A confidentiality agreement between the two parties lies at the heart of the spat.Getty Images
A lawsuit over a deal in the fast-growing alternative lending market is reopening a tried but important debate about the use of confidential information in takeover bids.
Though the target involved is small – IOU Financial, the Canadian company that alleges wrongdoing, is listed on the S&P/TSX Venture Exchange and has a market value of only $25-million – any ruling will help clarify precisely how private information can be used in future deals.
In June, Qwave Capital LLC, an Atlanta-based venture capital firm, launched a partial bid for IOU, hoping to acquire 55 per cent of the Montreal-based small business lender. Angry at the offer, IOU has taken Qwave to court, asking a judge to suspend it.
A confidentiality agreement between the two parties lies at the heart of the spat. In November, IOU and Qwave offered to share private information under a non-disclosure agreement, or NDA. These documents are often signed to see if a mutual business combination can be formed, and they usually last for a set period of time – typically, they restrict potential bidders from going hostile or launching proxy battles for 12 or 18 months.
Under these circumstances, any use by Qwave of confidential information to launch a hostile bid would be offside. To make this case, IOU is relying on precedent court rulings – and it may have a point. "A breach of a confidentiality and standstill agreement is a serious issue, which in Canada could result in a remedy of ... terminating the bid or proxy fight," said Walied Soliman, a lawyer at Norton Rose Fulbright LLP.
It is tough to determine how the court will rule, but a review of Canadian case law suggests IOU's argument has some merit. Here are three cases that may emerge in the proceedings:
Research In Motion Ltd. v Certicom Corp. [2009]
Research In Motion Ltd. and Certicom Corp. signed two separate non-disclosure agreements in 2007 and 2008, and both agreements provided that confidential information was to be used solely to assess the possibility of a contractual relationship between the parties. In 2009, though, RIM went hostile, and launched a bid for Certicom. The Ontario Superior Court ultimately ruled that the hostile approach broke the agreement, and it effectively terminated RIM's bid. The wrinkle here is that RIM eventually acquired Certicom, but had to outbid a competitor to do so – a process that ultimately satisfied Certicom.
Aurizon Mines Ltd. v. Northgate Minerals Corp. [2006]
In 2005, Northgate Minerals Corp. entered into a mutual year-long confidentiality agreement with Aurizon Mines Ltd. on the possibility of a business combination. Seven months later, Northgate launched a takeover bid. Aurizon sought a ban on the bid, but Northgate argued that the trigger – the exchanging of confidential information – didn't exist. British Columbia's Court of Appeal determined that a breach of confidentiality was not contingent on confidential information being exchanged – in other words, the timeline limitations agreed to under the NDA were enough to block a deal – and ordered a permanent injunction.
Maudore Minerals Ltd. v. The Harbour Foundation [2012]
In this case, the courts offered a different perspective. The Harbour Foundation and City Securities Ltd. were the largest shareholders of TSX Venture-listed Maudore Minerals, and both intended to nominate new directors to Maudore's board. However, on the eve of the special meeting to elect them, Maudore sought to ban shareholders from voting their stock, on the grounds that one of the nominees breached a confidentiality agreement by using the confidential information in its dissident proxy circular. The Ontario Superior Court ruled that the nominee was allowed to use the confidential information for reviewing and evaluating Maudore's properties and projects for Harbour and argued that using the information to decide how shareholders' rights should be exercised was not a misuse of the information.
Details about IOU Financial's court application and the confidentiality agreement signed between the two parties were not available.
Davies Ward Phillips & Vineberg LLP is legal counsel to IOU Financial and Borden Ladner Gervais LLP is legal counsel to Qwave.