Canada: Yukon Appeal Court's Interoil Decision Based On Cold, Hard And Questionable Facts


A recent court decision from the Yukon has grabbed the attention of financial advisers and mergers and acquisition practitioners, raising questions about established market practices in M&A transactions, particularly with respect to fairness opinions. In a decision rendered on November 4, 2016, the Yukon Court of Appeal blocked ExxonMobil Corporation's proposed $2-billion takeover of InterOil Corporation that was structured as a statutory plan of arrangement. Although the transaction was itself a topping bid to a previously proposed transaction and was approved by over 80% of InterOil's shareholders, the Court cited a number of "red flags" that prevented it from concluding that the proposed arrangement was objectively "fair and reasonable" as required by the corporate statute. The red flags cited by the Court included the following:

  • There were deficiencies in the fairness opinion received by InterOil's board – for example,
    • the financial adviser providing the fairness opinion, Morgan Stanley, was paid a fee that was contingent on the success of the transaction;
    • InterOil's financial adviser failed to assess the value of capped Contingent Value Rights (CVRs) payable by ExxonMobil relative to the value of InterOil's unexplored petroleum prospects on which the CVRs were based;
    • the fairness opinion was not accompanied by facts, information or analysis to indicate the basis for the opinion.
  • The board failed to engage a second financial adviser on a flat-fee basis.
  • The committee constituted by the board to oversee negotiation of the transaction was found to be fairly passive and merely received reports from management.
  • The CEO who led the negotiations stood to receive $2.6 million in termination payments and $32 million under share awards and was therefore incentivized to approve the deal.

The Court ultimately held that, in light of these governance, disclosure and procedural deficiencies, the trial judge was incorrect in finding that the shareholder vote was a reliable proxy for the arrangement's fairness.

In our view, the deficiencies cited by the Court of Appeal regarding the fairness opinion and the suggestion that a flat-fee fairness opinion from an independent financial adviser is the "best-practice" standard were conclusions that are not consistent with established Canadian market practice. This inconsistency occurred because the trial judge made factual findings based on the uncontroverted expert evidence filed by the InterOil shareholder who was opposing the transaction, rather than on a full and complete evidentiary record. In particular, InterOil did not file countervailing expert evidence or cross-examine the opposing shareholder's expert witness in order to challenge the assertions that best practices require obtaining an independent flat-fee fairness opinion and that fairness opinions contain or are accompanied by disclosure of the information and analysis on which their conclusions are based. Nonetheless, the statements of the trial judge and the Court of Appeal, particularly with respect to the use and nature of fairness opinions, raise key issues for Canadian M&A practice that need to be considered.

Key Takeaways

1. CEO conflicts can be caused by incentives to transact

The Court's criticism of the prominent role of management in the negotiations with ExxonMobil is a cautionary reminder to independent directors to watch for and actively manage conflicts of interest. The CEO of InterOil stood to receive almost $35 million from a successful transaction, yet played a key role in the negotiation of the transaction. Transaction-based payments are designed to counter management's tendency toward entrenchment and are usually designed to align management's interests with the interests of shareholders; however, when the choice is between a sale of the company and the status quo, a transaction-based payment may give rise to a conflict of interest. While it may be appropriate for management to be involved in the negotiations of the sale price, the board or special committee should appropriately supervise the negotiations and ensure that it is not influenced by those entitled to significant payments. Holding in camera sessions that exclude board members who are entitled to transaction payments or those whose continued employment is jeopardized by the transaction can mitigate the influence of these interests. Board minutes should record the procedural steps taken to manage these conflicts.

2. Arrangement hearings are a difficult forum for complex determinations of corporate governance, adequate process and disclosure

The expert evidence asserting deficiencies in the InterOil transaction, which was relied on by the trial judge and which formed the foundation for the Court of Appeal's decision, was filed just days before the arrangement hearing. Rather than delay the hearing and file responding or contradictory evidence – whether by filing responding expert affidavits or through cross-examination – InterOil chose to proceed on the basis of the existing factual record. It did so presumably because it was under intense deal-execution pressure to proceed with the hearing and it was confident that the 80% approval by its shareholders would be sufficient to persuade the Court that the transaction was fair and reasonable. Although the lower court judge did approve the transaction largely on the strength of shareholder approval, his findings of fact concerning InterOil's corporate governance and procedural deficiencies – which were based on an incomplete record – laid the factual foundation for the Court of Appeal's ultimate rejection of the transaction.

The case is an important reminder of the significance of court procedures in a plan of arrangement and the risks of proceeding in the absence of a full factual record. Although plan of arrangement hearings are conducted in real time, with transactions placed on hold pending the outcome of hearings, proponents of plans of arrangement must carefully assess and weigh the benefits and costs of proceeding without delay against the risks of not fully or robustly challenging any evidence filed in opposition.

