A recent dust-up between Research in Motion Limited (RIM) and Certicom Corp. in the course of RIM’s hostile take-over bid for Certicom has once again raised the issue of the effect and effectiveness of confidentiality and standstill agreements in Canadian M&A practice.
In her decision dated January 19, 2009, Justice Alexandra Hoy of the Ontario Superior Court held that RIM was in breach of non-disclosure agreements between RIM and Certicom and that, as a consequence, RIM was permanently enjoined against proceeding with its take-over bid for Certicom.
The case is noteworthy not merely because an unsolicited bidder found itself on the wrong side of the law and was stopped in its tracks for breaching an agreement. What makes the decision remarkable is the nature of the agreement that was held to have been breached. In this case, unlike the 2006 Aurizon v. Northgate case in British Columbia and the 2007 Ventas v. Sunrise REIT case in Ontario, the standstill agreement between RIM and Certicom had already expired when RIM launched its take-over bid.
Prior to any of the take-over activity, RIM and Certicom had had a commercial relationship and had entered into a series of non-disclosure agreements over a number of years. In 2007, the parties began discussions about a possible acquisition transaction and subsequently entered into a new non-disclosure agreement that contained both confidentiality and standstill provisions. The standstill portion of the agreement prohibited RIM from making a hostile take-over bid for the shares of Certicom for a period of 12 months from July 2007.
In mid-2008, the parties entered into a further non-disclosure agreement akin to their earlier “ordinary course” agreements, but not containing a standstill provision. Both the 2007 and 2008 agreements contained customary provisions about the permitted uses of the confidential information of Certicom protected by the agreements.
So, the key facts are that RIM’s standstill obligations under the 2007 agreement had expired almost six months prior to the commencement of its take-over bid for Certicom, but its confidentiality obligations under both the 2007 and 2008 agreements remained in effect.
Certicom took a dim view of RIM’s offer and the fact that it had taken it directly to shareholders in the form of a take-over bid. Certicom quickly launched an application in the Superior Court to enjoin the bid. Certicom’s position in the litigation was that the existence and expiry of the standstill portion of the 2007 agreement was essentially irrelevant, and that RIM was nevertheless off-side the confidentiality provisions of both agreements because it had used the confidential information it obtained from Certicom to decide whether to launch the hostile bid.
Justice Hoy agreed with Certicom and issued a permanent injunction against RIM’s bid. As a result, arguably, the confidentiality agreement between the parties became a “super-standstill”, irrespective of the specifically negotiated and expired standstill provision.
There is tension in this decision between, on the one hand, Justice Hoy’s close analysis of the contractual language in the confidentiality provisions (to the point of examining the dictionary meaning of the word “between”) and, on the other, the pragmatic reality of what experienced businesspeople who enter into these sorts of agreements would expect their terms to mean in the real world.
When parties enter into a confidentiality agreement with a time-limited standstill obligation baked in, what do they think they’re getting themselves into? Is it reasonable for the disclosing party to believe that the confidentiality obligations will provide ongoing (perhaps indefinite) standstill-like protection, even though the specific negotiated standstill has expired and fallen away? Or is it reasonable to assume that the standstill provisions codify the receiving party’s standstill obligations – and when those obligations are gone, they’re gone?
No matter how you might answer those questions, Justice Hoy’s decision will have an immediate practical effect on the negotiation of confidentiality and standstill agreements in present and future deals.
It can be expected that M&A lawyers will ensure that they have given their template draft agreements a good scrubbing to: (1) make it unambiguously clear that their buy-side draft permits everything not prohibited by the standstill once the standstill expires; and (2) leave their sell-side draft open to the interpretation adopted by Justice Hoy.
In the immediate aftermath of the injunction, RIM announced that it had withdrawn its offer for the shares of Certicom. Shortly thereafter, on January 23, 2009, Certicom announced a negotiated plan of arrangement transaction with VeriSign, Inc. at Cdn.$2.10 per share. RIM re-entered the picture on February 3, 2009 with a friendly offer to Certicom’s board at Cdn.$3.00 per share. While investors will no doubt continue to follow the matter with interest, practitioners will unfortunately be deprived of the opportunity to see how Justice Hoy’s decision would have fared in the appellate courts.
This article originally appeared in the February 20, 2009 issue of The Lawyers Weekly published by LexisNexis Canada Inc.