by failing to appreciate, and to reconcile, the differences  between the wording of sections 4.4(1) and 4.4(8), and more generally,

b)     by failing to understand the “architecture” of section 4.4 of the Purchase Agreement and to consider it against the background of the factual matrix in which the Agreement was negotiated.

[26]          I do not agree.

The Application Judge’s Reasoning

[27]          The thrust of the application judge’s reasoning in this regard is found at paragraphs 35, 36, 38 and 39 of her reasons:

35     Sunrise REIT expressly and unambiguously agreed that it would not amend, modify, waive or fail to enforce any of the standstill terms or other conditions included in any of the confidentiality agreements between Sunrise REIT and any third parties. The standstill enforcement obligations are found in sections 4.4(1) and 4.4(8) of the Purchase Agreement.

36     Sections 4.4(2) and 4.4(3) address Sunrise REIT's obligations with regard to “a bona fide written, unsolicited Acquisition Proposal (that did not result from a breach of this section 4.4).” Sections 4.4(2) and 4.4(3) are prefaced with the words “notwithstanding anything contained in section 4.4(1).” Sections 4.4(2) and (3) do not say “notwithstanding anything contained in section 4.4(1) or 4.4(8).” If it had been the parties’ contractual intention to exempt the circumstances described in sections 4.4(2) and (3) from the operation of section 4.4(8), they could have so provided but they did not. Similarly, unlike sections 4.7 and 4.8 which commence with the words “notwithstanding any other term of the Agreement”, sections 4.4(2) and 4.4(3) do not use this language.

38     It seems to me that the clear scheme of this Purchase Agreement was [to] ensure enforcement of standstill agreements that had been signed as part of the auction process. This strikes me as being objectively reasonable and was a form of protection afforded to the purchaser, Ventas. This was part of the package negotiated between it and Sunrise REIT.

39     Such an interpretation derives from the words used by the parties to the Purchase Agreement and gives effect to the parties’ intention. It is also consistent with the context of the transaction including the auction process which was the genesis of the Purchase Agreement. The Purchase Agreement does not preclude bona fide written unsolicited Acquisition Proposals nor does it preclude such a proposal from a party whose standstill agreement operated to permit such a proposal. It simply precludes a proposal from anyone who is in breach of its standstill agreement. While creative, I view Sunrise REIT's and HCP's interpretation arguments to be strained. They disregard the parties’ intention and the true meaning of the subject sections and the Purchase Agreement as a whole. [Footnote omitted.]

            The Scheme and Interpretation of Section 4.4

[28]          I agree with the application judge that an important purpose of this part of the Purchase Agreement is to ensure the enforcement of standstill agreements entered into by previous players in the auction process.  The negotiating context demonstrates that Ventas has been skilful in protecting its own position with respect to competition and standstills – unlike the HCPI Standstill, the Ventas/Sunrise Standstill Agreement expired at the conclusion of the auction – and it is objectively reasonable, given this background, that it would seek protection against competition from those who were unsuccessful in the auction, particularly its principle competitor.

[29]          From Sunrise’s perspective, the safety valve lies in the unitholders’ meeting.  If the unitholders believe that there is a more favourable offer available – one worth the risk of rejecting the Ventas proposal – they may well vote to reject the Ventas proposal at their meeting on March 30.

[30]          The language used by the parties in the Purchase Agreement supports this interpretation. 

[31]          Viewed contextually, sections 4.4(1), 4.4(2), 4.4(3) and 4.4(8) form part of a section of the Purchase Agreement that deals with the general covenant of Sunrise not to shop for other offers pending unitholder consideration of the Ventas bid.  Viewed in light of the factual matrix in which the Agreement was negotiated, the provisions provide deal protection for Ventas, as the successful bidder in the auction, subject to Sunrise REIT’s fiduciary out obligations.

