The recent Delaware ruling in In Ancestry.com Inc. Shareholder Litigation provides a cautionary tale relating to a target company developing aggressive projections during an auction process.

The Relevant Facts

Following the announcement of a going-private transaction, some shareholders of Ancestry.com filed suit in the Delaware Court of Chancery alleging, among other things, that the board preferred the interests of the winning bidder over shareholders. Previously:

1. Ancestry hired Qatalyst Partners LLP as its financial advisor and initiated an auction process.
2. Ancestry’s management prepared “bullish” projections for the auction process. Notably, Ancestry does not develop long-term projections in the usual course of business. These aggressive projections were provided to Qatalyst.
3. The auction had a promising start with 12 potential bidders entering into confidentiality agreements and conducting due diligence. However, following due diligence, only three bidders remained, including Permira Advisers, LLC.
4. Permira indicated that it would make a partial offer for Ancestry in the $32/share range, subject to the participation of other equity sources. Ancestry’s largest shareholder and its management agreed to roll their equity interest into the surviving entity.
5. Qatalyst informed Ancestry’s board that it could not provide a fairness opinion at $32/share based on the aggressive projections.
6. Permira made a firm partial bid for Ancestry at $32/share.
7. Ancestry’s management revised the aggressive projections to, among other things, account for the issues raised by potential bidders during the due diligence process.
8. Qatalyst provided a fairness opinion based on the revised projections, thereby enabling the board to recommend the Permira offer to shareholders. The board’s proxy circular provided shareholders with the aggressive projections and the revised projections.

The Ruling

The Court accepted the board’s position that the optimistic projections were deliberately “bullish” and that the board appropriately refined its views as to the future prospects of Ancestry with advice from management and its financial advisors, and in light of feedback received from potential bidders during the prolonged auction process. Nevertheless, the Court found it problematic that there were no entries in the board minutes or in other contemporaneous documentation alluding to the aggressive projections being “optimistic”. The Court also found the process by which the aggressive projections were revised “a bit unusual.” The Court was perplexed that Qatalyst formally informed the board that it could not provide a fairness opinion based on the aggressive projections; presumably, this would have been unnecessary if the numbers were understood by everyone to be “sell-side puffery”.

While denying the relief sought by the shareholders (to enjoin the shareholder vote on the merger), the Court ordered the board to revise its proxy circular to inform shareholders about a “fairly important omission of [an] actual objective fact” — that the aggressive projections were revised because of Qatalyst’s inability to provide a fairness opinion.

 The Takeaways

1. An open ongoing dialogue between a target’s board, management and the financial advisors is very important when preparing financial projections in contemplation of a sale process.  Management should clearly articulate the assumptions underlying the projections to the board and the financial advisors and ensure that everyone understands their implications.  This will go a long way to ensure there are no surprises later.
2. Ensure that the minutes from a meeting where the target’s board reviews bullish financial projections clearly document that the projections were prepared on that basis.  The record should show that the board carefully reviewed the projections with management and the financial advisors and concluded that it was in the best interests of the corporation to provide bullish projections to potential buyers to maximize the sale price.
3. In Canada, a target is required to include in its proxy circular for a voting transaction (such as a plan of arrangement or amalgamation) sufficient detail to enable reasonable securityholders to form a reasoned judgment concerning the transaction.  For a take-over bid, the target must disclose in a directors’ circular information that would reasonably be expected to affect the decision of securityholders to accept or reject the bid.  It would be interesting to see whether a Canadian securities commission would view the initial refusal of an investment bank to provide a fairness opinion based on aggressive projections as sufficiently material to warrant disclosure in a circular of a Canadian public company.  Note that it is not customary in Canada for a target to include financial projections in a circular.

The Canadian government’s Bill C-60 contains proposed amendments to the Investment Canada Act that will significantly impact foreign investors whom the Canadian government considers as state-owned enterprises (SOEs).  An investor might be an SOE even if a foreign state only indirectly “influences” the investor.  Under these amendments, if the Minister of Industry determines that an investor is an SOE and it is acquiring control of a Canadian business, then the applicable review threshold will be the lower SOE-specific threshold and not the significantly higher threshold for non-SOE investments.  A finding by the Minister that an investor is an SOE may also give rise to national security review implications. The proposed amendments introduce potentially broad concepts and elements of uncertainty that will likely, without further clarity from the government, place a burden on parties assessing and addressing regulatory risk should these amendments become law.

