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SPECIFIC PERFORMANCE An M&A transaction does not always go as planned. Unfortunately, a transaction may fail at any time, including after the execution of a purchase agreement. For example, a buyer faced with financial uncertainty or a seller with a better opportunity may be hesitant to complete a transaction. However, if all of the conditions to closing in favor of both parties have been met, can one party seek specific performance and require the other party to close an M&A transaction even though the other party does not wish to proceed? > The answer largely depends on a number of factors, namely: • the applicable governing law; • the contractual provisions; • the practical challenges of implementation and enforcement. Two legal regimes apply in Canada: civil law applies in the province of Québec with respect to property and civil rights matters and common law applies in the rest of the country. Subject to a few exceptions, which we will discuss below, while the granting of specific performance is discretionary under common law, it is a remedy to which an aggrieved party is entitled under civil law. The fundamental difference between the common law in Canada and the civil law of Québec with respect to the remedy of specific performance is that the aggrieved party under civil law does not have to establish the inadequacy of damages in order to claim specific performance. As will be discussed below, notwithstanding these differences, similar considerations will apply in determining whether or not the remedy of specific performance is available or even desirable in the context of an M&A transaction. CANADIAN COMMON LAW > GENERAL PRINCIPLES Remedies for breach of contract seek to put the aggrieved party in the position in which it would have been had the contract been performed. At common law, the remedy as of right for a breach of contract is an award of monetary damages, on the basis that an aggrieved party can then use the monetary award to acquire a substitute for what it had originally bargained for. Specific performance is an equitable remedy, which can only be obtained if a court exercises its discretion to grant it. A court will typically be inclined to exercise its discretion in favor of ordering specific performance if an award of monetary damages would be inadequate to place the aggrieved party in the same position in which it would have been had the agreement been performed. Some of the grounds upon which damages are normally considered inadequate include where (i) the subject of the agreement is unique, (ii) damages are difficult or impossible to calculate, or (iii) the party in breach of the agreement is not in a financial position to pay an award of damages. In any case, even if damages are considered inadequate, specific performance may still be refused on other grounds, including where (i) the performance of the obligation would be difficult to supervise (for example, where, given the nature of the obligation, it would be difficult for a court to determine if the party is in compliance with the obligation), or (ii) the agreement contains an element of personal service. > APPLICATION OF COMMON-LAW RULES TO M&A TRANSACTIONS In the context of M&A transactions, Canadian common-law courts have shown a willingness to grant specific performance where they have concluded that damages would be inadequate. Some of the factors that will influence a court's decision in determining whether specific performance is an appropriate remedy include: (i) whether the subject of the agreement is the sale of shares of a public company or a private company; (ii) in cases where a buyer is seeking specific performance, whether the buyer's interest is purely financial; and (iii) whether it is the seller or the buyer that is seeking specific performance. In the context of the sale of shares of a private company, courts have ruled that damages are normally considered inadequate on the basis that the shares are unique and a substitute asset is not readily available, and that the valuation of damages can be difficult. (See, for example, Newton v. Graham, 2011 SKQB 423 (CanLII). The transaction consisted of the acquisition of the shares of a corporation operating a business in a rural community. The purchase price was $20,000). In the context of a sale of publicly traded shares, courts have suggested that the same arguments in favor of inadequacy are more difficult to make except where the consummation of the transaction would give the aggrieved party control or de facto control of the underlying business. (See I.M.P. Group Limited v. Dobbin, 2008 CanLII 46328 (ON SC). The buyer was the largest shareholder of the subject public company and required the shares relating to the disputed agreement to have effective control of the public company. The buyer successfully obtained specific performance of an oral agreement.) Courts have also suggested that the type of buyer seeking specific performance may influence the availability of the remedy. In a recent Ontario Court of Appeal decision, Wallace v. Allen, 2009 ONCA 36 (CanLII), a buyer was denied specific performance on the basis that it was a financial buyer and that the business to be purchased was therefore not unique for the buyer. (The Court of Appeal found that the parties who had only executed a letter of intent and had a draft purchase agreement, in fact, had a binding agreement. The subject matter of the transaction was the delivery of all of the shares of four private companies for a purchase price of $3,200,000.) With respect to a seller seeking specific performance, it may be harder to claim that damages are inadequate, especially where the consideration for the sale of the business is money. An argument could be made that damages are inadequate for a seller, where (i) other buyers cannot be readily found; and (ii) there would be irreparable damage to the business being sold if there was a failure to consummate the transaction. For example, a failed transaction may lead to a perception that the seller's business is struggling, which can give rise to issues with respect to employee, client and supplier retention and, in the case of a public company, put downward pressure on the trading value of the stock of the seller. Also, specific performance in favor of a seller may be justified on the basis that if such remedy is available to one party, it should be available to the other (principle of mutuality). QUÉBEC CIVIL LAW > GENERAL PRINCIPLES In Québec, specific performance is not a discretionary remedy and the aggrieved party is prima facie entitled to specific performance (see, for example, Varnet Software Corporation c. Marcam Corporation, 1994 CanLII 6096 (QC CA)). The general principles regarding remedies set out in article 1590 of the Civil Code of Québec (the "Code") provide, inter alia, that if one party to an agreement fails to perform its obligations without www.lexpert.ca | LEXPERT • June 2013 | 49 C-00-Firm.indd 49 13-05-17 10:07 AM