Canada: Canadian Courts Take A Second Look At Fairness To Shareholders In Plans Of Arrangement

Acquisitions of public companies in Canada are, by a wide margin, completed by way of a statutory plan of arrangement. There are many reasons for this, including the procedure's flexibility in allowing for tax planning or to provide for the acquisition of multiple classes of securities, as well as the ability to achieve 100% ownership in a single closing. A recurring concern with the approval process for a plan of arrangement is the requirement for court approval of the arrangement. Recently, the risks around this have been highlighted by the Marquee Energy decision at first instance which was overturned on appeal (discussed in our recent Alert) and the decision in InterOil Corporation v. Mulacek1 ("InterOil"). In both cases, courts have scrutinized transactions notwithstanding a favourable shareholder vote and, in the InterOil case, refused to grant approval.

InterOil Background

In InterOil, the Yukon Court of Appeal (made up of judges from the British Columbia Court of Appeal) reversed a successful application for approval of an arrangement pursuant to the Yukon Business Corporations Act. Under the proposed arrangement, shareholders of InterOil would receive, in exchange for their InterOil shares, shares of Exxon Mobil Inc. ("Exxon") plus a capped "contingent resource payment" ("CRP"). Total consideration exceeded $2 billion. InterOil's primary asset was a 36.5% joint venture interest in an oil and gas field in Papua New Guinea. The Exxon transaction was the result of a superior proposal made by Exxon following the announcement by InterOil of its agreement to an acquisition proposed by a third party (but prior to shareholder approval of such acquisition). Exxon had paid a $60 million break fee on behalf of InterOil in order to allow InterOil to terminate the prior transaction and accept the Exxon deal.

InterOil's Board bid retained Morgan Stanley to prepare a fairness opinion for the Exxon arrangement. Morgan Stanley was to receive a fee for providing the opinion, which was largely contingent on the arrangement taking place. While it is not clear from the Court of Appeal's reasons, it appears that Morgan Stanley may have been involved for some time. The decision states that Morgan Stanley had already given a fairness opinion regarding the prior transaction, but also indicates that InterOil had been exploring a sale of the company since mid-2015. The proxy circular sent to shareholders in connection with the arrangement indicates that Morgan Stanley was engaged as financial advisor (and not just to provide the fairness opinion). As will be seen, the Court of Appeal made much of the contingent nature of Morgan Stanley's fee in evaluating Morgan Stanley's fairness opinion, but the full nature of the engagement is not explored.

A special meeting of shareholders was held and the resolution to enter into the arrangement with Exxon passed with 80% approval. Philippe E. Mulacek ("Mulacek"), holder of 10% of the outstanding InterOil shares and also the founder and former chairman/director of InterOil, voted against the resolution. Mulacek also opposed the application to have the Yukon Court approve the arrangement.

Yukon Supreme Court

At first instance, the chambers judge granted the application and approved the arrangement. Mulacek argued that the fairness opinion was seriously deficient and adduced two expert opinions (including an "unfairness" opinion from Paradigm Capital) to rebut the Morgan Stanley fairness opinion. One opinion claimed that the process undertaken by the board recommending the transaction was deficient and failed to meet current governance best practice to ensure adequate safeguards of shareholder interests. The Paradigm opinion concluded that, from a financial point of view, the consideration contemplated by the arrangement was inadequate to the shareholders of InterOil. With respect to whether the arrangement was fair and reasonable, although the chambers judge accepted that there may have been deficiencies in the Morgan Stanley opinion and the process, he decided to approve the arrangement relying primarily on the fact that 80% of the shareholders of InterOil had voted in its favour.

Yukon Court of Appeal

The Court of Appeal overturned the Yukon Supreme Court and found that, while it is for the shareholders to decide between conflicting views of the prospects of InterOil, it is the court's task to decide whether the proposed arrangement has been shown to be fair and reasonable. The Court of Appeal stated, "Clearly, it was the shareholders' decision to make, but court approval was also required by the Act to ensure the decision was fair and reasonable in the sense of being based on information and advice that was adequate, objective and not undermined by conflicts of interest".

In rejecting the arrangement, the Court held that the Morgan Stanley opinion was deficient in its substantive analysis of the transaction. Specifically, the report failed to value the CRP, which, together with the contingent nature of Morgan Stanley's fee, meant that the opinion was of limited utility to the directors and shareholders and the court. The Court agreed with Mulcaek's expert who stated that that board should have obtained independent advice on the value of the CRP and the gas field asset.

