Battle for Sunrise REIT lands in Ontario court

The messy battle for control of Sunrise Senior Living Real Estate Investment Trust has erupted into a high-stakes legal dispute that could have a lasting effect on directors' conduct during takeovers.

Kentucky-based Ventas Inc. launched a rare lawsuit in Ontario Superior Court yesterday seeking $250-million of damages from Sunrise, a Toronto-based retirement home operator, for allegedly breaching the terms of a takeover contract.

Ventas struck an agreement in January to acquire Sunrise for $1.1-billion or $15 a unit, and the U.S company said the takeover has been "undermined and jeopardized" by Sunrise's failure to enforce the terms of a contract that effectively restricted a competing suitor from launching a richer offer.

Sunrise said in a statement yesterday that the Ventas claim has no merit and it intends to "vigorously defend it."

The lawsuit marks one of the first times that a suitor has sued a target company during a takeover battle and legal experts said the case could potentially thwart the freedom of public company directors to solicit richer bids.

"This is a very significant lawsuit," said one mergers and acquisition specialist who declined to be identified. "The courts have always encouraged boards to fulfill their fiduciary obligation to attract competing bids and this case could threaten that freedom."

The clash over Sunrise erupted in February when California-based Health Care Property Investors Inc. proposed a more lucrative $18-a-unit proposal to acquire the Toronto company. Health Care had been a bidder for Sunrise last year, but Ventas won the auction to buy the Toronto company.

Ventas successfully argued in Ontario Superior Court last month that Health Care's subsequent takeover offer violated the terms of an earlier so-called standstill agreement it signed with Sunrise that restricted it from making a new bid for 18 months.

The court ordered Health Care to withdraw the offer, but Ventas said in its lawsuit yesterday that its competitor's actions and Sunrise's failure to alert investors about the standstill contract created an "illegitimate expectation" in the market that the higher bid was legal.

Ventas said that Sunrise was contractually bound by its January purchase agreement to reject Health Care's overture and alert investors about the legal restrictions. By failing to take these steps, Ventas said in its lawsuit that Sunrise "undermined and jeopardized" its acquisition proposal.

Sunrise unitholders are set to vote Wednesday on the Ventas offer and the Kentucky company has faced increased pressure from investors to sweeten its bid. Sunrise's unit price soared to a high of $18.10 a unit on the Toronto Stock Exchange after it announced Health Care's proposal.

The units have fallen since then, sliding another 10 cents yesterday to $16.70 yesterday, above the $15-a-unit Ventas offer.

Analysts said that by filing its lawsuit ahead of Wednesday's vote, Ventas is apparently seeking to discourage competing suitors and win over investors to its proposal. They said hedge funds dislike the uncertainty created by litigation.

In a note to investors, Royal Bank analyst Neil Downey said: "It seems to us as if Ventas' legal action against Sunrise REIT is part of a campaign to scare unitholders into submission."

Added another analyst who declined to be identified: "This is very simple. This is a scare tactic" aimed at powerful U.S. investors known as hedge funds. "The one thing that hedge funds fear the most is uncertainty and litigation probably ranks at the top of that uncertainty list. This is the next chess move."

Earlier this week, Ventas executives travelled to New York to meet with a number of Sunrise investors, including hedge funds, to pitch its offer.

The shareholder presentation, filed with U.S. regulators, asks "Was HCP ever a credible bidder for Sunrise REIT?" noting that it made three conditional proposals, all rejected by the Sunrise board because they were conditional. Ventas argued in its presentation that there would be "substantial downside" to rejecting the deal.

The Ventas lawsuit may not be the last, legal experts warned. Powerful investors acquired big stakes in Sunrise after Health Care's offer at prices well above the Ventas bid. If Ventas succeeds with its lower offer, the Toronto company could face lawsuits from investors who lost money by acquiring the units in anticipation of a richer Health Care deal.