Link to full article: http://news.mccarthy.ca/en/news_template.asp?news_code=1941

The Quebec Court of Appeal’s decision in Francoeur v. 4417186 Canada Inc., 2013 QCCA 191, provides a cautionary tale on the dangers of entering into a share purchase agreement and subsequently closing a share purchase transaction, without ample due diligence.

The one-sided apportionment of risk

The Francoeur share purchase agreement (the “SPA”), which was signed by parties the court characterized as “fierce competitors”, contained the following key provisions.

1. The purchaser acknowledged that (a) until closing, it did not have access to certain “key documents” held under seal, (b) it had not undertaken any due diligence, and (c) it accepted the risks in the circumstances.
2. The material under seal included a list of golden parachute arrangements with key employees.
3. The closing was conditional on various terms that could be waived by the purchaser.
4. Prior to the closing, the target company’s president had the power to make decisions in the ordinary course of business, but was precluded from signing contracts valued in excess of $100,000.
5. The seller’s representations and warranties were limited to those expressly stipulated in the SPA.
6. The purchaser had limited indemnification rights in the case of misrepresentations by the seller.

The target company’s pre-closing activity

On the same day that the SPA was signed (but before closing), the target company’s president announced the departure of its vice-president. Soon thereafter, the target company negotiated a settlement (the “Disputed Agreement”) with the vice-president specifying, inter alia, that the vice-president would transition to a new position at a reduced salary (albeit more than the $100,000 limitation imposed in the SPA) for 12 months. In exchange, the vice-president waived all recourse against the seller in relation to his termination.

Post-closing: The purchaser’s remorse

The purchaser, after reviewing the documents under seal, took the position that the vice-president was not entitled to (a) a golden parachute because he was not an employee of the target company when the transaction closed, or (b) payments pursuant to the Disputed Agreement.

Predictably, the vice-president sued the target company (which at this point was owned by the purchaser). Also predictably, the purchaser sued the seller and the former president for indemnification, alleging that the seller fraudulently concealed the target company’s golden parachutes from the purchaser and secretly concluded a sham transaction to convey an entitlement to which the vice-president had no right.

The Quebec Court of Appeal

The Quebec Court of Appeal reversed the trial judge’s finding that the Disputed Transaction was invalid and the vice-president had no entitlement to the golden parachute. Among other things, the Quebec Court of Appeal held the following.

1. The golden parachute was not fraudulently hidden from the purchaser. As the transaction’s closing was not assured, it was reasonable for the target company to protect confidential information from its competitor. The purchaser assumed all risks associated with conducting no due diligence.
2. In any event, the SPA could not alter the vice-president’s entitlement to a golden parachute. The purchaser acquired the target company in a share transaction that left the company intact and therefore responsible for valid pre-closing agreements entered into by the company.
3. The SPA permitted the former president to negotiate the Disputed Agreement even though its value was in excess of the $100,000 limitation imposed in the SPA. Until closing, the former president was charged with running the business. The SPA’s limitations did not alter the target company’s duty to provide the vice-president with a proper notice of termination or a financial equivalent due to his dismissal. Moreover, the Court found the former president’s actions reasonable as the transaction’s closing was not assured and it was in the target company’s best interests to lock up a key employee for 12 months.
4. The former president and seller were not liable to the purchaser even if they had misrepresented facts relating to the vice-president’s dismissal. In the SPA, the purchaser waived any right it might have had to take legal action based on such a misrepresentation.

The Three Takeaways

In circumstances where due diligence is short-circuited for business reasons, a purchaser should:

1. be reminded that in a share transaction, the purchaser acquires the good, the bad and the ugly from the target company, subject to protections negotiated in the share purchase agreement.
2. consider negotiating:
   • for the disclosure of proprietary information subject to a confidentiality agreement;
   • a rigorous indemnification clause to specifically account for risks that the purchaser is unwilling to assume (that said, seeking indemnification from the seller may require costly litigation); and
   • a retention amount to be held in trust until an appropriate period post-closing.
3. reconsider the risks and benefits of acquiring the target company without appropriate due-diligence – of course, targeted due-diligence from qualified and trusted legal advisers is always recommended, subject to business priorities.

In our recent series on corporate-spin off transactions, we focused on why a company should consider a spin-off, and how the spin-off could be implemented. In this post, we briefly outline some of the common risks that a company should be aware of before pursuing the spin-off.