[32]          As I read section 4.4 of the Agreement, it has four major components.  First, it contains the overriding obligation of Sunrise not to solicit other bids, buttressed by the commitment of Sunrise to enforce existing standstill agreements that may be in place with bidders who have already engaged in the auction process (section 4.4(1)).  Secondly, it contains the “fiduciary out” protection for the Sunrise Trustees (and unitholders), permitting the Trustees to consider bona fide unsolicited Acquisition Proposals from third parties (that are not in breach of the provisions of section 4.4) (sections 4.4(2) and 4.4(3)).  Thirdly, it contains a series of provisions dealing with how the parties are to address a situation where a permitted Acquisition Proposal is received (sections 4.4(3) – 4.4(7)).[5]  Lastly, section 4.4(8)(v) returns to the general non-solicitation obligation, reinforcing it by ensuring that Sunrise will (i) ensure all of its officers, Trustees and agents are aware of the non-solicitation provisions, (ii) immediately stop negotiating with anyone previously involved in the bidding process, (iii) require those bidders to return any confidential documentation and information they may have received during the process, (iv) terminate access to the data room by anyone other than Ventas and its representatives, and finally (a reiteration of the requirement set out in section 4.4(1)):

(v) not amend, modify, waive or fail to enforce any of the standstill terms or other conditions included in any of the confidentiality agreements between Sunrise REIT and any third parties …

[33]          Contrary to the appellants’ submissions, however, it is not any Acquisition Proposal that the Trustees are free to consider as part of the fiduciary out scenario; it is only an Acquisition Proposal from a third party that is not in breach of section 4.4 of the Agreement.

[34]          Properly understood in this fashion, then, a reading of section 4.4 demonstrates that there is no conflict between the provisions of sections 4.4(1)(ii), 4.4(2), 4.4(3) and 4.4(8)(v).  The repeated standstill enforcement terms complement one another.  As the application judge pointed out, the opening phrases of sections 4.4(2) and 4.4(3) – “notwithstanding anything contained in Section 4.4(1)” – do not have the words “or Section 4.4(8)(v)” added to them.  This reinforces the interpretation that section 4.4(8)(v) is there to clarify that Sunrise’s obligation to enforce its Standstill Agreements with third parties is not negated by the fiduciary out clause.  An unsolicited proposal by a prior bidder bound by a Standstill Agreement is a proposal that is otherwise in breach of section 4.4, because it violates section 4.4(8)(v), and therefore is not immunized by the fiduciary out provisions.

[35]          In that sense, contrary to the appellants’ submissions, the application judge’s reading of the Purchase Agreement does not reduce section 4.4(8)(v) to simply the functional equivalent of section 4.4(1)(ii).  Nor is it a case of section 4.4(8)(v) continuing to require the enforcement of a Standstill Agreement even when the fiduciary out clause is otherwise applicable.  The fiduciary out clause does not apply where the unsolicited proposal is tendered in breach of the non-solicitation provisions of the Purchase Agreement, i.e., in breach of a Standstill Agreement that Sunrise is obliged to enforce.  The fiduciary out formula is an important feature of the non-solicitation format, but it does not allow Sunrise to resile from the terms of its Standstill Agreements with earlier bidders, in my opinion.

The Difference in Wording between Sections 4.4(1)(ii) and 4.4(8)(v)

[36]          Mr. Howard emphasized what he argued was a difference in wording between those two provisions.  He points out that section 4.4(1)(ii) expressly refers to situations involving “an actual or potential Acquisition Proposal” whereas section 4.4(8)(v) contains no such reference, and further, that other subsections of section 4.4(8) – namely, sections 4.4(8)(ii) and (iii) – refer to Acquisition Proposals as well, although not in the context of standstill agreements (4.4(8)(ii) and 4.4(8)(iii)).  Because section 4.4(8)(v) does not refer to “Acquisition Proposals”, Mr. Howard submits it does not apply in the context of such a proposal and therefore does not apply in the context of the HCPI Acquisition Proposal.

[37]          There are several problems with this argument.  First, it misapprehends the fact that any proposal to acquire more than twenty percent of the assets of Sunrise – whether made before or after the close of the auction – constitutes an “Acquisition Proposal” as defined in the Agreement.  Consequently, section 4.4(8)(v) can only apply in the context of an Acquisition Proposal of some sort, regardless of its wording. 

