The Lexpert Guides to the Leading US/Canada Cross-Border Corporate and Litigation Lawyers in Canada profiles leading business lawyers and features articles for attorneys and in-house counsel in the US about business law issues in Canada.
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SPECIFIC PERFORMANCE "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. justification, the other party may, without prejudice to its right to obtain damages, choose amongst a number of remedies including specific performance. The only impediment to an aggrieved party's right to obtain specific performance is that the case has to "admit of it" (Article 1601 of the Code). This notion has been interpreted by courts in Québec as well as authors to mean that the specific performance remedy is not available where the performance of the obligation: (i) requires the personal service of the other party, though this prohibition does not usually apply where the other party is a corporation, (ii) has become impossible, (iii) would interfere with the rights of a third party, or (iv) would be difficult to supervise (see Gennium Pharmaceutical Products Inc. c. Genpharm Inc., 2008 QCCS 2292 (CanLII) and Charron c. Groupe santé Roy, 2002 CanLII 33119 (QC CS)). > APPLICATION OF QUÉBEC CIVIL LAW RULES TO M&A TRANSACTIONS There is a limited number of reported cases in which the Québec courts have dealt with specific performance in the context of M&A transactions. The cases that do exist involve relatively small and uncomplicated private target deals where one of the parties claimed that, despite the failure to sign a purchase and sale agreement, there was a binding agreement and specific performance ought to be granted. In most of these cases, the buyer petitioned the court for an action in "passage of title," which is a form of specific performance typically used in real estate transactions and available in sale transactions pursuant to Article 1712 of the Code. (See for example is 9153-1335 Québec Inc. c. Jems Investments (Quebec) Inc., 2011 QCCS 6079 (CanLII), which involved a transaction consisting of the acquisition of the shares of a corporation in the restaurant business. The purchase price was to be paid in cash and was less than $3,000,000. The issues regarding the action for passage of title specific performance, though discussed, were moot as the court did not find that the parties had an agreement. See also Kyriacou c. London, 2011 QCCS 186 (CanLII), which was confirmed by London c. Kyriacou, 2013 QCCA 37 (CanLII). The transaction consisted of the acquisition of the shares of two corporations, one of which was in the daycare business and the other owned the building in which the daycare was operated. The purchase price was less than $1,000,000. The action in passage of title was granted.) Under Quebec's civil law, if a seller sells the property that is the subject of a purchase and sale agreement to a third party, the buyer cannot seek specific performance, even where the third party has acted in bad faith. In such cases, the aggrieved buyer can only sue for damages (see Article 1397 of the Code). At common law, specific performance will not be refused for the sole reason that the shares or the assets have been sold to a third party. If such third party had prior notice of an agreement between a seller and an aggrieved buyer, specific performance can still be obtained by the aggrieved buyer. (See I.M.P. Group Limited v. Dobbin, 2008 CanLII 46328 (ON SC) and Barrick Gold Corporation v. Goldcorp. Inc., 2011 ONSC 3725 (CanLII).) PRACTICAL CONSIDERATIONS There are certain practical considerations that one needs to take into account in determining whether specific performance is the desired remedy: Time required to get a judgment: Whether one is applying to a court of common law or civil law in Canada, it can take about two years before a final judgment on the merits for specific performance is obtained. Even where the suit is fast-tracked through the judicial system, the waiting period for a judgment to be rendered may make the remedy impractical. Financial state of buyer/seller: During such time as a judgment for specific performance is rendered, a buyer may lose its financing, which could mean that even if specific performance is granted it may be difficult to execute. A seller under financial distress may not have the financial leeway to wait for a judgment. Risk of the business: A buyer seeking specific performance will be relying on the seller to conduct the business during the waiting period and assumes the risk the business may not be in the state that the buyer expects at the time judgment is rendered. A buyer can seek an injunction to enforce the interim period covenants in the purchase agreement (to the extent they exist), but the performance would be difficult to supervise and a court may refuse to grant an injunction on that basis. (In Québec, a buyer would also need to obtain a temporary injunction to stop the sale of the shares or the assets to a third party for the reasons mentioned above.) REMEDY AND TERMINATION CLAUSES Once the parties to a purchase agreement have considered the appropriate remedy for a failure to close the transaction, they may try to eliminate the risk of an unwanted remedy by expressly setting out the available remedies in the purchase and sale agreement. Termination provisions should also be reviewed carefully to ensure they are consistent with the intended remedies sought. > SPECIFIC PERFORMANCE IS THE REMEDY OF CHOICE Whether under the Canadian common law or Québec civil law, a party cannot force the performance of an agreement that has been properly terminated. Consequently, in circumstances where the parties want to keep the option of exercising the remedy of specific performance, they must ensure that the termination provisions in the purchase and sale agreement do not allow the defaulting party to terminate and do not allow automatic termination. Where the agreement is governed by the laws of a Canadian common-law province, the parties may consider including a clause providing that they agree that damages would be inadequate in compensating for any breach of the agreement and that accordingly, a party may seek to enforce the performance of the agreement by injunction or specific performance. Though a contractual right to specific performance may not be conclusive or prevent a court from refusing to grant specific performance, it may still influence a court's decision in favor of specific performance and even be considered an important factor. (See Height of Excellence Financial Planning Group Inc. v. Bergen, 1999 SKQB 142 (CanLII). See also Robert J. Sharpe, 50 | LEXPERT • June 2013 | www.lexpert.ca C-00-Firm.indd 50 13-05-17 10:07 AM