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There's much fuss about the break fee that Primaris Retail Real Estate Investment Trust has agreed to pay white knight bidder H&R REIT if their almost $3-billion acquisition agreement falls through because somebody else offers more.
There's griping among shareholders of Primaris about the size of the fee, which works out to about 3.8 per cent of the equity value of the bid, but also the structure, which includes an option to buy two Toronto properties at a discount, with the discount being calculated as part of the value of the fee. One Toronto commentator, Mark McQueen, went so far as to call on the Ontario Securities Commission to strike down the fee (though it may well be that it's more a matter for courts than securities regulators, some lawyers say.) The fact is, there are precedents for what Primaris and H&R have done, though not too many lately. Such asset options as part of termination fees are rare, but not unheard of.
Here are five examples.
1. Bear Stearns and JPMorgan Chase & Co.
As part of Bear Stearns' emergency sale to JPMorgan in 2008, the parties agreed to a break fee that included giving JPMorgan the option to buy the Bear Stearns headquarters tower on Madison Ave. in New York for $1.1-billion (U.S.), adjusted for costs and any attached debts.
Given the circumstances of Bear's sale, with the board not exactly in the strongest negotiating position, this perhaps isn't the best precedent for Primaris and H&R to lean on. But there are more.
2. Genesis Exploration and Vintage Petroleum
In their 2001 plan to merge, Canada's Genesis agreed to an option that would give Vintage the ability to buy various Genesis assets and properties at "fair market value." Vintage would have 180 days to exercise the option.
3. Petromet Resources and Talisman Energy
This 2001 merger agreement gave Talisman an option to buy Petromet's stake in a property at "fair market value." Talisman had six months to exercise the option.
4. Parmalat and Ault Foods
When Italy's Parmalat agreed to buy Toronto dairy company Ault Foods in 1997 to expand in Canada, Ault gave Parmalat a break-fee option valid for 3 months to buy most of Ault's fluid milk business in Quebec for $65-million.
5. Shaw Communications and WIC Western International Communications
This 1998 deal is perhaps the most interesting, because the asset option clause was tested in court and held up. WIC agreed to pay Shaw $30-million (Canadian) as a break fee, and gave an option to purchase WIC's radio assets for $160-million. Rival bidder CanWest fought back, but when the matter ended up in front of a judge, the ruling was that the inducements were a reasonable enticement to bring a higher bidder to the table.
The judge at the time found that "the granting of an asset purchase option (or "asset lock-up", as it is sometimes called, in the jargon of the trade) to a potential bidder may be a proper and acceptable measure for a target corporation to adopt as a competitive-bid-stimulating inducement where – viewed in the context of the entire negotiated transaction, as in the case of break fees – it strikes a reasonable commercial balance between its potential negative effect as an auction inhibitor depressing shareholder value and its potential positive effect as an auction stimulator enhancing shareholder value."
(Boyd Erman is a Globe and Mail Capital Markets Reporter & Streetwise Columnist.)