[38]          Secondly, the argument appears to be founded on the unarticulated premise that an Acquisition Proposal, as referenced in sections 4.4(1)(ii), 4.4(2) and 4.4(3), is the equivalent of a Superior Proposal.  The appellants’ theory of the Agreement is that the Trustees are entitled to consider any Acquisition Proposal received after the close of the auction, and that the commitment in section 4.4(8)(v) to enforce standstill agreements only applies in the event that a subsequent Acquisition Proposal received by the Trustees does not make the grade as a Superior Proposal.  The function of section 4.4(8)(v), they say, is to permit the Trustees in such circumstances to prevent a bidder in such a case – whether a prior bidder or not – from continuing to participate in the bidding process.

[39]          It is not the case, however, that an Acquisition Proposal and a Superior Proposal are the same thing.  The latter is a narrower concept than the former.  While an Acquisition Proposal is essentially an offer by anyone to acquire more than twenty percent of the assets of Sunrise, a Superior Proposal is an Acquisition Proposal[6] that is more favourable to the unitholders from a financial point of view than the Ventas bid.  Sunrise submits, at paragraph 43 of its factum, that section 4.4(8)(v) “is part of the filtering protection for both Ventas and Sunrise REIT that allows and obliges Sunrise REIT to deal summarily with offers that do not meet the Acquisition Proposal threshold.” Sunrise does not mean the “Acquisition Proposal threshold” in this statement, however; it means the “Superior Proposal threshold.”  To support the appellants’ argument, the reference to “Acquisition Proposal” in section 4.4(1)(ii) would have to be read as “Superior Proposal”.  That is not what it says.

[40]          Moreover, and in any event, a careful reading of section 4.4(1)(ii) does not bear out the nexus between the reference to “Acquisition Proposal” and the commitment to enforce the standstill agreements.  For ease of reference I repeat the wording of section 4.4(1)(ii) here:

4.4(1) Following the date hereof, Sunrise REIT shall not …

(ii) participate in any discussions or negotiations in furtherance of such inquiries or proposals or regarding an actual or potential Acquisition Proposal or release any Person from, or fail to enforce, any confidentiality or standstill agreement or similar obligation to Sunrise REIT or any of its Subsidiaries.

[41]          Section 4.4(1)(ii) in reality contains two prohibitions, not one.  The language does not work otherwise.   Sunrise agrees not to participate in discussions or negotiations regarding actual or potential Acquisition Proposals.  It also agrees not to release anyone from, or fail to enforce, existing Standstill Agreements.  The drafters could well have divided section 4.4(1) into six general prohibitions rather than five.  The commitment to enforce the Standstill Agreements is not, therefore, tied to “Acquisition Proposals” in a way that section 4.4(8)(v) is not.

[42]          Accordingly, I agree with the application judge’s observation that while the appellants’ interpretation arguments are creative, they are strained.  As she said, “They disregard the parties’ intention and the true meaning of the subject sections and the Purchase Agreement as a whole.”

An Interpretation that Reflects the “Factual Matrix”, is “Commercially Sensible”, and Accords with the Fiduciary Obligations of the Sunrise Trustees

[43]          Nor do I accept the submission that the application judge failed to consider the factual matrix underlying the negotiation of the Purchase Agreement, or that she failed to give effect to the “commercial sense” component of contract interpretation.

[44]          In a blended argument, the appellants submit that the application judge’s interpretation of the Purchase Agreement ignores the factual matrix in which the Agreement was negotiated, defies commercial sense and reasonableness, and eviscerates the fiduciary out mechanism that was central to the parties’ agreement.  Respectfully, I do not read the application judge’s reasons in this fashion.

The Factual Matrix

[45]          Contracts are not made in a vacuum, and there is no dispute that the surrounding circumstances in which a contract is negotiated are relevant considerations in interpreting contracts.  As this court noted in Kentucky Fried Chickensupra, at para. 25, “[w]hile the task of interpretation must begin with the words of the document and their ordinary meaning, the general context that gave birth to the document or its ‘factual matrix’ will also provide the court with useful assistance.”

