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Farley's Reflections: Sunrise, Sunset

Sunrise, sunset. Perhaps a matchmaker would have helped. The saga of the dispute between Ventas, Inc. and Health Care Property Investors, Inc. arose five years ago when Sunrise Senior Living Real Estate Investment Trust’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" (per Blair J.A. for the Ontario Court of Appeal) in Ventas, Inc. v. Sunrise Senior Living Real Estate Investment Trust, 2007 ONCA 205 (CanLII) at para. 2. The Court of Appeal upheld the decision of Pepall J. given two weeks earlier (2007 CanLII 8934 (ONSC)) that Sunrise was obligated to enforce the Standstill Agreement which was entered into by HCP (the unsuccessful auction participant) with the result that HCP was disqualified from pursuing a topping bid that it had announced in a press release.

This was not the end of the story. As a result of the release of the United States Court of Appeal’s decision affirming the Kentucky jury award of $101 million dollars to Ventas for tortious interference with a prospective advantage in (6th Cir, May 17, 2011), a little more light has been shed on this battle. This compensatory award was effectively the difference between Ventas’ original bid in the auction based on $15/unit and what it felt it had to increase it by $1.50 to overcome the uncertainty as to approval by the Sunrise unitholder vote created by HCP’s proposed conditional offer of $18. As the sun starts to set, this epic is approaching Götterdämmerung for HCP because the litigation continues and is coming to a crescendo. It is still now just twilight, rather than darkness. But surely there will be darkness once these gods and giants have finished fighting each other.

The reader may wish to refer to my reflections: "Does the Left Hand Know What the Right Hand is Doing?" in Volume 4, Issue 3 of McCarthy Tétrault’s Litigation Co-Counsel May 20, 2011 as to the elements of the Canadian tort of unlawful interference with economic relations (in that article I observed that two panels of the Ontario Court of Appeal had mysteriously come out with different standards for this tort within 10 days of the release of their reasons, with the two panels sharing a common member). The U.S. Appeal Court reviewed the law of Kentucky in this regard and determined that there had been express adoption of certain sections of the Restatement (Second) of Torts issued by the American Law Institute.

Section 766B: Intentional Interference With Prospective Contractual Relation

One who intentionally and improperly interferes with another’s prospective contractual relation…is subject to liability to the other for the pecuniary harm resulting from loss of the benefits of the relation, whether the interference consists of (a) inducing or otherwise causing a third person not to enter into or continue the prospective relation or (b) preventing the other from acquiring or continuing the prospective relation.

Section 767: Factors in Determining Whether Interference is Improper

In determining whether an actor’s conduct in intentionally interfering with a contract or a prospective contractual relation of another is improper or not, consideration is given to the following factors:

  1. the nature of the actor’s conduct;
  2. the actor’s motive;
  3. the interests of the other with which the actor’s conduct interferes;
  4. the interests sought to be advanced by the actor;
  5. the social interests in protecting the freedom of action of the actor and the contractual interests of the other;
  6. the proximity or remoteness of the actor’s conduct to the interference; and
  7. the relations between the parties.

It was observed that improper interference under Section 766B requires the plaintiff to "show malice or some significantly wrongful conduct" with unlawful means being defined as including fraud, deceit or coercion. Relying on Section 768, the U.S. Appeal Court noted that in the case of a tortious interference claim between competitors, plaintiffs are held to a more exacting standard as competition is not an improper basis for interference. The U.S. Appeal Court stated:

As the district court observed, to ignore HCP’s breach of its contract with Sunrise would "create an artificial reality within the case." (…HCP’s breach of its Standstill Agreement with Sunrise illuminates the anti-competitive activities in which HCP engaged and is central to an understanding of Ventas’ allegations of fraud and deception. As Ventas argued at trial, HCP misled the market by making public statements that were contrary to its obligations under the Standstill Agreement without disclosing the existence of the agreement or other relevant information. See, e.g., Hornung, 754 S.W.2d at 859 ("[M]alice may be inferred in an interference action by proof of lack of justification.").

