Standstill Agreements in Auctions – Lessons from the Sunrise/Ventas Decision
A public company will usually use an auction process to put itself up for sale to maximize its selling price. A recent decision of the Ontario Court of Appeal (Sunrise REIT v. Ventas) had the dramatic effect of preventing an apparently higher offer in the context of an auction process from being made.
Sunrise Senior Living Real Estate Investment Trust was a TSX-listed real estate investment trust with interests in seniors’ living communities. In November 2006, it put itself up for sale by auction. Interested parties signed confidentiality agreements that all included a standstill provision prohibiting the interested party from making any proposal to acquire Sunrise without its board’s prior consent.
Negotiations proceeded with two interested parties – Health Care Property Investors, Inc. (HCP) and Ventas Inc. Ventas made a proposal to acquire Sunrise’s assets for $15 per unit. HCP did not submit a final bid.
Ventas and Sunrise signed a purchase agreement in January 2007 that prohibited Sunrise from soliciting any further bids, but contained a ‘fiduciary out’ allowing Sunrise to consider bona fide unsolicited superior proposals. Ventas was given a right to match
any unsolicited superior proposal, failing which Sunrise could terminate the purchase agreement, pay a break fee to Ventas and sign a new purchase agreement with the superior bidder.
The purchase agreement with Ventas also contained a provision, not expressly subject to the fiduciary out, that required Sunrise to not waive or fail to enforce the standstill provisions in any confidentiality agreements signed with third parties. The Ventas confidentiality agreement terminated if a third party made a bid for Sunrise or if Sunrise entered into a purchase agreement with a third party, while the HCP confidentiality agreement had no such provision.
HCP then offered to acquire Sunrise for $18 per unit on terms identical to the Ventas/ Sunrise transaction, subject to its concluding an agreement with the management company of Sunrise’s properties. Sunrise did not immediately treat this proposal as a superior proposal because of the uncertainty created by this condition.
The parties made various applications to court, essentially to determine whether Sunrise could entertain the HCP offer.
The Ontario Superior Court, in a decision upheld by the Ontario Court of Appeal, concluded that the fiduciary out did not override the covenant from Sunrise in the Ventas purchase agreement not to waive the standstill provision in any confidentiality agreements with other parties. Accordingly, Sunrise was obligated to enforce the standstill with HCP, despite the apparent superiority of the HCP proposal.
Ultimately, Ventas increased its offer to $16.50 per unit, the Sunrise unitholders approved the transaction and the sale was completed in April 2007.
McCarthy Tétrault Notes:
The key lesson from the case is that the standstill provisions in confidentiality agreements demand very careful attention.
Other issues include the following:
Both HCP and Sunrise unitholders would doubtless have preferred that the HCP confidentiality agreement, or at least its standstill provision, terminated if another party entered into a purchase agreement with Sunrise or commenced an unsolicited bid.
Some target companies may prefer that auction participants not have such termination right. This creates an incentive for parties to put forward their best bid because they know that any purchase agreement entered into with the successful bidder will prohibit the target company from waiving any standstill, preventing superior bids from being made later by parties to the auction.
Where different parties have different standstill agreements, the incentives for parties in the auction can be different, which may lead to a potentially unfair auction process. Accordingly, target companies should try to ensure that all their confidentiality agreements contain identical standstill provisions. Potential purchasers should ask for a ‘most favoured nation’ clause so that, if another bidder negotiates a standstill with the target that is more favourable, they will automatically get the benefit of any such provisions and remain on an equal footing with other bidders.
If the board of a target company intends its fiduciary out in the purchase agreement to trump any of its obligations in the agreement other than its covenant not to solicit other offers (such as the obligation to enforce a standstill), it should make sure this is clear from the wording of the agreement.