Canada: "Gross Over Or Under Value" Not Grounds For Overturning Share Valuation

There are few circumstances in which courts will allow obvious errors committed by a decision-maker to go uncorrected. However, one situation in which courts will not intervene to correct a mistake is the valuation of a corporation's shares when the parties have agreed to refer the decision to a valuator.

In a recent decision, Saputo Inc. et al v. Dare Holdings Ltd. et al¹, the Superior Court of Justice of Ontario confirmed that the court will only intervene to correct mistakes by a valuator that result in the valuation being in discordance with the provisions set out in the Unanimous Shareholders Agreement (USA).

Unanimous Shareholders Agreement provisions

In Saputo, the applicants sought to set aside a valuation of certain shares of Dare Holdings Limited conducted pursuant to a USA as part of an acquisition of the applicants' minority interests in Dare.

Under the terms of the USA, the valuator was to take into account and apply generally accepted accounting and valuation principles and was not permitted to diminish the fair market value of the shares as a result of Saputo or its affiliates owning a minority interest in Dare.

The applicants listed three complaints resulting in an undervaluation of their shares that they argued were grounds for setting aside the valuation: the valuator did not consider the presence of special interest purchasers in the marketplace; the valuator used public trading multiples that the applicants stated amounted to creating a minority discount; and the valuator's treatment of Dare's working capital and unprofitable plants was not in accordance with generally accepted accounting and valuation principles.

Contractual terms vs. professional judgment

The court concluded that only the valuator's treatment of Dare's working capital, by failing to provide a sufficient level of review and analysis, did not meet generally accepted valuation standards. As a result, this aspect of the valuation did not comply with the terms of the USA.

However, the court concluded that the other aspects of the valuation objected to by the applicants were matters of professional judgment. While the valuator may have been incorrect in the principles it applied, this did not mean it failed to carry out its contractual mandate.

The court concluded that the appropriate remedy was to have the valuator determine whether the original assessment of Dare's working capital was reasonable as of the valuation date, and if not, what adjustments needed to be made applying the generally accepted valuation principles as mandated under the USA. The court refused to set aside the entire valuation, which was the remedy sought by the applicants.

The decision in Saputo demonstrates it is not the magnitude of an error committed by a valuator that opens up a valuation to court review, but rather whether the error violates the terms of the contractual submission to valuation. An error in the valuator's discretionary judgment will not be overturned. However, failure to comply with the contractual terms may be remedied on review.

Footnote

^{1 Saputo Inc. et al v. Dare Holdings Ltd. et al, 2012 ONSC 4981.}

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