Overview and Key Takeaway
The unfolding trade tensions initiated by the new U.S. administration have galvanized the Canadian public to address various overdue internal housekeeping matters to prepare for a future with greater independence from the U.S.
Among these should be amending corporate law in Canada to expressly allow target companies to claim for lost shareholder premium against a delinquent buyer in a busted public M&A deal. In 2024, Delaware showed that a relatively straightforward fix to this problem was possible. To safeguard shareholders in Canadian public companies – from retail investors to pension funds – Canadian federal and provincial lawmakers should follow Delaware’s lead.
Our detailed analysis follows. For Fasken’s other M&A thought leadership, visit our Capital Markets and M&A Knowledge Centre and subscribe. For our related business opinion in The Globe and Mail, see our bulletin, Canadian Publicly Traded Companies Need More Recourse When Mergers Fall Through”.
A Brief History of “Benefit-of-the-Bargain” Damages
The problem of lost shareholder premium, also known as “benefit-of-the-bargain” damages, first and most famously surfaced in 2005 in Consolidated Edison, Inc. v. Northeast Utilities.[1] In a merger dispute governed by New York law, the U.S. Federal Court (Second Circuit) held that absent clear contractual language to the contrary, the target could not claim damages for benefit-of-the-bargain damages for the buyer’s breach of the merger agreement.
The logic was that lost shareholder premium damages are not available to the target because it is the target’s shareholders, and not the target itself, that are entitled to the deal consideration, and under contract law a party cannot claim for damages beyond the benefits the party is entitled to under the merger agreement.
Widespread concern immediately ensued among U.S. dealmakers. They feared the ruling could transform a merger agreement into little more than a mere option whereby, if the buyer refused to close without justification, its only liability would be compensating the target for its out-of-pocket costs. This concern was aggravated by how infrequently specific performance has historically been ordered to compel the consummation of a busted public merger.
U.S. dealmakers responded by incorporating various contractual clauses geared toward entitling a jilted target to pursue benefit-of-the-bargain damages, and all appeared well for almost two decades. However, in October 2023, these drafting fixes failed their first judicial test since ConEd in a ruling arising from Elon Musk’s acquisition of X (formerly known as Twitter).
In Crispo v. Musk,[2] the Delaware Court of Chancery dismissed each of the three main approaches to “ConEd language” honed over 18 years of M&A negotiations. Concern among U.S. dealmakers once again ensued, this time amplified by the fact that, unlike in ConEd, Crispo v. Musk was a dispute governed by Delaware law (the law chosen for most high value U.S. mergers). But to the credit of the Delaware legislature, Delaware corporate legislation was amended in August 2024 to permit merger parties to agree to allow the target to claim for damages based on the lost shareholder premium should the buyer breach its closing obligations.
Protecting Investors: Why Canada Should Follow Delaware’s Lead
Canadian federal and provincial lawmakers should follow Delaware’s lead, and the risks and problems raised by not doing so were recently illustrated by a busted billion dollar Canadian public M&A deal.[3]
Cineworld Group plc, a company listed on the London Stock Exchange, agreed to acquire Cineplex Inc., a company listed on the Toronto Stock Exchange, in an all cash deal signed in December 2019 and shortly before the pandemic’s onset. But in June 2020, well into the pandemic and on the eve of the deal’s expected closing, Cineworld backed out. After the Ontario court ruled Cineworld did not have legal grounds to terminate, the question became the damages payable.
This was the first test of the widely held assumption in Canada that “benefit-of-the-bargain” damages would be available by basic operation of law. Notwithstanding ConEd and the widespread use in the U.S. of contractual attempts to ensure that lost premium damages would be available in merger disputes, Canadian agreements, almost without exception, did not include any express language attempting to allow the target to sue for lost premium.[4] For example, in the most recent American Bar Association Canadian Public Target M&A Deal Point Study,[5] only two percent of transactions include clauses expressly entitling a target company to pursue “benefit-of-the-bargain” damages on behalf of shareholders.
Cineplex argued it was owed $1.32 billion, being the lost shareholder premium. But this was rejected, the court instead deciding that Cineplex should receive the “lost synergies” of the deal, being the apparent benefit the target would have enjoyed had the deal closed (and had the two media and entertainment companies combined their operations as planned). This was calculated at $1.24 billion, i.e., only $80 million less than the benefit of the bargain. But this relatively narrow gap should be of little comfort to Canadian dealmakers: it could easily have been radically different, and the court’s logic was suspect on several fronts.
First, academics highlight that calculating damages in M&A by way of lost synergies is fraught with conceptual difficulties and reliability concerns.[6] Their worries arise from difficulties connected to the quantification and allocation of projected future synergies, uncertainties regarding the target’s fate after closing, and the potential for damages to be strongly influenced by the structure of the transaction and the nature of the buyer. They note, for example, that a “financial” buyer (e.g., private equity) may not bring any synergies to the table.
Second, Cineworld (the buyer) took on over C$2.2 billion in debt to finance the deal, and presumably Cineplex (the target), once it became part of the Cineworld group, would have assumed some of this debt burden. Yet the court did not offset any of the synergies to be enjoyed by Cineplex with any of the costs of obtaining them, holding that Cineworld’s evidence on this point was “vague and uncertain”.
Third, Cineplex’s “lost synergies” analysis is perhaps most curious for having been the court’s preferred approach in the context of an all-cash deal. The form of the transaction appeared to overshadow its substance: Cineplex shareholders exchanging all their shares for a cash premium. Whatever the actual synergies, they were effectively for the benefit of Cineworld and what was effectively lost was the premium. By contrast, a share for share transaction with a low premium, typically seen in transactions described as a “merger of equals” where the selling shareholders have the opportunity to participate in the combined company going forward, may be a circumstance where a “lost synergies” damages award would be appropriate.
Concluding Comments
All told, the risks of “synergy-less” buyers and uncertain synergy calculations are real and significant, and where they manifest it will be target shareholders that suffer, from retail investors to pension funds. The urgency of the situation is also intensified by the widespread economic uncertainties resulting from the unpredictable nature of the new U.S. administration’s agenda. Turbulent economic times can bring great swings in stock value, and when this occurs between signing and closing, it can leave an M&A buyer looking for the door.
Canada needs to ensure that its capital markets are efficient and that investors’ reasonable expectations, i.e., being entitled to “benefit-of-the-bargain” damages in a busted public M&A deal, are protected. Delaware has shown that a relatively simple fix to the lost shareholder premium problem is possible. Canadian federal and provincial lawmakers should protect investors in Canadian public companies by following Delaware’s lead.
[1] 426 F.3d 524 (2d Cir. 2005).
[2] C.A. No 2022-0666-KSJM (Del. Ch. Oct. 31, 2023).
[3] See Cineplex v. Cineworld, 2021 ONSC 8016 (CanLII).
[4] For further discussion, see G. Abols, B. Moore and P. Blyschak, “Cineplex’s C$1.24 Billion Damages Award: Should Market Practice in Canadian Public M&A Learn From the U.S.?” 27(4) The M&A Lawyer 8-11 (April 2023).
[5] For further discussion of this study, see Fasken’s What’s Market in Canadian Public M&A?
[6] See J. Chan and M. Petrin, “Lost Synergies and M&A Damages: Considering Cineplex v. Cineworld” (2022) 100 Canadian Bar Review 275.