[46]          Sunrise points to a number of surrounding circumstances which it says the application judge ignored in arriving at her decision.  These include that:

a)      the Purchase Agreement was entered into at the conclusion of the second stage of a private sale auction process where it was clear that the overall objective of Sunrise was to maximize value for it unitholders;

b)     the expectations of the bidders, objectively determined, could not have been that the “winner” of the auction was assured of acquiring the Sunrise assets, because everyone was aware that there would be a fiduciary out clause and that superior proposals could displace the winning bid;

c)     Ventas’s own standstill terms ceased to apply in the event that Sunrise entered into a sales transaction with a third party, and Ventas could not know whether the other Standstill Agreements rested on the same footing (and did not know that HCPI’s did not);

d)     Ventas never told Sunrise it believed the participants in the auction would be excluded from the operation of the fiduciary out provision; and

e)     Ventas had bargained for, and achieved, considerable deal protection, in the form of the “no shop” provision, the right to match any Superior Proposal, and the right to receive a $39.8 million break fee if it chose not to match such an offer.

[47]          Matters involving the factual matrix underlying a contract are matters of fact, or at least matters of mixed fact and law.  A judge is owed considerable deference in her assessment of such matters.  Here, the experienced Commercial List judge was exercising a function common to that role – the interpretation of a commercial contract – and, while she may not have dealt with the foregoing themes expressly as the appellants would like, her reasons, read as a whole, indicate that she was alive to most, if not all, of them.  She was certainly aware of the facts contained in points (a), (b), (c) and (e) above, as she dealt with them at one time or another in the reasons.  The factor mentioned in (d) is not dispositive of anything.

[48]          At the conclusion of her consideration of the interpretation issue, as noted earlier, the application judge said (at paras. 38 and 39):

38        It seems to me that the clear scheme of this Purchase Agreement was [to] ensure enforcement of standstill agreements that had been signed as part of the auction process.  This strikes me as being objectively reasonable and was a form of protection afforded to the purchaser, Ventas.  This was part of the package negotiated between it and Sunrise REIT.

39        Such an interpretation derives from the words used by the parties to the Purchase Agreement and gives effect to the parties’ intention.  It is also consistent with the context of the transaction including the auction process which was the genesis of the Purchase Agreement.  The Purchase Agreement does not preclude bona fide written unsolicited Acquisition Proposals nor does it preclude such a proposal from a party whose standstill agreement operated to permit such a proposal.  It simply precludes a proposal from anyone else who is in breach of its standstill agreement. [Emphasis added, footnote omitted.]

[49]          I can find no basis for concluding the applications judge was not attuned to the need to keep the factual matrix in mind when conducting her interpretative exercise.

[50]          Nor do I accept that she either ignored the need to interpret the contract in a way that reflected sound commercial sense, or that she failed to give it such an interpretation.  It is apparent from her recitation of the principles of contract interpretation that she was aware of the relevance of the “sound commercial sense” theme.  She cited the following passage from this Court’s decision in Kentucky Fried Chicken, supra, at para. 27:

Where, as here, the document to be construed is a negotiated commercial document, the court should avoid an interpretation that would result in a commercial absurdity: [City of Toronto v. W.H. Hotel Ltd. (1966), 56 D.L.R. (2d) 539 at 548 (S.C.C.)]. Rather, the document should be construed in accordance with sound commercial principles and good business sense: [Scanlon v. Castlepoint Development Corporation et al. (1992), 11 O.R. (3d) 744 at 770 (Ont.C.A.)]. Care must be taken, however, to do this objectively rather than from the perspective of one contracting party or the other, since what might make good business sense to one party would not necessarily do so for the other.

[51]          The appellants’ argument that the application judge failed to interpret the Purchase Agreement in a fashion that accords with sound commercial sense is grounded in the belief that she overlooked the importance of the “maximizing value” principle and the centrality of the Trustees’ fiduciary obligations in that regard, in cases of this nature.  She did neither, in my view.

[52]          As noted above, the application judge was sensitive to the fiduciary out provisions that permitted other bona fide written unsolicited Acquisition Proposals.  In her view, however, this was balanced, objectively and reasonably, by the requirement that Sunrise ensure enforcement of Standstill Agreements that had been signed as part of the auction process in order to protect the successful bidder.  This interpretation makes commercial sense, in my view.

