October 4, 2022

Busted Deals: What’s the Right Measure of Damages?

Twitter’s battle with Elon Musk has prompted a lot of discussion about the proper remedies for jilted sellers in M&A litigation.  A recent article looks at that issue through the lens of the Ontario Superior Court of Justice’s 2021 decision in Cineplex v. Cineworld, in which the Court determined that the anticipated synergies associated with the deal should be included in the damages awarded to the target. The authors say that’s the wrong approach. Here’s the abstract:

What is the appropriate remedy when an M&A transaction fails to close because of the acquirer’s breach of contract? Even before the controversy surrounding Elon Musk’s proposed acquisition of Twitter in the US, this question arose recently in Canada. In Cineplex v. Cineworld, the Ontario Superior Court of Justice awarded $1.24 billion in damages based upon the target’s loss of anticipated synergies.

This article highlights the problems with this approach, including conceptual and reliability issues with calculating and apportioning synergies to one entity in a business combination and significant variation in the availability and size of damages depending on transaction structuring and the financial or strategic nature of the buyer or deal.

To avoid many of these issues and provide more consistent outcomes, we argue that courts should award specific performance, where feasible, or alternatively loss of consideration to shareholders as the seller’s or target’s damages. This latter measure best approximates the target corporation’s lost bargain and expectations, and has the least reliability issues.

Awards of expectancy damages to target shareholders in the form of lost consideration have faced significant challenges, most notably in the Second Circuit.  In Consolidated Edison v. Northeast Utilities, (2d. Cir. 10/05), the Second Circuit held that, under New York law, a “no third-party beneficiaries” clause in the merger agreement was a bar to shareholder expectancy claims, because they were not parties to the agreement.  However, as I blogged a few years ago, many commenters suggest that it’s unlikely that Delaware would take a similar approach.

John Jenkins