Even for seasoned practitioners, a great deal of planning is required to effectively “spin-out” a part of an existing business and the road to completion is rife with challenges and legal complexities. First and foremost, a failure to adequately address the division of assets and liabilities as between the Parent and Spinco could spell disaster for all parties involved. Advice from counsel is a must to deal with these sorts of issues. The Parent and Spinco should enter into an agreement that comprehensively allocates assets and liabilities between them. An intellectual property licence agreement, a shared facilities agreement and a transitional services agreement (among other agreements) should specify the respective rights of the Parent and Spinco vis-à-vis intellectual property, real estate, and other corporate services.

Boards of directors must also be attuned to compliance with the range of corporate and securities law requirements involved in such transactions. If the Parent assets that are spun-off to Spinco represent “all or substantially all” of the assets of the Parent, for example, then shareholder approval for the spin-off must be obtained (by way of special resolution). Depending on the method used to implement the corporate spin-off, securities legislation may also deem the share transfer to be a “distribution”, which invokes prospectus and registration requirements.

Finally, spin-offs should never simply be used as a means of dumping company debt, bad assets and struggling business lines. In conceiving the package of assets to be allocated to Spinco, boards of directors need to be mindful of the risks involved in sending that company out into the world without the tools it needs to survive. The relative cost-benefit as between the Parent and Spinco, in other words, must not be too wide. Directors may otherwise run the risk of exposing themselves to liability vis-à-vis the adequacy of the spin-off. For an interesting read on some of the pitfalls of spin-offs, we recommend this recent article by Steven M. Davidoff.

Despite these hurdles, pursuing a spin-off is still well worth the challenge – especially in times when financing is not readily available. In the mining and mineral resource sectors in particular, many of the major players have reversed the two-decades long trend of expansion (through the acquisition of new mines around the world) with the logic of “shrinking to grow”. The goal for these companies is to “focus on margins and containing soaring costs, rather than boosting output.”

Some recent examples include Score Media Inc.’s spin-off of its digital assets into theScore, Inc., Mondelez International, Inc.’s (formerly Kraft Foods Inc.) spinoff of its North American grocery business, Petrobank Energy and Resources Ltd.’s spin-off of Petrominerales Ltd., Bankers Petroleum Ltd.’s spin-off of its US assets into BNK Petroleum Inc., and Mansfield Minerals Inc.’s spin-off of Pachamama Resources Inc.

In our last post, we outlined some of the reasons why corporate spin-offs are used. In this post, we address some of the most common methods used to implement the corporate spin-off.

How do I implement it?

In some cases, a Canadian public corporation seeking to distribute shares of Spinco to its shareholders will be able to do so by a reorganization known as a “butterfly transaction”.  The advantage of a butterfly transaction is the deferral of Canadian income tax both at the corporate and shareholder level. The tax rules governing butterflies are highly complex and various restrictions, including prohibitions on certain pre and post-butterfly transactions, may preclude the Parent from using this method.

Depending on the circumstances, other options for a Canadian public corporation to effect a spin-off of Spinco shares are (a) as a dividend-in-kind, (b) a distribution of property as part of a share-for-share exchange, and (c) a distribution of property on a corresponding reduction of stated capital as part of the reorganization of the distributing corporation’s business. Engaging tax counsel is a must.

Spin-Off Dividend. Spin-offs are sometimes achieved by distributing shares of Spinco to the shareholders of the Parent by way of a dividend. This was the method used by Time Warner in its spin-off of AOL. Boards of directors must exercise their business judgment and conclude that the distribution is in the best interests of the Parent. Directors, too, will need to comply with corporate laws designed to ensure that the Parent is, after the payments are made, still able to satisfy its liabilities as they become due.

In the context of a Canadian corporation, the dividend-in-kind (i.e. satisfied by the distribution of Spinco shares) would be taxed in the hands of the shareholders as a regular dividend (i.e. non-eligible dividend or eligible dividend if so designated for Canadian tax purposes by the payor corporation).

Reduction of Stated Capital. The Parent may be able to distribute shares in Spinco to its shareholders by way of a reduction of stated capital. In certain circumstances, this will be treated as a tax-free return of paid-up capital rather than a taxable dividend. The corporate statutes in Canada, however, generally provide that a corporation must obtain the approval of its shareholders (by a special resolution) in order to reduce its stated capital.

