Two recent decisions of the Ontario Superior Court of Justice, Commercial List have clarified the role of fairness opinions in M&A transactions undertaken by way of plan of arrangement. These decisions follow the uncertainty created by the court's decision in Champion Iron Mines Limited (Re). Please see our previous Blakes Bulletin: Courts Are Not 'Rubber Stamps' for Approving Plans of Arrangement: Ontario Judge.
In Champion, the court considered an application for approval of a plan of arrangement under which Champion would be acquired by Mamba Minerals Limited. While the court concluded that the transaction satisfied the plan of arrangement criteria, it went on to state that the fairness opinion obtained by Champion – which was in a form commonly used in plan of arrangement transactions – did not contain sufficient analysis or meet the formal requirements to be accepted as expert evidence by a court, and was therefore not admissible. The decision led some commentators to suggest that going forward a fairness opinion may need to include all underlying reasoning and analysis on its face and meet the court's formal standards in order to be admissible evidence. In the two new decisions, the court affirms that the Champion decision does not signal a departure from past practice with respect to fairness opinions.
BEAR LAKE GOLD DECISION
In the first of these two decisions, Bear Lake Gold Ltd. (Re), Justice Herman J. Wilton-Siegel approved a plan of arrangement pursuant to which Kerr Lake Mines Inc. would acquire the common shares of Bear Lake Gold in exchange for common shares and warrants of the buyer. The court concluded that the arrangement was fair and reasonable, taking into consideration, among other things, that the board of directors had obtained a fairness opinion. Justice Wilton-Siegel then commented on the Champion decision and the court's refusal to consider the fairness opinion in that case:
"I do not share this concern in the context of M&A transactions involving the acquisition of securities of an issuer by a third party. In such circumstances, I consider that a fairness opinion is properly included as an indicia of a good faith transaction as well as of the fairness and reasonableness of the proposed transaction..."
Justice Wilton-Siegel went on to explain that a fairness opinion is not a valuation and that the analysis underlying the fairness opinion, while not contained in the opinion itself, is typically the subject of a detailed presentation to the board of directors of the target. An applicant for approval of an arrangement does not intend that the fairness opinion will constitute expert evidence, but rather submits the fairness opinion to the court only as evidence that:
- The board has considered the fairness and reasonableness of the proposed arrangement on the basis of objective criteria
- The board has provided information to shareholders to enable them to reach their own conclusions in respect of the fairness of the transaction.
In the view of the court, the reaction of the market following the announcement of a proposed transaction provides shareholders with a basis to assess the merits of the fairness opinion and to determine whether to object to the decision of the target board to proceed with the transaction. For these reasons, Justice Wilton-Siegel concluded:
"...there is no compelling reason to depart from the existing practice regarding the use of fairness opinions for the purposes of court approval of statutory arrangements involving M&A transactions where there is no valuation opinion."
ROYAL HOST DECISION
In the second decision, Re Patents Royal Host Inc., Justice Frank J.C. Newbould issued an interim order authorizing the holding of a special meeting of shareholders to vote on a proposed arrangement under which Holloway Lodging Corporation would acquire all of the shares of Royal Host in exchange for cash and shares. The affidavit filed in support of the motion for the interim order stated that the fairness opinion obtained by the target's board of directors would be included in the proxy circular mailed to shareholders, but would not be tendered to the court at the final hearing as evidence that the arrangement was substantively fair.
Justice Newbould noted that this statement was "no doubt provided in response" to the Champion decision. While Justice Newbould recognized that reliance on the fairness opinion would be a matter for the court hearing the final arrangement application, he referred to the Bear Lake Gold decision and agreed with its analysis that a fairness opinion is properly included in materials filed with the court:
"The purpose of a fairness opinion is a commercial one. It is an opinion to be considered by the board of directors and the shareholders in a commercial context. It is not an expert report in a litigation context. If the board or shareholders are not satisfied with the report, they can vote with their feet and not proceed with or approve the arrangement."
These two new decisions affirm the position set out in our earlier Blakes bulletin that it remains open for a court to consider the fact that a target board has obtained a fairness opinion, as distinct from the contents of that fairness opinion, in concluding that a plan of arrangement should be approved. However, if an applicant intends for the substance of the fairness opinion to be relied upon as expert evidence, it must still meet the court's requirements under the relevant rules of civil procedure.
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