The Court also found other reasons why there should have been another fairness opinion. In its view, the fact that management would realize significant compensation from the transaction meant that it was incumbent on the Board to ensure the deal reflected fair value — by seeking another "independent" opinion. The Court did not examine whether the compensation arrangements in fact incentivized management to get the best price possible. It also expressed the view that the special committee had not done enough to act independently of management in the course of negotiations.

The Court of Appeal found that these and other "red flags" required the chambers judge to do more than simply accept the majority vote as a "proxy" for fairness or the cash amount of Exxon's offer as a proxy for reasonableness.

Other Cases

If nothing else, the InterOil decision shows how unpredictable outcomes for plans of arrangements can be once they are before the courts. In a 2010 decision, notwithstanding widespread criticism and opposition from several large institutional shareholders, the Ontario Divisional Court upheld a lower court ruling approving a plan of arrangement involving Magna International Inc.2 where shareholders had voted 75% in favour.

With regard to fairness opinions, two 2014 Ontario cases provided diverging commentary that appeared to have the net result of leaving practice the same. In Champion Iron Mines Limited3 the Court rejected a fairness opinion as being inadmissible and commented that companies should tender strong, robust fairness opinions when applying to the Court with a plan of arrangement. Despite this commentary, the plan was approved on the basis that there was a high level of shareholder approval (over 99%) and the Board and Special Committee had determined that the Arrangement was in the best interests of Champion Iron and its shareholders. On the other hand, in Bear Lake Gold Ltd. (Re)4 the Court held that a fairness opinion in respect of a plan of arrangement is not intended to be expert evidence akin to that tendered at trial but rather is to be used by the court as a factor in determining whether the plan of arrangement is fair and reasonable to the shareholders. Notably, the arrangement was passed by 97.9% of the votes cast at the shareholders meeting called to consider the arrangement. The Court approved the arrangement.

In a 2009 decision of the Ontario Securities Commission, Re HudBay, the Vice Chair of the OSC had expressed concern in respect of fairness opinions contingent on transaction fees by noting that they will not establish that a director has discharged their fiduciary duties. Following significant concern being voiced by the M&A community, the Vice Chair in remarks at a Conference Board of Canada conference, stated that the HudBay decision depended on its own facts and that it was not the intention of the OSC to send a message to directors not to get a fairness opinion or that success fees could not be paid to the person giving a fairness opinion. As a result, practice in this area, including payment of success fees to financial advisors who also gave fairness opinions, did not change.

As the InterOil case demonstrates, however, once things get into court, the rules change. The Yukon Court of Appeal made the point that the "only independent opinion in evidence" was the opinion of Mulacek's expert and the Court did not place much weight on the Morgan Stanley opinion. Since the purpose of a fairness opinion is to help the directors discharge their fiduciary duties, this is not necessarily inappropriate. However, it does demonstrate that in a contested hearing on fairness, it may be necessary for the company that is the subject to a plan of arrangement to introduce evidence beyond the fairness opinion itself.

Conclusion

It is difficult to know what the impact of the InterOil decision will be. Certainly, it reinforces what has always been the case — if a transaction is implemented by way of a plan of arrangement, then one must be prepared for disgruntled securityholders to use the platform it provides to oppose the transaction. With regard to fairness opinions, it would not seem inappropriate for boards of directors to themselves determine, knowing the relevant fee arrangements of their advisors, whether a further independent opinion is necessary in the particular circumstances. Nevertheless, boards may decide in some circumstances, to seek fairness opinions from a financial advisor whose compensation is not tied to the outcome of the transaction.

Footnotes

1 2016 YKCA 14

2 2010 ONSC 4685

3 2014 ONSC 1988

4 2014 ONSC 3428

About BLG

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 Mondaq.com.

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

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (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 www.mondaq.com

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 Mondaq.com’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.

Disclaimer

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.

Registration

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 by clicking here .

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 unsubscribe@mondaq.com 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.

Cookies

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.

Links

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.

Mail-A-Friend

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.

Security

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 webmaster@mondaq.com.

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 EditorialAdvisor@mondaq.com.

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 enquiries@mondaq.com.

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