Plan of Arrangement. The advantage of a plan of arrangement is that it enables the Parent to effect a custom, multi-faceted transaction in a flexible and efficient manner.  For example, a plan of arrangement is commonly used to effect a spin-off by way of a butterfly transaction or share-for-share exchange.  Through a plan of arrangement, the distribution of Spinco shares by the Parent to its shareholders can also benefit from prospectus and registration exemptions under National Instrument 45-106 – Prospectus and Registration Exemptions. In addition to seeking court approval for the plan of arrangement, the Parent will need to take appropriate steps to obtain shareholder approval (possibly including approval from other securityholders, such as bondholders).

Stay tuned again for a final commentary on corporate spin-offs, in which we reveal some of the common challenges and risks associated with this transaction.

“Independent directors who step into these situations involving essentially the fiduciary oversight of assets in other parts of the world have a duty not to be dummy directors.” p. 21 of transcript, In re Puda Coal Stockholders Litigation, Del. Ch. C.A. 6476-CS (February 6, 2013).

A recent Delaware bench ruling considers some of the issues highlighted by fraud allegations against emerging market issuers like Sino-Forest Corporation and Zungui Haixi Corporation, and the Ontario Securities Commission’s recently issued Staff Notice 51-720 – Issuer Guide for Companies Operating in Emerging Markets.

In re Puda, shareholders sued the directors of the NYSE Amex-listed Puda Coal Inc. after an audit committee investigation uncovered that two China-based directors had misappropriated all of the company’s corporate assets. Among other things, shareholders alleged that the directors (even the three directors who investigated the fraud) had acted in bad faith by failing to adequately monitor the company. The fraud was uncovered 18 months and 2 public offerings after it occurred when it was discovered that Puda’s sole producing asset in China had been sold to a subsidiary controlled by the chairman.

The Court made the following comments before denying the directors’ motion to dismiss for failure to state a claim:

 “If the assets are in [emerging markets,] you’re not going to be able to sit in your home in the U.S. and do a conference call four times a year and discharge your duty of loyalty. That won’t cut it. That there will be special challenges that deal with linguistic, cultural and others in terms of the efforts that you have to put in to discharge your duty of loyalty.” (p. 21 of transcript)

“That if you’re going to have a company domiciled for purpose of its relations with investors in Delaware and the assets and operations of the company are situated in China that, in order for you to meet your obligation of good faith, you better have your physical body in China an awful lot. You better have in place a system of controls to make sure that you know that you actually own the assets. You better have the language skills to navigate the environment in which the company is operating. You better have retained accountants and lawyers who are fit to the task of maintaining a system of controls over a public company” (pp. 17-8 of transcript)

The Court was also highly critical of the three directors who resigned instead of suing the directors who misappropriated corporate assets. As a consequence, the company was left in the hands of the director who allegedly misappropriated the corporate assets (p. 6, the second director implicated in the fraud resigned earlier).

“…there are some circumstances in which running away does not immunize you. It in fact involves a breach of fiduciary duty. And I think the extreme circumstances here might well constitute one.” (p. 23 of transcript)

Three quick take-aways:

1. Be diligent. Stay informed. Retain experts when appropriate.
2. The diligence applied may be protected by the business judgment rule under Canadian corporate law.
3. Directors may be exposed to liability if they don’t pursue corporate wrongdoers. Resigning is not really an option if by doing so you leave shareholders in the hands of those who you believe have acted improperly.

It is quite common that an existing credit facility has to be paid out in connection with the completion of an M&A transaction, as a result of, for example, a new credit facility being put in place to finance the acquisition which replaces the purchaser’s existing credit facility, or as a  result of both the purchaser and the target having separate credit facilities in place prior to the transaction, only one of which will be required going forward.

The process of paying out an existing credit facility should be quite straightforward as long as proper consideration is paid to the following five items:

