Canada: Keep Calm And Carry On - InterOil And Smoothwater

There are, generally speaking, relatively few judicial decisions touching on the practical aspects of M&A law in Canada, particularly when compared to the output of the Delaware courts.  In November, however, we saw decisions out of the Yukon Court of Appeal (through the British Columbia Court of Appeal acting as the appellate court for the Supreme Court of Yukon) in InterOil, and the Alberta Court of Appeal in Smoothwater, that touched on important considerations relating to change of control transactions, particularly transactions progressed by way of a judicially-sanctioned "plan of arrangement".  While unlikely to substantially alter the "best practices" for boards of directors of target companies in the discharge of their fiduciary duties, they do serve as a reminder of the importance of careful and thoughtful attention to the discharge of those duties and the potential hurdles that buyers and sellers can face in trying to bring their transactions to completion.

Smoothwater

The Smoothwater decision was, at its heart, a debate about the discretion of the board of directors to choose how to structure a transaction. Alberta Oilsands (AOS) had entered into a transaction under which Marquee Energy (Marquee) would be "arranged", with the result that AOS would acquire all of the shares of Marquee in exchange for shares of AOS and then, pursuant to a short-form vertical amalgamation, amalgamate with Marquee.  Since the transaction was an arrangement of Marquee it required Marquee shareholder approval, and Marquee shareholders were entitled to dissent rights if the transaction was approved.  The statute did not, however, require that the transaction be approved by AOS shareholders.  If the transaction had instead been progressed by way of a "long-form" amalgamation of AOS and Marquee then it would have required approval from the shareholders of both AOS and Marquee, with each group of shareholders having "dissent rights".

Smoothwater, a shareholder of AOS, opposed the proposed combination and instead favoured the liquidation of AOS.  It intervened in the arrangement proceedings involving Marquee, asking the court to order that the shareholders of AOS also be provided with an opportunity to vote on, and dissent from, the transaction.  At first instance Smoothwater was successful, with the trial judge concluding that the transaction was, in essence, a "merger", and that the primary reason for using an arrangement had been to circumvent the need for approval from AOS shareholders.  This decision was reversed on appeal, with the Court affirming that the choice of the structure of a transaction is in the discretion of the board of directors, and that shareholders are not entitled under the corporate law to a shareholder vote unless one is expressly provided to them.  It was not bad faith for the directors to choose from among a multiplicity of potential transaction structures the structure that maximized commercial certainty, even if this choice meant that shareholders would not get rights, such as approval or dissent rights, that they would be entitled to if an alternative transaction structure was selected.

Interoil 

The InterOil decision dealt with the question of whether a proposed arrangement involving the exchange of all of the shares of InterOil Corporation (InterOil) for shares of Exxon Mobil Corporation (Exxon), plus a capped contingent cash payment, was "fair and reasonable."  This is one of the three judicial tests for approval of a plan of arrangement that was articulated in BCE, and in practice is usually the only test capable of controversy.  The arrangement had been approved by the InterOil shareholders, with approximately 80% of shareholders who voted at the meeting voting for the transaction.  The arrangement was opposed, however, by a former insider of InterOil, who contested the fairness of the arrangement at the final order hearing and introduced his own evidence against the transaction (which included a contrary financial analysis).  Although the chambers judge ultimately approved the arrangement on the basis of the substantial majority of shareholders who had voted on it, in doing so he noted a number of concerns regarding the process followed and the disclosure provided to shareholders, including: (a) the value impact of the cap on the contingent payment, (b) the conclusory nature of the fairness opinion delivered to the Board of InterOil and included with the meeting materials for the shareholder meeting, (c) the lack of disclosure of the quantum of the success fee payable to the financial advisor that had provided the fairness opinion, (d) the incentives of management of InterOil in the event of a successful transaction, and (e) the lack of a second "fairness opinion" from an independent financial advisor paid on a "flat fee" basis.