[53]          On behalf of HCPI, Mr. Leon placed great emphasis on the sanctity of the fiduciary out mechanism in acquisition agreements of this nature.  There is no doubt that the directors of a corporation that is the target of a takeover bid – or, in this case, the Trustees – have a fiduciary obligation to take steps to maximize shareholder (or unitholder) value in the process: see CW Shareholdings Inc. v. WIC Western International Communications Ltd. (1998), 39 O.R. (3d) 755, at 768 and 774 (Gen. Div.).  That is the genesis of the “fiduciary out” clauses in situations such as the case at hand.  They enable directors or trustees to comply with their fiduciary obligations by ensuring that they are not precluded from considering other bona fide offers that are more favourable financially to the shareholders or unitholders than the bid in hand.

[54]          It is not necessary – nor would it be wise, in my view – to go as far as HCPI suggests this court might go, and adopt the principle gleaned from some American authorities, that the target vendor can place no limits on the directors’ right to consider superior offers and that any provision to the contrary is invalid and unenforceable: seeParamount Communications, Inc. v. QVC Network Inc. 637 A. 2d 34 (Del. 1994), and ACE Ltd. v. Capital Re Corp., 747 A. 2d 95 at 105 (Del. Ch. 1999).  That is not what happened in this case.

[55]          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 HCPI. 

[56]          An auction process is well-accepted as being one – although only one – “appropriate mechanism to ensure that the board of a target company acts in a neutral manner to achieve the best value reasonably available to shareholders in the circumstances”: Maple Leaf Foods Inc. v. Schneider Corp. (1999), 42 O.R. (3d) 177 at 200 (C.A.).  Here, the trustees, acting reasonably and on professional advice, formed the view that an auction process was the best way to maximize value, and conducted such an auction to the point where they attracted a successful bidder.  This is not a case where the Trustees were unable to judge the adequacy of the bid (Schneider, at 200).  They had dealt with seven prospective purchasers in the course of the two auction rounds, and had received preliminary proposals.  Ventas’s $15.00-per-unit price represented a 35.8% increase over the market price of the Units on the date the auction closed.  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.

[57]          It is well accepted that “where an agreement admits of two possible constructions, one of which renders the agreement lawful and the other of which renders it unlawful, courts will give preference to the former interpretation”: John D. McCamus, The Law of Contracts (Toronto: Irwin Law, 2005) at 729.  Advancing this principle, the appellants argue that we should be loathe to adopt an interpretation of the Purchase Agreement that is inconsistent with overarching fiduciary obligations.  While I accept the principle put forward, however, I do not think it applies in the context of this case for the reasons outlined above.  The interpretation given to the Purchase Agreement by the application judge is not inconsistent with the Trustee’s fiduciary obligation to maximize unitholder value.  Indeed, it is consistent with that obligation.

[58]          Finally, Mr. Leon emphasizes the importance of the word “nothing” in the opening language of sections 4.4(2) and 4.4(3) of the Purchase Agreement.  Both provisions open with the words “Notwithstanding anything contained in Section 4.4(1), until the Unitholder Approval, nothing shall prevent the Board from …” [emphasis added].  Mr.Leon submits that “nothing” means what it says, and must be given the full scope of that meaning, in order to ensure that “nothing” in the Purchase Agreement or otherwise is permitted to stand in the way of the Trustees performing their duty to maximize shareholder value.  This point involves parsing the Purchase Agreement in a microscopic fashion that is a little too fine, in my view.  The use of the word “nothing” in sections 4.4(2) and 4.4(3) is nothing more than a different way of saying “Notwithstanding anything contained in Section 4.4(1) … the Board is not prevented from …”.  I would not ascribe to it the expanded role that HCPI proposes.

The Meaning of “Bona Fide

[59]          The appellants also attack the conclusion of the application judge that the HCPI Acquisition Proposal was not a “bona fide” offer.  She accepted the Ventas submission that “a proposal made in breach of a contractual obligation not to make such a proposal cannot be considered to be bona fide,” noting that sections 4.4(2) and 4.4(3) of the Purchase Agreement contemplate an Acquisition Proposal from a third party “that did not result from a breach of … Section 4.4”.

[60]          There was much debate about the meaning of “bona fide”.  The application judge viewed it as meaning acting “in good faith; sincere, genuine”, relying upon The Oxford English Dictionary.[7]  She found that the HCPI Acquisition Proposal was not bona fide because it was made in breach of the HCPI Standstill Agreement, which Sunrise was obliged by s. 4.4 to enforce.  The appellants agree that bona fide means “genuine” or “made in good faith” but submit that a bona fide Acquisition Proposal, as contemplated by the Purchase Agreement, is one that is “genuine” or “authentic” in the sense that it is not a sham and is reasonably capable of becoming a Superior Proposal, and that this decision must be made in the context of the entire situation.

