Canada: Financial Advice Under More Scrutiny In M&A

Financial advice is a growing area of focus for target boards in M&A transactions and is increasingly in the spotlight in deal litigation.

Disputes implicating financial advisers are arising in connection with adviser conflicts of interest and the scope and disclosure of fairness opinions. Expert financial advice assists boards in fulfilling their responsibilities in overseeing the negotiation of M&A transactions and, when disclosed, that advice also assists shareholders in evaluating those transactions. However, recent developments are a reminder to directors to scrutinize carefully the advice they receive and the adequacy of the disclosure of that advice to shareholders.

Adviser Conflicts of Interest

A series of decisions from the Delaware courts has highlighted potential conflicts of interest which financial advisers may face. Conflicts of interest have arisen where financial advisers seek to advise on both sides of a transaction, where they have financial interests in a particular form of transaction or the outcome of a sales process, and where no disclosure of these conflicts has been made to the advisers' clients. Conflicts may negatively affect a target board's sales process and the board's ability to rely on financial advice tainted by conflict in connection with fulfilling their fiduciary duties.

These Delaware cases give some examples of the kinds of conflicts of interest that can arise:

  • Sell-side advisers soliciting potential buyers. The target's financial adviser solicited proposals from buyers after being instructed not to, paired up buyers in breach of "no teaming" restrictions, and approached buyers to provide financing, without disclosure to the board.1
  • Sell-side advisers holding an interest in the bidder. The target's longtime financial adviser, who was advising the target on pursuing a spin-off, was also a significant shareholder of the bidder and held two board seats. Its lead banker also had a significant undisclosed personal investment in the target. These financial interests gave rise to a conflict of interest. A second financial adviser was hired to advise the target on the proposed merger but it would only get paid if that deal was consummated, creating a conflict for the second adviser without curing the concerns regarding its primary conflicted advisers. All of this resulted in what the Delaware court called a deal "tainted by disloyalty."2
  • Sell-side advisers doing financing work for buyer. The target conducted a sale process with the assistance of a financial adviser who intended to capture financing work from potential bidders for the target and also financing work for the acquisition of a competitor that was running a concurrent sales process. While the target's special committee was aware of the adviser's intentions, it did not make enquiries or impose any practical check on the adviser's activities. The Delaware court found that the board had breached its fiduciary duty and was aided and abetted in the breach by the financial adviser. Significantly, the court decided that the adviser's sell-side engagement letter, which stipulated that it could extend acquisition financing to purchasers, did not preclude a claim against the adviser for failing to inform the target board about a specific conflict of interest.3
  • Lack of independence. The independence of financial advisers has also been highlighted by the courts. In a recent decision, the Delaware court criticized a sell-side financial advisers' valuation report prepared in support of an M&A transaction, which produced a favourable tax result for the seller, but adversely affected the option holders who were cashed out pursuant to the terms of the stock option plan. The sell-side advisers, who had been retained to provide an "independent" valuation, were found to have produced a report to achieve the valuation outcome targeted by the target's principal shareholder, and were found to have lacked independence.4

Identifying and managing potential financial adviser conflicts of the kind described above is one of the board's responsibilities in M&A transactions. Target boards should require that their financial advisers identify and disclose potential conflicts, not merely in the engagement letter but throughout the mandate. Standard disclosures in their engagement letters may not be adequate to address this risk. In certain cases, a target board's engagement of a second, unconflicted adviser may also not be enough to cure pervasive conflict of interest concerns in an M&A transaction. The conflict of interest decisions from Delaware deliver a clear message: a target board must ensure that conflicts of interest are identified and addressed during an M&A process, requiring that financial advisers make full disclosure of both potential and actual conflicts of interest. Failure to do so can taint a sale process.

Fairness Opinions

In its decision in the 2009 HudBay proceedings, the Ontario Securities Commission noted that an adviser's success-based compensation may adversely affect the ability of a board to rely on financial advice: "a fairness opinion prepared by a financial adviser who is being paid a signing fee or a success fee does not assist directors comprising a special committee of independent directors in demonstrating the due care they have taken in complying with their fiduciary duties in approving a transaction."5 Recent decisions from Canadian courts have again put fairness opinions in the spotlight.

The current Canadian practice of financial advisers providing a fairness opinion in the context of an M&A transaction (other than mandatory valuations provided in connection with related-party transactions), without public disclosure of the underlying financial analysis supporting the opinion, was called into question by the Yukon Court of Appeal's decision in InterOil v. Mulacek, and the subsequent decision of the Yukon Supreme Court approving an amended version of the arrangement of InterOil. Like HudBay, the InterOil decisions also questioned a board's ability to rely on a fairness opinion where the financial adviser providing the opinion received a success fee (and whether the amount of the success fee needed to be disclosed to shareholders).

In the amended version of the InterOil arrangement, the target not only provided additional disclosure on the financial advice it had received, but it also included in its circular a fairness opinion from its financial advisers which included more detail than current Canadian market practice. Post-InterOil, target boards will have to consider whether the circumstances of the transaction require a more detailed fairness opinion or enhanced disclosure that highlights information provided by financial advisers and the conclusions reached by the board based on financial advice. Where a transaction may be challenged in court, the rationale for a more detailed fairness opinion and enhanced disclosure will likely be stronger. For a detailed analysis of the InterOil decisions, see our bulletin " Deal Litigation Puts Growing Pressure on Financial Advice."


1 Del Monte Foods Company Shareholders Litigation, Delaware Court of Chancery, 2011.

2 In re El Paso Corp. Shareholder Litigation, Delaware Court of Chancery, 2012.

3 In re Rural/Metro Corp. Stockholders Litigation, Delaware Court of Chancery, 2014.

4 Fox v. CDX Holdings, Inc., Delaware Court of Chancery, 2015.

5 Ontario Securities Commission, 2009.

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