Canada: Interoil/Exxon Plan of Arrangement: Third Time's A Charm

On February 20, 2017, InterOil Corporation ("InterOil") obtained approval from the Yukon Supreme Court for an updated plan of arrangement with ExxonMobil Corporation ("Exxon"). This was InterOil's third court application for approval of a plan of arrangement in connection with Exxon's acquisition of InterOil, as described in an amended and restated arrangement agreement dated December 15, 2016 (the "Updated Arrangement"). Pursuant to the court-approved plan of arrangement, Exxon acquired all of the issued and outstanding common shares of InterOil on February 22, 2017.

Judicial History

On InterOil's first application, its original plan of arrangement involving Exxon, as described in the original arrangement agreement with Exxon dated July 21, 2016 (the "Original Arrangement"), was approved by the Yukon Supreme Court on October 19, 2016, notwithstanding disclosure and corporate governance deficiencies noted by the application judge. Unsurprisingly, the 5.5% InterOil shareholder that opposed the Original Arrangement, Phil Mulacek ("Mulacek"), appealed this decision, and it was subsequently overturned by a unanimous ruling of the Yukon Court of Appeal (comprised of members of the British Columbia Court of Appeal) for reasons which we previously discussed in our Capital Markets & M&A securities law bulletin Court of Appeal Overturns Approval of US$2.3 Billion Merger Between InterOil and ExxonMobil.

An overarching theme in the Court of Appeal decision was the lack of proper disclosure to shareholders. Even though over 80% of InterOil shareholders had voted in favour of the Original Arrangement, the Court of Appeal held that InterOil had not provided shareholders with adequate disclosure as to the value they would be giving up and the value they would be receiving under the Original Arrangement. Without sufficient disclosure, the Court of Appeal concluded that shareholders of InterOil did not have the ability to make an informed decision in voting to approve the Original Arrangement. Accordingly, the Court of Appeal was not able to use the results of the shareholder vote as a proxy in its evaluation of the 'fair and reasonable' part of the test to approve a plan of arrangement (as set forth in BCE v. 1976 Debentureholders, 2008 SCC 69).[1] According to the widely accepted test from BCE, an application for a plan of arrangement must: (i) comply with all statutory and court-mandated requirements; (ii) be brought in good faith; and (iii) be fair and reasonable.

The fairness opinion that InterOil had obtained with respect to the Original Arrangement was prepared by Morgan Stanley, whose compensation was in large part tied to the success of the transaction. This fee arrangement, which was not disclosed in the management information circular, along with the fact that the opinion failed to value a material asset of InterOil, cast doubt on the legitimacy of the report's conclusions as to the fairness of the proposed transaction. Coupled with the uninformed shareholder approval, these "red flags," led the Court of Appeal to overturn the application judge's decision and block the Original Arrangement from proceeding. Other issues of concern at both levels of court were repeated failures of InterOil to respond to Mulacek's concerns (both in and out of court) and the fact that the Chief Executive Officer of InterOil was heavily involved in the negotiation of the Original Arrangement while facing a potential conflict of interest, in that he stood to gain over $34 million dollars upon its closing, $32 million of which were payable due to the acceleration of his restricted share units under InterOil's management incentive plan. The transaction committee that had been struck with respect to the Original Arrangement was found to be 'passive' and under the influence of the CEO.

Following the Court of Appeal decision, InterOil applied to the Yukon Supreme Court for approval of the Updated Arrangement, which approval was granted.