3. Transaction proponents must be clear about the purpose of fairness opinions

Although the fairness opinion received by the InterOil board was typical of those found in Canadian M&A transactions, the Court found that this opinion was deficient in failing to include any substantive analysis and failing to disclose the amount of Morgan Stanley's fee. Although it might be possible to distinguish the InterOil case on its facts and the uncontroverted evidence of best practices presented by the opposing shareholder at the trial, the comments of both the trial judge and the Court of Appeal suggest that courts are seeking objective evidence regarding the fairness and reasonableness of a plan of arrangement and that a standard form Canadian-style fairness opinion on its own will not generally be considered very persuasive. A similar conclusion was reached by the Ontario Superior Court in Champion Iron Mines Ltd. In this case,the judge ruled that a typical fairness opinion cannot be accepted as expert evidence.

Historically, the purpose of a fairness opinion has been to demonstrate that the board, in approving a transaction, has taken due care by receiving expert financial advice with respect to the fairness of a transaction from a financial point of view. This is a different purpose from using a fairness opinion to prove to a third party, such as a court or the shareholders, that the proposed transaction is fair from a financial point of view to the company's shareholders. Despite these differences in purpose, in proxy circulars for arrangements and in plan of arrangement hearings, proponents commonly rely upon fairness opinions as evidence of the fairness of the proposed transaction as opposed to merely evidence that the board made its recommendation on the basis of expert advice. The experiences of Champion Iron Mines and InterOil (as well as a prior case involving Royal Host) demonstrate that overplaying the purpose and significance of a fairness opinion can in fact be counterproductive, particularly if supporting financial analysis backing up the conclusion is not independently filed as evidence with the court.

4. A transaction can be structured as a bid or an amalgamation

Plans of arrangement have generally been a preferred form of transaction structure for the acquisition of a public company, particularly in more complex transactions or when securities are being offered to target shareholders and use of a plan of arrangement affords access to the exemption under U.S. securities laws for securities being issued to U.S. residents. However, the InterOil decision underscores the risks inherent in a transaction structure that requires court approval. Although any transaction (whether structured as a plan of arrangement, takeover bid or amalgamation) can be challenged in court, including under the oppression remedy provisions of Canadian corporate statutes, the plan of arrangement process presents opposing shareholders with a ready-made forum to make their case. In addition, in contrast to an oppression proceeding, at an arrangement hearing the proponent bears the burden of establishing that the transaction is fair and reasonable. This has been held by courts to be a higher standard than that required to defend a shareholder's claim that the transaction is oppressive to the company's shareholders.

In the vast majority of arrangement cases, court approval is obtained in a straightforward way, particularly if shareholder support for the transaction is strong. While M&A advisers have always weighed the incremental risks of a successful challenge inherent in a plan of arrangement structure, we anticipate that greater weight will be given to this consideration in future transaction planning, with alternative structures (such as takeover bids or amalgamations) becoming preferred structures when the flexibility afforded by a plan of arrangement structure is not a significant consideration.

5. There is greater emphasis on full disclosure

In overturning the trial judge's acceptance of the shareholder vote as evidence of the fairness of the transaction, the Court of Appeal noted the lack of information disclosed to shareholders regarding the value of the company's assets as well as the lack of information regarding the financial adviser's conclusion that the consideration offered to shareholders was fair. The Court stated that, in approving an arrangement, the Court must be satisfied that shareholders were in a position to make an informed decision. While the importance of a properly informed shareholder vote is not a novel principle and is a common basis for challenging a transaction that has received shareholder support, the InterOil decision seems to raise the bar on the nature and extent of the disclosure required. It will be interesting to see whether as a result of the decision, Canadian practice migrates to the U.S. standard whereby fairness opinions are accompanied by detailed disclosure in a proxy circular of the analysis underlying the fairness opinion and by disclosure of the amount of the financial adviser's fee.

6. Will flat-fee fairness opinions become the future standard?

As discussed above, the trial judge accepted uncontroverted evidence that best practices required the hiring of a second independent financial adviser compensated on a flat-fee basis, given the contingent success fees that was to be paid to Morgan Stanley. Some commentators have suggested that the decision stands for the proposition that a flat-fee fairness opinion will be required for all plans of arrangement. We do not believe that the decision goes that far and we note that, although the trial judge made a number of findings regarding the deficiencies in the fairness opinion, the Court of Appeal identified these deficiencies as part of a list of red flags in the transaction and not as the sole basis for its conclusion.

Unfortunately, neither the trial judge nor the Court of Appeal provided any analysis on why a flat fee is superior to a customary success fee arrangement or why a fairness opinion is a better determinant of value than a price established in an arm's length competitive bidding situation. As a result, boards and special committees will need to continue to consult with legal advisers to determine appropriate compensation arrangements for financial advisers, as well as how those arrangements and underlying analyses should be disclosed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions