Break fees and reverse break fees in M&A are typically highly negotiated and can be important tools to align the interests of the parties.
Two relatively recent Alberta appellate court rulings illustrate that break fees can also be fiercely contested and subject to potentially unexpected interpretation.
The rulings underscore the need for careful drafting and close consideration of deal terms, deal dynamics and applicable regulatory processes, as well as how these might evolve between signing and closing.
Western Energy Services v Savanna Energy Services
The Break Fee
The 2023 ruling of the Alberta Court of Appeal (ABCA) in Western Energy1 arose from an unsolicited takeover bid launched in 2016 (Bid A). The bidder (Bidder A) had locked-up 43.5% of the target's shares. As required by securities law, Bid A included a minimum 50% tender condition. Bid A also included a 2/3rd minimum tender condition, waivable at Bidder A's discretion.
A special committee of the target's board formed to consider Bid A recommended against it, and the special committee instead sought a competing offer from a white knight (Bidder B). This resulted in the target entering into an arrangement agreement with Bidder B that represented a premium to the price offered under Bid A. The arrangement agreement included a break fee of $15 million payable by the target to Bidder B should the target be acquired by a third party.
The break fee trigger expressly carved out payment of the break fee on the completion of Bid A "unless the terms of such bid are amended or modified after the date hereof". Each party was also required to notify the other party of any offer that could reasonably be expected to result in the target being acquired by a third party (the Notice Requirement) such that payment of the break fee would be triggered.
The execution of the arrangement agreement between the target and Bidder B led Bidder A to waive the 2/3rd minimum tender condition under Bid A, and accordingly it filed a "Notice of Variation" with securities regulators. The notice stated that it was only waiving the 2/3rd tender condition and that no other terms of Bid A were impacted. The target and Bidder B responded by amending the arrangement agreement to increase the consideration being paid, as well as to increase the break fee to $20 million.
Notwithstanding the increased premium being offered by Bidder B, 51.6% of the target's shares accepted Bid A and Bid A was completed. Bidder B thereafter commenced an action against the target claiming for payment of the $20 million break fee.
The Ruling of the ABCA
The key question before the court was whether Bid A had been "amended or modified" such that payment of the break fee was triggered. In upholding the decisions of an applications judge and a chambers judge of the Alberta Court of King's Bench (ABKB),2 the ABCA held that Bid A had not been amended or modified, and its rationale was twofold.
The crux of the ABCA's reasoning was that the waiver of the 2/3rd minimum tender condition by Bidder A "did not require an amendment or modification" of Bid A; rather, the waivable condition "was an integral component of the offer as made."3 Stated differently, Bidder A had not altered any of the terms of its offer. It had merely exercised a right it previously reserved for itself under the offer, and the fact that filing a Notice of Variation was necessary under securities law "did not effect an interpretive change" in Bid A.4
A second element of the ABCA's reasoning related to the Notice Requirement.5 Consistent with the decision of the chambers judge, the ABCA noted that neither the target nor Bidder B had provided notice to the other party under the Notice Requirement following the filing of the Notice of Variation by Bidder A. Instead, the parties amended the arrangement agreement to increase the consideration being paid and the break fee. The ABCA took this as evidence the parties did not view the break fee as having been triggered at that time.
Chemtrade Electrochem v Superior Plus
The Break Fee
The 2025 ruling of the ABCA in Chemtrade Electrochem6 arose from an arrangement agreement executed in 2015. The completion of the transaction required receipt of competition approval in Canada and antitrust approval in the United States. The former was obtained but the latter was not, leading to the termination of the arrangement agreement. After the transaction was terminated, the target claimed payment under the arrangement agreement of the reverse break fee of $25 million by the buyer.
The main question before the ABCA was the interpretation of the term "HSR Approval", being the defined term used by the parties to refer to antitrust approval. There was no dispute that antitrust approval had not occurred; the U.S. Federal Trade Commission (FTC) had obtained an injunction (the Injunction) blocking the transaction. What was in dispute was whether "HSR Approval", as defined by the arrangement agreement, had occurred prior to the outside date, which would trigger payment of the reverse break fee if the transaction did not ultimately close. "HSR Approval" was defined in the arrangement agreement as:
"the expiration or early termination of any waiting period, and any extension thereof, applicable to the completion of the transactions contemplated by this Agreement under the HSR Act."7
The dispute resulted from the events that transpired following the parties' application for antitrust approval in October 2015. This application triggered the first 30-day waiting period under the HSR Act.8 Following its preliminary review, the FTC issued a request for additional information (the Request) in November 2015. This request triggered a subsequent 30 day waiting period during which the parties could not close the transaction and after which the parties could only close the transaction after they had each certified substantial compliance with the Request. This was followed by the execution of a standstill or "timing" agreement among the FTC and each of the parties in January 2016 whereby the parties undertook:
- not to certify substantial compliance with the Request until at least February 5, 2016;
- not to close the transaction until at least 60 days after they had substantially complied with the Request; and
- to provide 10 business days advance notice to the FTC before closing the transaction.
During the waiting period the parties worked with the FTC in an attempt to resolve the FTC's antitrust concerns regarding the transaction. During this time the parties also extended the "Outside Date" under the arrangement agreement from March 31, 2016 to June 29, 2016.
On June 9, 2016 the parties notified the FTC that their undertaking under the timing agreement not to close the transaction would expire on June 28, 2016. On that date, the FTC obtained the Injunction. On June 30, 2016, each of the parties sent a notice of termination to the other party. When the target did so, it claimed it was owed the $25 million reverse break fee.