1. Payout letter – A payout letter should be obtained from the lender being paid out (or in the case of a syndicated credit facility, from the agent on behalf of the lender).  The payout letter should at a minimum state that, upon receipt of a specific payout amount (including applicable per diem amounts should closing be delayed) set out in the letter, the credit facility is repaid in full, and all guarantees and security are released.  If the credit facility being paid out includes a revolving facility (and especially a swingline facility), the final payout amount may not be available until the day of payout given the possibility of daily fluctuations, in which case you will need to ensure to follow up with the lender being paid out for the amount on the date of repayment.
2. Letters of credit – Letters of credit issued under the existing credit facility will need to either be cancelled and re-issued to the beneficiary under the new facility, deemed to be issued under the new facility (if the prior lender is the same as the new lender or if it is a part of the syndicate of new lenders), cash collateralized (this is the more common approach where the prior lender is not part of the new credit facility, as it avoids the hassle of obtaining back the original letters of credit) or back-stopped by back-to-back letters of credit.  If letters of credit are to be cash collateralized, additional security documentation may be required and some of the security registrations will need to stay in place (with a more limited collateral description).
3. Bankers’ acceptances – Advances by way of bankers’ acceptances cannot be repaid prior to their maturity, and as a result any outstanding bankers’ acceptances at the time of the payout will need to be cash collateralized by the borrower (triggering the requirement to deliver additional security and maintain existing registrations in place as described above).  To avoid this issue, if you are expecting to pay out credit facilities, you should consider converting bankers’ acceptances borrowings to prime borrowings as they mature prior to the date the credit facilities are to be repaid.
   
4. Discharges of security – While security discharges will not be filed until the payout amount has been received, some discharge documents, such as for example real property discharges, require the signature of the lender that is being repaid and therefore it is preferable that such documentation be signed and delivered in escrow for closing of the M&A transaction so that you do not have to approach the lender again for these after it has been paid out.
5. Return of pledged collateral – You should ensure that all share certificates and other original collateral pledged to the lenders is returned on payout of the credit facilities.  It is quite likely that such collateral will need to be pledged immediately to any new lender on closing.  In addition, any notes issued to lenders evidencing the loan should be returned on payout of the facilities, so that they can be cancelled.

Lenders which are to be paid out at closing should be approached early on in the transaction to avoid timing issues.  If this is done and the points above are considered in advance of closing, the payout process should then proceed quite smoothly at closing of the deal, permitting the parties to focus on the more substantive and important points of the M&A transaction instead of dealing with last minute hitches relating to a payout of credit facilities.

Last Spring we announced a special series of blog posts aimed at addressing some of the most significant distinctions between Canadian and US law that ought to be considered in the early stages of the proposed acquisition of a Canadian target.

Following the launch of that series our team blogged about important topics like:

• Financing considerations in: Financing the Acquisition of a Canadian Business: Cross-Border Credit Transactions;
• Acquisition structures in: Plan of Arrangement – A Flexible “Made-in-Canada” Acquisition Structure;
• Updates to the Corruption of Foreign Public Officials Act in: Overseas Financing and Acquisitions: The Increasing Importance of Anti-Corruption Due Diligence;
• Updates to the Investment Canada Act in: The Investment Canada Act – Recent Announcements and New 2013 Investment Canada Act Review Threshold;
• Shareholder activism in: 5 Things US Activist Investors Need to Know about Canada;
• Personal property security considerations in: Personal Property Security Estoppel Letters: What Are These and Why Are They Needed? and You Say UCC, We Say PPSA; and
• Real estate security considerations in: Good News for Canadian Mortgagees and The Power of the Private Power of Sale.

With the release of our 2013 publication of Doing Business in Canada, we are excited to update our US followers that this year we have launched a digital edition available for download to your tablet devices (CLICK HERE), which covers a range of topics about establishing or acquiring a business in Canada.

We look forward to continuing to provide you with coverage of cross-border M&A issues, but in the meantime, if there’s a particular topic you want us to blog about (or if you have questions about Canada more generally), we’d be happy to hear from you – just send us an e-mail: rhansen@mccarthy.ca and hgordon@mccarthy.ca.

Most M&A contracts contain provisions that confer discretionary contractual powers on one or both parties to the transaction (e.g., the right to withhold consent to an assignment).  One of the most pressing questions in modern contract law is whether the party in possession of such a power must exercise it in good faith. In Bhasin v. Hrynew, 2013 ABCA 98, the Alberta Court of Appeal recently addressed this issue, and held that parties are not under a duty of good faith in exercising a right of non-renewal when the term of an evergreen contract comes to an end. While Bhasin did not concern an M&A agreement, it is an important cautionary tale for those who would seek to use the duty of good faith to limit any discretionary contractual right, and may well prove important to future M&A litigation.