[61]          In the end, there is not much difference between the parties as to the meaning of the term “bona fide”.  As with the principles of contract interpretation, they differ on the application of the term in the circumstances of this case.  Given the language of the Purchase Agreement, and the context in which it was negotiated – particularly the language “that did not result from a breach of this Section 4.4” in sections 4.4(2) and 4.4(3) – I do not think the application judge erred in her assessment and use of the term “bona fide” here.

Miscellaneous

[62]          Two additional points were made by the appellants, but need not be dealt with at length. 

[63]          First, HCPI argued that Sunrise had given its prior consent to HCPI to make its subsequent Acquisition Proposal following completion of the auction process and the execution of the Purchase Agreement.  This consent is said to derive from the waiver Sunrise gave to both HCPI and Ventas as part of the invitation to bid in the second round.  The application judge made a specific finding against this position, however, concluding that the December 29, 2006 letter “cannot possibly be construed as constituting Sunrise REIT’s prior written consent as that term is used in the Standstill Agreement.”  There is no basis for interfering with this finding.

[64]          Secondly, HCPI submitted that the position of Ventas on these applications was tantamount to saying that the benefit of the HCPI Standstill Agreement had been assigned to it.  The application judge correctly found that there was no merit in this argument.  I agree with her that neither the Standstill Agreement nor its benefits had been assigned to anyone, and no one was taking the position that they had.

The HCPI Cross-Appeal

[65]          HCPI applied for a declaration that communications between it and SSL regarding Sunrise were permitted.  The application judge declined to deal with this request, given her ruling which effectively precluded the HCPI Acquisition Proposal from being pursued.  She concluded the application was moot.

[66]          I agree and for the same reason find it unnecessary to deal with the cross-appeal for the same relief.

CONCLUSION

[67]          For the foregoing reasons, then, I would dismiss both the appeal and the cross-appeal.

[68]          If the parties are unable to agree as to costs, they may make brief written submissions in that regard, not to exceed five pages in length.

[69]          In closing, I would like to thank all counsel for their able presentations and assistance.

“R.A. Blair J.A.”

“I agree J. MacFarland J.A.”

“I agree H.S. LaForme J.A.”

RELEASED: March 23, 2007

 


[1] B.G. Checo International Ltd. v. British Columbia Hydro and Power Authority, [1993] 1 S.C.R. 12 at 23-24; Scanlon v. Castlepoint Development Corp. (1992), 11 O.R. (3d) 744 at 770 ( C.A. ).

[2] Toronto Dominion Bank v. Leigh Instruments Ltd. (Trustee of) (1998), 40 B.L.R. (2d) 1 at para. 403 (Ont. Gen. Div.), aff’d (1999), 45 O.R. (3d) 417 ( C.A. ); Venture Capital USA Inc. v. Yorkton Securities Inc. (2005), 75 O.R. (3d) at para. 26 ( C.A. ); Eli Lilly & Co. v. Novopharm Ltd., [1998] 2 S.C.R. 129 at 166-68 [Eli Lilly].

[3] Eli Lillyibid. at 166; Kentucky Fried Chicken v. Scott’s Food Services Inc. (1998), 114 O.A.C. 357 at paras. 25-27 ( C.A. ) [ Kentucky Fried Chicken].

[4] Consolidated Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., [1980] 1 S.C.R. 888 at 901; Kentucky Fried Chickenibid.

[5] The Proposal has to be a Superior Proposal; Sunrise has to notify Ventas of the Proposal and provide it with all relevant documentation; Ventas had the right to match the Proposal within five days (as defined) and, if it chooses not to, to terminate the Agreement and receive the break fee (see also, section 5.3 and Schedule “B” (definition of “Termination Payment”)).

[6] That meets the section 4.4(2) requirements of being bona fide and unsolicited.

[7] 2d ed., s.v. “bona fide”.

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Case Information

August 04, 2013

2007-03-20

Blair

2007 ONCA 205

C46790, C46791

Court of Appeal for Ontario

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