Key Findings

In issuing its final order approving the Updated Arrangement, the Yukon Supreme Court made the following key findings:

  • Fairness Opinion: In connection with the Updated Arrangement, InterOil hired an independent financial advisor, Bank of Montreal ("BMO"),that provided a fairness opinion on the proposed transaction on a fixed-fee basis. The application judge felt that the BMO fairness opinion provided a useful template for future fairness opinions in terms of the level of detail and analysis that ought to be provided to shareholders and to the court in transactions conducted by way a plan of arrangement. The BMO fairness opinion clearly set out the materials reviewed and assumptions made, provided a comprehensive explanation of the valuation methodologies used, and analyzed the consideration InterOil shareholders were to receive under the Updated Arrangement. This stood in contrast to the Morgan Stanley fairness opinion which, in the words of the Yukon Supreme Court, "provided no reliable opinion at all." Perhaps unhelpfully, the Yukon Supreme Court also noted that "[i]t is not acceptable to proceed on the basis of a Fairness Opinion which is in any way tied to the success of the arrangement" (emphasis added).
  • Improved Corporate Governance Process: Apart from the new independent fairness opinion, the corporate governance processes of InterOil had significantly improved with the creation of a transaction committee comprised of four independent members of the board of directors of InterOil (the "Transaction Committee"). The Transaction Committee had its own legal counsel, which explained to the Transaction Committee its role and its mandate to consider the Original Arrangement, the Updated Arrangement, and alternatives to an arrangement transaction. After this deliberative process, the Transaction Committee provided a report to the Board of InterOil, which formed the basis of the Board's recommendation that InterOil shareholders vote in favour of the Updated Arrangement. The Board recommendation was accompanied by a management information circular that contained full and complete disclosure of the nature and details of the Updated Arrangement, which enabled shareholders to make an informed decision when voting on the Updated Arrangement.
  • Increased Shareholder Support: 80% of shareholders voted in favour of the Original Arrangement (with dissent rights being exercised by approximately 10% of shareholders), as compared to over 91% of the shareholders who voted in favour of the Updated Arrangement (with dissent rights being exercised by only 0.5% of shareholders).

Market Practice & Conclusion

A court's assessment of what is 'fair and reasonable' may not include an uninformed shareholder vote approving a plan of arrangement. In contested transactions that may be challenged by a shareholder, it would be prudent for an issuer to obtain a fairness opinion by a financial advisor on a fixed-fee basis. Perhaps most importantly, disclosure in the management information circular will be reviewed by both a court and the securities regulatory authorities.

Accordingly, the market should not panic. The basic concept remains that a shareholder must understand what it is giving up and what it is receiving when it is voting to approve a proposed transaction by way of a plan of arrangement. No one item alone will determine whether a plan of arrangement is fair and reasonable. Like most things, it is a process. The fact situation of each proposed transaction must be reviewed to determine what makes sense in the particular context. At the same time, as a result of the Yukon decisions with respect to InterOil, it would be prudent to be more cautious in advising issuers on how to prepare disclosure in the management information circular. It remains unclear, however, whether all jurisdictions will impose higher standards or market practice will change as a result of InterOil.

As an aside, since the proceeding before the OSC with respect to HudBay Minerals,[2] there has been a noted move toward obtaining a second fixed-fee independent fairness opinion where the financial advisor providing the original fairness opinion receives, as part of its compensation, a success fee. Due to the increased focus on fairness opinions as a result of Hudbay and judicial commentary in the applications involved in InterOil, the Ontario Securities Commission is expected to release a Staff Notice on Multilateral 61-101 – Protection of Minority Security Holders in Special Transactions in the spring which will deal, in part, with fairness opinions. Though it is not required under securities laws to obtain fairness opinions and such opinions are not formal valuations, it is customary in Canada for issuers to obtain them as evidence of satisfying their fiduciary duties and acting independently and objectively in forming their decision to recommend a proposed transaction to shareholders. Such transactions include certain related party transactions, going private transactions and mergers and acquisitions conducted by way of a plan of arrangement. As a result of the increased focus on fairness opinions and their common use, the Ontario Securities Commission is expected to provide guidance on fairness opinions, including the terms under which they are entered into, their use by boards and/or special committees and the breadth of the OSC's disclosure expectations in the management information circular with respect thereto. Once the Ontario Securities Commission provides some clarity on these issues, market practice may be impacted in a more meaningful way.



The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2017

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.

Similar Articles
Relevancy Powered by MondaqAI
Borden Ladner Gervais LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Borden Ladner Gervais LLP
Related Articles
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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