Background

The facts in Bhasin are discussed in detail in an earlier post on Canadian Appeals Monitor, and may be summarized fairly shortly here. The case involved a claim against CAFC, a company which marketed RESPs to parent-investors through various retail dealers, by one such retail dealer, Mr. Bhasin. Section 3.3 of their dealership agreement – to which Bhasin had agreed after legal advice and negotiations – contained an evergreen clause.  It provided that the contract would automatically renew for successive, periods unless one party notified the other that they desired expiry of the agreement prior to the end of the relevant term. CAFC exercised its right to not renew the agreement, and Bhasin sued, alleging among other things that CAFC’s decision was made in bad faith. According to Bhasin, CAFC declined to renew the contract in retaliation against Bhasin for refusing to submit to an audit by a competitor who CAFC had appointed to monitor its dealers’ compliance with Alberta securities law, and to coerce a merger between Bhasin and that competitor. Bhasin’s action was successful before Moen J. at first instance.

The Bhasin Appeal

The Court of Appeal overturned the trial judgment, rejecting Moen J.’s conclusion that the non-renewal right was subject to implied preconditions. In doing so, the Court produced a lengthy list of legal principles to the delight of defendants everywhere (see para. 27), which emphasize that there is no duty to perform most contracts in good faith, that courts are reluctant to rewrite or imply terms into commercial agreements, and that there are limits upon the judicial power to consider parol evidence. Applying these principles, the Court made four interesting findings.

First, it held that Moen J. erred in relying upon parol evidence of contractual negotiations, oral promises and the expectations of the parties given the existence of an entire agreement clause in the contract. This clause excluded any “terms.. expressed, implied or statutory, other than expressly set out in this Agreement”. As a result, the Court distinguished the Ontario Court of Appeal’s ruling in Civiclife.com Inc. v. Canada (A.G.) (2006), 215 O.A.C. 43, where an entire agreement clause that did not expressly exclude implied terms was found insufficient to preclude the application of the duty of good faith. The Court also noted that, even apart from the entire agreement clause, it was inappropriate to consider this parol evidence since the contract was not ambiguous and the evidence went beyond mere background knowledge.

Second, the Court rejected the submission that the contract was an “employment” agreement, such that CAFC was subject to a duty of good faith by operation of law. It noted that the agreement was “clearly not an employment contract in form or substance”, and that even if it were, employment contracts are not as a general matter contracts of good faith, particularly in “a case of non-renewal (expiry), not of termination”.

Third, the Court also rejected the argument that a duty of good faith arose by implication from the intentions of the parties. It observed that nothing in the contract suggested the parties intended it to be of perpetual duration. Instead, 3.3 plainly stated that the agreement would expire if one party chose to exercise its non-renewal right. To suggest that “the contract will keep renewing itself automatically every three years, if the motive for giving the notice does not meet certain standards… flatly contradicts the clause’s words”.

Finally, the Court held that Moen J. erred in focusing upon inequality in bargaining power or sophistication between the parties. In fact, given Bhasin’s receipt of the legal opinion and the “expressly negotiated” nature of the evergreen clause, the Court found that the existence of such inequality was not “even arguable”.

Significance

The significance of Bhasin lies in the Court’s refusal to impose a duty of good faith upon the exercise of non-renewal rights, even though – as Moen J. emphasized below – they involve the use of a discretionary power. As the Ontario Court of Appeal observed in Civiclife.com, discretionary contractual powers are one of the classic situations in which courts will imply duties of good faith. Indeed, the Alberta Court of Appeal’s own prior judgment in Mesa Operating Ltd. v. Amoco Canada Resources Ltd. (1994), 149 A.R. 187 (C.A.); Lord Sumption made the same point more recently in Hayes v Willoughby [2013] UKSC 17 at para. 14.

By declining to imply such a duty in Bhasin, the Court has signalled that the mere fact a contractual right is discretionary is not itself a sufficient reason for placing good faith constraints upon it. Rather, judges must still ask whether those constraints are consistent with the text, context and purposes of the relevant provision and the contract as a whole. There may be some cases in which an unfettered discretionary right is precisely what a reasonable observer would conclude the parties intended. The non-renewal provision in Bhasin is an example of this phenomenon.

As a practical matter, therefore, Bhasin suggests that parties negotiating clauses in M&A contracts which confer discretionary contractual powers should insist upon express limits to those powers if they are concerned that the powers may be exercised for improper purposes. Absent such express terms or a statute imposing a duty of good faith (e.g., as under the Arthur Wishart Act (Franchise Disclosure), 2000), the strategy of sheltering in the common law duty of good faith at trial may prove difficult, especially where the clause was negotiated between parties of roughly equal bargaining power with the benefit of legal advice, and is located in a contract containing an entire agreement clause. In the end, as Bhasin confirms, “the thoughts or impressions of the parties cannot be used to vary the express terms of a contract”.