There was a "Comedy of Errors," not restricted to HCP’s activities, but also reaching over to those of Sunrise and of Ventas. They include the following:

(a) An auction process would ordinarily suggest that the rules of the game are the same for all bidders as set out in Maple Leaf Foods. Blair J.A. in Ventas noted at para. 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. 1998 CanLII 5121 (ONCA), 1998 CanLII 5121 (ONCA), (1999), 42 O.R. (3d) 177 at 200 (C.A.).

(b) However, in this case as set out at page 3 of the U.S. Appeal Court reasons:

The auction procedures required each participant to sign a confidentiality agreement, which included a standstill provision ("Standstill Agreement") that would, among other things, prohibit the participant from making or announcing any bid outside of the auction process for a period of 18 months following the conclusion of the auction. The Standstill Agreement also proscribed any actions that would require Sunrise to publicly announce a bid outside of the auction process.

As invitees to the preliminary stages of the auction, both Ventas and HCP independently negotiated and entered into Standstill Agreements with Sunrise. Neither was a party to the other’s Standstill Agreement. HCP’s Standstill Agreement permitted HCP to make only one final bid, but Ventas’ Standstill Agreement permitted Ventas to make a second final bid if Sunrise accepted a competing offer after Ventas made its initial final bid.

Thus there would not appear to have been a level playing field for these two bidders. While Ventas knew rules applicable to Ventas and while HCP knew the rules applicable to HCP, it appears that neither knew the rules applicable to the other. So possibly Ventas had a handicap advantage even if it were not aware of that advantage until much later in the game.

(c) Ventas assumed when it negotiated the purchase agreement with Sunset to acquire the assets of Sunrise that HCP’s standstill obligations would also fall away. If that had been the case, then HCP would have been permitted to make a topping bid with Ventas having the comfort of a break fee in the event HCP was eventually successful in a bidding war.

(d) If the auction were designed to maximize value for the equity holders, why did Sunrise agree in Section 4.4 of the Ventas Purchase Agreement to enforce any standstill obligations then remaining outstanding, particularly when it seems that Ventas assumed that HCP had a standstill obligation that was identical to that of Ventas’s and that would fall away on the conclusion of an agreement by someone to buy the assets of Sunrise? This seems contrary to a fiduciary out condition situation that is so valuable to the beneficiaries of an enterprise that has put itself into play.

(e) SSL was an operator of many retirement facilities, including those of Sunrise and some of HCP. Perhaps HCP picked an unnecessary fight with SSL (or at least was attempting to wage war on two fronts) that prevented it from making an unconditional offer. Coming to a deal with SSL was essential to success on the part of any bidder. The HCP CEO had to acknowledge he was playing hardball with SSL.

(f) Once it had a signed deal with Ventas which was publicly disclosed, Sunrise advised HCP that HCP must still honour its standstill obligations. However, some weeks after that caution, Sunrise suggested to HCP that it might want to make a bid. This strikes me as remarkably peculiar behaviour. However Ventas did not take Sunrise to task in any litigation. It therefore seems that Ventas did not want to fight a two enemy war, particularly when such a fight would likely have alienated the Sunrise unitholders who had yet had to approve the deal.

(g) HCP jumped in with both feet (perhaps positioning one of those appendages in its mouth) with a public announcement that it was making an $18 bid without mentioning that it would be conditional on reaching a deal with SSL. The press release advised of a proposed "acquisition that reflects its significantly higher price and is otherwise identical to the agreement between Sunrise and Ventas." Subsequently the condition was disclosed.

(h) HCP indicated in a press release that it had sent a signed unconditional offer to Sunrise. However, its CEO had to admit in testimony that a signed offer had never been sent nor had he been authorized to send one.

(i) HCP’s CEO also had to admit that HCP had wanted to hurt Ventas by making it pay more than the $15/unit Ventas had signed up for. No doubt this was a "Eureka!" moment for Ventas’s counsel in cross-examination.

