Note on Ventas Inc. v. Sunrise Senior Living Real Estate Investment Trust (Ontario, Mar. 2007)

Sunrise Senior Living Real Estate Investment Trust (“Sunrise”), a Toronto Stock Exchange listed company, put itself up for auction in November 2006.  Seven parties, including Ventas Inc. and Health Care Property Investors Inc. (“HCP”), signed confidentiality agreements.  The confidentiality agreements signed by Ventas and HCP contained standstill provisions prohibiting them from making a proposal to acquire securities or assets of Sunrise for 18 months without Sunrise’s prior written consent.[1]

Ultimately, the interested parties were winnowed to Ventas and HCP, and Ventas made a proposal to acquire Sunrise’s assets for $15 per unit.  HCP did not submit a final bid.  As a result, Ventas and Sunrise entered into an purchase agreement in January 2007 containing a no shop provision with a customary fiduciary out.  Ventas was given matching rights should a superior proposal arise, failing which Sunrise could terminate the purchase agreement, subject to paying the 3.5% termination fee, and enter into an agreement with the new bidder.  The purchase agreement 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 relevant provisions are excerpted below:

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 or 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, (emphasis added)

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

… 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[2]…

(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:

…

(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,

…

(7) Sunrise REIT shall, as promptly as practicable, notify the Purchasers of any relevant details relating to any Acquisition Proposal….

(8) Sunrise REIT shall

…(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. (emphasis added)

Subsequently, HCP 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 then made various applications to court, essentially to determine whether Sunrise could entertain the HCP offer.[3]

In holding that the Purchase Agreement requires Sunrise to enforce the HCP Standstill, precluding the higher bid, the Ontario Superior Court wrote:

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.

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.

It also should be observed that 4.4(2) and 4.4(3) contemplate a bona fide Acquisition Proposal. Bona fide means acting or done in good faith; sincere, genuine.  I agree with the submission of counsel for Ventas that a proposal made in breach of a contractual obligation not to make such a proposal cannot be considered to be bona fide. Sections 4.4(2) and 4.4(3) are not designed to address Acquisition Proposals that are not bona fide. So, for instance in this case, HCP is in breach of its Standstill Agreement and therefore HCP's proposals would not be encompassed by sections 4.4(2) and 4.4(3) because they could not be considered to be bona fide. Furthermore, sections 4.4(2) and 4.4(3) also contemplate an Acquisition Proposal from a third party that did not result from a breach of section 4.4. An Acquisition Proposal submitted in breach of a standstill agreement, to the extent it is considered by Sunrise REIT, would result from a breach of section 4.4. Again, in this case, sections 4.4(2) and 4.4(3) would be inapplicable on this ground as well.

… It seems to me that the clear scheme of this Purchase Agreement was 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.

Ontario Superior Court of Justice, Mar. 6, 2007 CarswellOnt 1704, 29 B.L.R. (4th) 292, 56 R.P.R. (4th) 183

Upholding the decision, the Ontario Court of Appeal wrote:

[A]n 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 skillful 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.

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.  …

[HCP] 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 … have a fiduciary obligation to take steps to maximize shareholder (or unitholder) value in the process…. 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.

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: see Paramount Communcations Inc. v. QVC Network Inc., 637 A.2d 34 (U.S. Del. Super. 1994), and ACE Ltd. v. Capital Re Corp., 747 A.2d 95 (U.S. Del. Ch. 1999) at 105. That is not what happened in this case.

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.

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" [citations omitted]. 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. 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.

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." 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.

Ontario Court of Appeal, Mar. 23, 2007.  2007 CarswellOnt 1705, 222 O.A.C. 102, 29 B.L.R. (4th) 312, 56 R.P.R. (4th) 163, 85 O.R. (3d) 254

Aftermath: Sunrise was obligated to enforce the standstill with HCP, despite the apparent superiority of the HCP proposal.  Ultimately, however, Ventas increased its offer to $16.50 per unit, the Sunrise unitholders approved the transaction, and the sale was completed in April 2007.