The Court of Appeal came to a different conclusion and allowed the appeal, for many of the procedural and disclosure reasons that the chambers judge identified in his lower court decision.  Given the procedural and disclosure concerns noted by the chambers judge, the Court of Appeal questioned whether the shareholder approval was based on "information and advice that was adequate, objective and not undermined by conflicts of interest".  As a result of the multiple concerns that were raised, the Court decided that it could not simply rely on the decision of the shareholders as a proxy for fairness, and needed to be satisfied that the arrangement was "objectively fair and reasonable in a more general sense".  The Court of Appeal therefore overturned the chambers judge, concluding that in all the circumstances it was not able to approve the arrangement as being "fair and reasonable".  As a consequence the proposed arrangement was not allowed to proceed.  

Lessons Learned

Every case is fact-specific, and so it is important not to over-generalize from conclusions drawn in particular circumstances.  These decisions do, however, remind us of some of the fundamental aspects of the plan of arrangement process, and at a practical level suggest certain issues that boards, and their advisors, will have to address as the implications of these decisions work themselves into market practice.

Court Approval

Statutory arrangements are a common method for implementing, in a single step, a change of control transaction, and the "fair and reasonable" test is a well-established requirement for judicial approval of a plan of arrangement, with the onus being on the applicant corporation (the corporation being arranged) to establish that the arrangement is, indeed, fair and reasonable.  In practice, courts have occasionally struggled with the appropriate analytical framework for assessing the "fairness and reasonableness" of these types of arrangements, and so often significant deference is accorded to the degree of shareholder approval for the arrangement. These decisions serve as a reminder that the required judicial sanction for a plan of arrangement does not automatically follow from the shareholder approval of that arrangement, and, perhaps most critically, that the court process provides a convenient forum for dissidents looking to challenge the transaction.  In Smoothwater an AOS shareholder was able to intervene in the Marquee arrangement, at least until this was set aside on appeal, and Interoil saw a dissident shareholder with just over 5% of the outstanding shares successfully block a transaction that had otherwise been approved by approximately 80% of the shares that were voted at the meeting.  Boards and their advisors will need to continue to factor in this consideration when deciding on the ideal transaction structure.

Board Discretion

Relatedly, Smoothwater emphasized, again, that it is up to the board of directors to choose their preferred transaction structure, and that it is legitimate for the board to take into account considerations of commercial certainty when deciding how they will implement a transaction, even if different choices have different consequences for stakeholder rights.

Disclosure Considerations

The emphasis placed in the InterOil decision on the question of whether the shareholder vote was an "informed" decision serves as a reminder of the importance of the disclosure provided to shareholders.  In particular, InterOil suggests a careful consideration of the level of information provided in support of the board's recommendation to shareholders, including where appropriate or necessary in light of the nature of the company's assets or the consideration being provided, on value considerations that influenced the board's recommendation.  Relatedly, target companies may look to their financial advisors to provide more elaborated forms of fairness opinions, including (as is more customary in the United States) some summary discussion of the valuation metrics used in coming to the conclusion on fairness, than the more "conclusory" short-form form of opinion that is relatively common practice in Canada.  The InterOil decision may also start the practice of including the quantum of the success fees payable to financial advisors in the shareholder disclosure package, especially (or perhaps only) when there is a single fairness opinion provider who is receiving a success fee as part of its compensation.

Conflicts

A change of control transaction generally raises the potential for conflicts – both "entrenchment" concerns, and "enrichment" concerns. InterOil is a reminder of the importance of the proper management by the board of those concerns.  This touches on many aspects of a change of control process, but at a practical level we may, following this decision, see a continued trend towards a fixed-fee fairness opinion being added to deals through the retention of a second financial advisor, recognizing that other considerations will continue to be relevant, including the existence and weight of other supporting factors, and that this may not be practicable in many transactions, including for smaller transactions where the deal size may not warrant the additional expense. We may also see some movement towards the increased role of independent committees in change of control situations, although this will also continue to be a case–by-case consideration outside of transactions involving a conflicted insider. 

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.