Lost Synergies and M&A Damages: Considering Cineplex v. Cineworld

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.

Keywords: M&A; breach of contract; damages; specific performance; synergies

JEL Classification: K22