(j) Sunrise issued a press release that Sunrise would not consider HCP’s offer until "such time as it receives a confirmation from HCP that their proposal is not conditional on [HCP] reaching an agreement with [SSL]." However, there was nothing said about this being a breach of the Standstill and Section 4.4 of the Ventas Purchase Agreement, which required Sunrise to enforce any continuing standstill obligations of any party.

(k) It was not until five days after Sunrise’s initial press release, and once Ventas had stumbled (like the derelict seaman blessing unawares the water serpents in the Rime of the Ancient Mariner) across the fact that HCP’s standstill obligations did not drop away, that Ventas appreciated that it had to take further remedial action. It issued a press release that Ventas would increase its offer to $16.50 in recognition that in the events leading up to unitholders’ approval vote sufficient proxies had been deposited to defeat the Ventas deal (notwithstanding the Pepall J. and Ontario Court of Appeal decisions that Sunrise had to enforce the HCP standstill obligations and that a bid from HCP would not be allowed). Ventas felt that this bump was needed to salvage the Sunrise deal and to protect its own reputation. Clearly, it was the good fortune of Ventas to have put that boilerplate into the purchase agreement even if it had assumed HCP’s standstill obligations would have fallen away.

The end result was that the vote turned around in favour of Ventas’ $16.50 bid. Litigation proceeded in Kentucky with Ventas suing HCP. The U.S. Appeal Court is not the final chapter; this court allowed the cross-appeal of Ventas ruling that there was sufficient evidence of fraud to submit the issue of punitive damages to the jury. This issue was remitted back for trial. Given the admissions made in the earlier trial, one may anticipate that HCP may well have serious concern about a very substantial award. One may recall that a Mississippi jury in a breach of contract concerning a single funeral home (where the compensatory damages were assessed at $6 Million) awarded $500 Million of punitive damages, thereby forcing Loewen Group Inc., a Canadian company, into protracted insolvency protection. So it will be awhile yet before the twilight after sunset turns to darkness and all one will hear are the cries of the dying gods and giants. At that stage one may recall the sign off of the radio commentator Paul Harvey: "And now you know the rest of the story."

Lessons to be learned

i) Ventas is now frequently cited as guiding authority as to commercial contract interpretation. Blair J.A. at para. 24 agreed with the view of Pepall J. as to how a commercial contract is to be interpreted:

    1. 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;
    2. 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;
    3. 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; and
    4. (to the extent there is any ambiguity in the contract)in a fashion that accords with sound commercial principles and good business sense, and that avoids a commercial absurdity.

However, one may wrestle with the point of intention in the case of Section 4.4 of the Ventas Purchase Agreement in light of the assumption of Ventas about HCP’s standstill obligations falling away.

ii) Meaningless redundant boilerplate may not be meaningless. While reading page after page of mind-numbing prose may be a cure for insomnia, parties should be grateful for their commercial counsel being awake and careful in discovering hidden traps/treasures.

(iii) Participants in an auction should ensure that the rules of the game are the same for all — or at least have disclosure that a rival may have a lower hurdle to jump.

(iv) In turn, where a fiduciary out is negotiated, the company in play should avoid putting in artificial/unnecessary barriers that may discourage or prevent others from making a topping offer that would enhance value.

(v) Having agreed to a certain course of action, a party should carry out its obligations under that agreement in good faith or face the consequences of breach. Under other fact circumstances Ventas may have determined that it would have been in its interests to sue Sunrise and its management for encouraging HCP to make a bid notwithstanding HCP’s continuing standstill obligations.

(vi) One should avoid U.S. jury trials, particularly if one is a foreign defendant.

(vii) One should not play unnecessary hardball with a party whose support one needs; nor should one make promises one cannot keep; nor should one make untrue statements. These actions can come back to haunt the actor.

(viii) Consider the consequences pursuant to securities legislation of making a press release containing material misinformation.

Perhaps an admonition for HCP and anyone else who wants to play hardball by interfering with economic relations is that which Shakespeare wrote, not in Julius Caesar: "Cry ‘Havoc’, and let slip the dogs of war", but rather his view in Cariolanus: "Do not cry havoc, when you should but hunt with modest warrant."