Trial judge's analysis of failed deal agreement relied too much on parties' intentions, ABCA rules

The court said Superior Plus Corporation does not owe a $25 million fee

Trial judge's analysis of failed deal agreement relied too much on parties' intentions, ABCA rules

A chemicals distributor does not owe a Calgary-based chemical manufacturing company a $25 million reverse termination fee after the US Federal Trade Commission stopped the former company from acquiring the latter, the Alberta Court of Appeal ruled Friday.

The appellate court said that the trial judge who ordered Superior Plus Corporation to pay the fee wrongly interpreted the company’s acquisition agreement with Canexus Corporation. The agreement provided for a reverse termination fee if the companies failed to obtain approval for the deal from Canadian and US competition and antitrust regulators.

The trial judge’s analysis of the agreement “was unreasonable and amounts to a palpable and overriding error,” the appellate court said.

“That interpretation is the result of her understanding of the parties' subjective intentions overwhelming the words of the agreement,” the court added. “The trial decision must be set aside.”

In 2015, Superior entered into an agreement to acquire all the shares in Canexus, a competitor in the specialty chemicals market. Under the agreement, Superior would pay a reverse termination fee if the parties failed to obtain the regulatory approvals needed for the transaction to close.

According to Friday’s decision, the FTC expressed concerns about the transaction and Superior offered several potential remedies to the US federal antitrust agency. However, the FTC did not accept any of the remedies and obtained a temporary restraining order and preliminary injunction from a US federal court to stop the parties from closing the deal.

Superior and Canexus agreed to terminate the deal, and another company, Chemtrade Electrochem Inc., acquired Canexus instead. Superior and Canexus claimed they were each entitled to a break fee following their failed transaction.

In 2022, a trial judge concluded that Superior owed Canexus a $25 million reverse termination fee. Under the companies’ agreement, Superior was responsible for the fee if the deal failed to garner certain regulatory approvals.

The trial judge found that the parties did not obtain approval under the US Hart–Scott–Rodino Antitrust Improvements Act (HSR Act), which sets out the process by which the FTC and the US Department of Justice conduct their reviews of whether a transaction impacts competition.

Superior appealed the trial judge’s decision, arguing that the judge erroneously “rewrote the definition of ‘HSR approval’” set out in the parties’ agreement, the Court of Appeal said.

The appellate court sided with Superior. Under the HSR Act, parties must notify the DOJ and the FTC of potential transactions and then wait 30 days before consummating the deal. The DOJ and the FTC can extend this 30-day waiting period to gather additional information. The agreement between Superior and Canexus defined “HSR approval” as the expiration or early termination of this waiting period before a June 29, 2016 deadline.

The trial judge concluded that Superior did not meet this deadline. However, the appellate court found that the trial judge misinterpreted the meaning of “HSR approval” in the agreement. The appellate court noted that the trial judge had come to her conclusion by considering the parties’ negotiations, non-binding proposals, and some of Superior’s internal documentation.

The appellate court said the trial judge’s misinterpretation of “HSR approval” resulted from her allowing her understanding of the companies’ intentions to overwhelm the words of their actual agreement.

Andrew Winton, one of the lawyers at Lax O'Sullivan Lisus Gottlieb LLP who represented Superior, told Canadian Lawyer on Monday, “The decision is an important caution about the limits of relying on the factual matrix when interpreting contracts and the risks of relying on evidence of the parties’ subjective intentions and expectations as part of the interpretive exercise.”

Winton adds, “It also serves as [a] useful reminder that contractual interpretation should focus on the words of the contract. The factual matrix, which can often take on a life of its own at trial, cannot overwhelm the plain language the parties used in their contract.”

A lawyer for Canexus, now known as Chemtrade, declined to comment. On Friday, however, Chemtrade president and CEO Scott Rook said in a statement that the appellate ruling was “extremely disappointing.” Rook added that the company is considering appealing the decision and “will continue to pursue all avenues of recovery available to us.”