The Ruling of the ABCA
The ABKB held that payment of the reverse break fee had been triggered as "HSR Approval" was not obtained prior to the Outside Date of June 29, 2016. Specifically, reading the terms of the arrangement agreement as a whole and against the transaction's factual matrix, the court held that "HSR Approval meant that the parties would have the necessary U.S. government approval to complete the arrangement."9
The ABKB gave weight to evidence indicating a "common understanding" among the parties during the transaction's negotiation that the reverse break fee would be payable if the parties did not obtain the "necessary regulatory approvals".10 This was supported by textbook commentary that the "primary purpose" of a reverse break fee generally is to "compensate the seller for the time and effort spent" pursuing a transaction that does not ultimately close due to regulatory hurdles that cannot be resolved.11
The ABCA overturned the ruling of the ABKB and granted the buyer's appeal, holding that "HSR Approval", as defined by the arrangement agreement, had occurred and accordingly, the reverse break fee had not been triggered.
The ABCA observed that the "definition of HSR Approval is, on its face, narrow and specific."12 This being the case, the ABCA held the trial judge had allowed her "understanding of the parties' subjective intentions" regarding the reverse termination fee to "overwhelm her reading of the Agreement..."13 The court explained that the factual matrix "must never be allowed to overwhelm the words" of the parties' agreement.14] Specifically, the ABCA viewed the ABKB's ruling as having read the words "without challenge by the regulatory agency" into the definition of "HSR Approval".15
According to the ABCA, a proper reading of the arrangement agreement as a whole revealed the "narrow and specific" drafting of "HSR Approval",16 including that there were a "significant number" of terms in the arrangement agreement that treated a "legal proceeding or court injunction" arising out of antitrust review as distinct from the definitions of "HSR Approval" or "Key Regulatory Approvals".17 For the ABCA, this objectively reflected a deliberate intent that "HSR Approval", as defined, had a limited scope of application. The end result was that, because the "waiting period" (as contemplated by the definition of "HSR Approval") under the timing agreement had "expired" on June 28, 2016, "HSR Approval" (as defined by the arrangement agreement) had occurred notwithstanding that the FTC had blocked the transaction.
Key Practical Takeaways
When negotiating break fees, Western Energy and Chemtrade Electrochem evidence the need for careful drafting and close consideration of deal terms, deal dynamics and applicable regulatory processes, as well as how these might evolve between signing and closing. We highlight the following:
In both disputes, the ABCA interpreted the applicable break fee provisions in a relatively narrow fashion to hold that the fees were not payable, in Western Energy to the benefit of the target and in Chemtrade Electrochem to the benefit of the buyer. That said, neither ruling stands for the proposition that breaks fees should, by their nature, be interpreted narrowly, but rather consistent with the general principles of contractual interpretation.
In Western Energy, the relevant backdrop was Canada's takeover bid regime under securities law. The parties expressly accounted for Bid A in drafting the break fee, but their treatment was brief and ultimately resulted in uncertainty of application. It is possible this ambiguity may have been unavoidable, e.g., if the parties were not aligned on whether waiver of the 2/3rds minimum tender condition in Bid A should trigger payment of the break fee. On the other hand, if the parties were ad idem one way or the other, which we generally would expect, their chosen drafting failed to effectively account for Bid A's terms, resulting in litigation. Either way, the ruling indicates the courts will not necessarily view a Notice of Variation as indicative of a change or modification to a previously made takeover bid, in particular where the bidder is merely exercising a waiver it had previously reserved for itself in the bid. The ruling also cautions that the courts may take into account the parties' conduct and reaction amid deal developments in interpreting a disputed contractual term, i.e., as occurred in relation to the Notice Requirement.
In Chemtrade Electrochem, the relevant backdrop was competition and antitrust approval in Canada and the United States, respectively. The ruling evidences a key difference between these otherwise largely aligned regulatory regimes: while in Canada the Competition Bureau may issue a "no action letter" indicating that it does not intend to challenge a proposed acquisition, United States regulators generally do not issue similar instruments. The ruling cautions that break fees and their defined terms should be carefully and appropriately tailored to the applicable regulatory regime, including upon consultation with subject matter experts and local counsel. A goal should be avoiding potential ambiguities as the regulatory process unfolds and, potentially, evolves in an unanticipated or unconventional manner. The ruling further cautions that parties should not put undue reliance on the generally understood market rationale or purpose for a break fee where this understanding may conflict with the terms of the break fee as drafted. While Canadian courts will generally consult the factual matrix, this should not detract from getting the drafting right.
Footnotes
1 Western Energy Services Corp v Savanna Energy Services Corp, 2023 ABCA 125 (CanLII) [Western Energy ABCA]. Read more
2 Western Energy v Savanna Energy, 2022 ABQB 259 (CanLII). Learn more
3 Western Energy ABCA at para. 61.
4 Western Energy ABCA at para. 63.
5 Western Energy ABCA at paras. 11, 29, 47 and 66.
6 Chemtrade Electrochem Inc v Superior Plus Corporation, 2025 ABCA 31 [Chemtrade ABCA].
7 Chemtrade ABCA at para. 27.
8 HSR" refers to the United States Hart-Scott-Rodino Antitrust Improvements Act of 1976.
9 Chemtrade Electrochem Inc v Superior Plus Corporation, 2022 ABKB 858 (CanLII) [Chemtrade ABKB] at para. 72. Read more
10 Chemtrade ABCA at paras. 33-34.
11 Chemtrade ABKB at para. 60.
12 Chemtrade ABCA at para. 42.
13 Chemtrade ABCA at para. 42.
14 Chemtrade ABCA at para. 36, quoting Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 (CanLII).
15 Chemtrade ABCA at para. 39.
16 Chemtrade ABCA at para. 42.
17 Chemtrade ABCA at para. 45.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
