The final approval of a plan of arrangement by the Ontario Superior Court of Justice has ignited a discussion about the use of fairness opinions in such transactions and their admissibility as evidence in court proceedings. In an unusual move, Justice Brown provided reasons for the approval, using the opportunity to expound upon the evidentiary utility of "standard" fairness opinions and the role of the courts in approving plans of arrangement.
Financial advisors are often retained to provide fairness opinions in the context of a plan of arrangement transaction. In BCE v. 1976 Debentureholders, the Supreme Court of Canada acknowledged that "a fairness opinion from a reputable expert" is often considered by the courts in determining the fairness of a plan of arrangement.
In Re Champion Iron Mines Limited, the court ultimately approved the plan of arrangement, wherein Mamba Minerals Limited and its wholly owned subsidiary acquired all of the issued and outstanding shares of Champion Iron Mines Limited ("Champion"). The court determined that the requisite statutory procedures had been met, that the application for the court's approval had been put forward in good faith and that the transaction was fair and reasonable.
In making the 'fair and reasonable' determination, the court relied on common indicators of fairness including, among other factors, the premium that the consideration offered for Champion's common shares represented for shareholders, the approval of the board of directors and an independent special committee, the high level of shareholder approval and the availability of dissent rights. However, Justice Brown specifically stated that he placed no weight on the fairness opinion delivered by Champion's financial advisor and concluded that the fairness opinion was, in fact, inadmissible from an evidentiary point of view.
Justice Brown criticized the fairness opinion, stating that it "simply asserted an opinion, without disclosing the reasons for it", that it was "devoid of analysis which a reader could follow in order to understand how the opinion was reached and what, if any weight should be given to the opinion. Justice Brown concluded that the fairness opinion was "inadmissible for the purposes of the final order application".
In reaching this conclusion, Justice Brown cited the Rules of Civil Procedure that govern expert evidence. In this case, the financial advisor's opinion did not meet the standard for expert evidence because it failed to disclose the reasons for the opinion. As such, a reader could not be expected to follow the analysis and determine the appropriate weight to be given to the opinion.
Justice Brown's criticisms were not restricted to the contents of the fairness opinion: "A court is not a boardroom. A court is just that – a court of law and evidence. Although the law-makers have injected the courts into the approval process for corporate transactions such as plans of arrangement, that does not alter the fact that the courts play a judicial role in the process, not an agenda checklist-type role."
While Justice Brown's criticisms did not ultimately prevent the final approval of Champion's plan of arrangement, they do suggest that greater care and consideration should be taken in the preparation of, and reliance on, fairness opinions, depending on the context in which they are to be used. If such opinions are sought to be entered as expert evidence with the courts, strict compliance with the rules of evidence, including the disclosure of financial advisor's analysis, are required. However, if fairness opinions are to be used only as a tool to assist the board of directors and a special committee in exercising their business judgment to determine whether or not they should recommend a transaction, strict compliance with the rules of court may not be needed.
Interestingly, the need for increased disclosure in M&A transactions is also being discussed in the United States in a similar context. In a number of small cap transactions, as a result of stockholder initiated litigation, the Delaware courts have determined that, in some instances, the company and its advisors should provide additional disclosure, including the details of the financial advisor's analysis in its preparation of a fairness opinion to stockholders. For example, in 2011 two proposed M&A transactions were challenged by stockholders, resulting in the companies proposing the transactions filing supplemental disclosure in relation to the transactions, including disclosure of the financial analyses undertaken by the companies' financial advisor.1
Given the decision of the Ontario Superior Court of Justice in Re. Champion and the additional disclosure provided to shareholders in In re. Icagen, it appears that there is a trend towards demanding for greater disclosure of the analysis underlying fairness opinions. This would provide both the courts and shareholders with a more in-depth understanding of how an opinion as to fairness was reached and what, if any, weight should be given to the opinion. This trend may lead to new industry standards in the preparation and presentation of fairness opinions, discussions about the utility of fairness opinions and treatment of fairness opinions in the context of court approved transactions. Stay tuned.
Footnote
1. Haas, Steven M. "Little Deals, Big Fees? Addressing Attorneys' Fee Awards in Small-Cap M&A Litigation" The M&A Lawyer. May 2013, Volume 17, Issue 5.
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