Canada: Yukon Court Awards Premium In Fair Value Determination - A Comment On Carlock v. ExxonMobil Canada Holdings ULC

Last Updated: March 27 2019
Article by Chat Ortved and Khaled Abdel-Barr

In a surprising recent decision with potential implications for public M&A transactions in Canada, the Supreme Court of Yukon determined that the "fair value" of the shares of InterOil Corporation ("Interoil") acquired by Exxon Canada Holdings ULC ("Exxon") in 2017 was significantly higher than the negotiated deal price.

The Acquisition of Interoil

The acquisition of InterOil by Exxon had already followed a somewhat tortuous path by the time the transaction closed in 2017. InterOil had conducted a strategic review, contacted numerous potential bidders, received three proposals, entered into an agreement with a bidder and finally accepted a topping bid from Exxon, for which it received a fairness opinion from its financial advisor. None of this was extraordinary in the context of a public M&A transaction. However, the acquisition by Exxon, which was proposed to be completed by a plan of arrangement (a court-approved acquisition process available under the Business Corporations Act (Yukon), as well as the other main corporate statutes in Canada), was challenged in court, with InterOil's former CEO alleging numerous corporate governance failures.

Though initially approved by the Supreme Court of Yukon (the "Court"), largely on the basis that in spite of the governance deficiencies found by the Court, the arrangement had been approved by a significant majority of the shareholders, the arrangement was struck down by the Yukon Court of Appeal, which found that the transaction was not "fair and reasonable" - the required test for approval of a plan of arrangement. The Court of Appeal emphasized the inadequacy of the fairness opinion, due to the financial advisor being entitled to a success fee, and the lack of disclosure of the analysis underlying the advisor's conclusion. In addition, the Court of Appeal pointedly disagreed with the chambers judge on the weight given to shareholder approval in the test of "fairness and reasonableness," noting that while adequately informed shareholders are entitled to sell their shares at any given price, "it was not open to the Court to set to one side the deficiencies it had identified, and simply accept the verdict of the market or the majority shareholders."1

Ultimately, the transaction closed, with InterOil obtaining a new fairness opinion (on a fixed fee basis), a new shareholder vote based on revised disclosure, in which over 90% of the shareholders approved the transaction, including the shareholder who had challenged the initial deal, and approval by the Court. Nonetheless, a number of shareholders dissented under the terms of the arrangement, which largely imported Section 193 of the Business Corporations Act (Yukon) (the "Act"). Much like the corresponding provisions in other Canadian corporate statutes, Section 193 of the Act entitled dissenting shareholders to receive the "fair value" of the shares acquired by Exxon, as determined by the Court. The result was the Court's surprising decision in Carlock v. ExxonMobil Canada Holdings ULC2 ("Carlock"), where the Court agreed with the dissenters' expert and set the "fair value" of the shares at US$71.46, a significantly higher value than the US$49.98 per share paid by Exxon in the transaction.

A "Starting Point" for Fair Value

Determinations of fair value under the various Business Corporations Acts in Canada are often challenging for courts. They are highly fact-specific, outside of most judges' expertise and normally informed by expert evidence that generates vastly different valuations for the same shares. Nonetheless, recognizing that "valuation is not an exact science,"3 Canadian courts have established principles designed to generate results that are as fair and predictable as possible

In Carlock, the Court identified some of those principles, including paraphrasing the guiding statement that the "one true [rule] is to consider all the evidence that might be helpful, and to consider the particular factors of the case, and to exercise the best judgment that can be brought to bear on all the evidence and all the factors."4 Doing so generally requires consideration of the various acceptable methods of valuation and then an exercise of judgment on which method is appropriate and how it is to be properly applied, including in relation to the underlying assumptions and the final result.5

It is important to note that the Canadian authorities on fair value, like their counterparts in the United States, have been clear that expert testimony is not determinative. One of the key principles mentioned above is that while the court may be guided by expert evidence, it is not bound by it.6 Similarly, the Delaware Court of Chancery has cautioned that it "should be chary about imposing the hazards that always come when a law-trained judge is forced to make a point estimate of fair value based on widely divergent partisan expert testimony."7

The authorities in Canada are also clear that absent mitigating factors that undermine its reliability (such as a meaningful conflict of interest or a barrier to any competing bids), the deal price is an appropriate "starting point" for a fair value determination.8 Leading Canadian cases give significant weight to the negotiated price between arm's length parties as a "starting point" for a determination of value, including in a case in which the target did not hold a formal auction but nonetheless engineered a competitive bidding process.9 In an influential article on fair value in Canada, which has been cited and relied upon in court, the authors state that "in circumstances where the price was negotiated in an appropriate and effective manner, both Canadian and American jurisprudence has demonstrated a willingness to rely on negotiated transaction prices... Provided the process undertaken was adequate, the negotiated transaction price provides an objective and realistic assessment of the fair value."10

For a public company, where the shares are valued constantly on a stock exchange by sophisticated parties (and absent mitigating factors, such as a thin public float or low trading volume), it is difficult to conceive how a negotiated deal price above the current trading price would not be a reliable indicator of fairness. As the Delaware Court of Chancery noted in the Aruba decision, "in a scenario where the underlying market price is reliable, competition and negotiation become secondary. Under these circumstances, an arm's-length deal at a premium over the market is non-exploitive. By definition, it gives stockholders 'what would fairly be given to them in an arm's-length transaction.'"11

In short, the authorities on the determination of fair value are generally clear that absent mitigating factors of some severity, the deal price is the appropriate starting point for a determination of fair value, with a discounted cash flow analysis or other approach always still available as a check. While the severity of those mitigating factors, and the weight accorded to them, are questions for the court to decide in each instance, it stands to reason that where a deal price has been negotiated at arm's length, multiple parties have submitted bids (including a topping bid that constitutes a "superior proposal" under an already binding deal), more than 90% of shareholders are willing to vote in favour of the deal after receiving a fairness opinion and corrective disclosure recommended by an appellate court, and where the court itself has approved the arrangement as "fair and reasonable", it is plausible to suggest that those mitigating factors ought to be quite devastating in order to displace a market value approach.

"Fair Value" for InterOil Shares

The positions of the parties in the InterOil "fair value" hearing were typical, in the sense that Exxon's expert valued the shares at the deal price of US$49.98 and the dissenters' expert valued the shares much higher, at US$71.46, based on a discounted cash flow analysis. The decision, however, contains at least two unusual elements: first, the dismissal of the market value approach even as a starting point for the analysis; and second, the selection of one expert's valuation wholesale once the discounted cash flow method had been identified as more appropriate.

The Valuation Approach

After providing an overview of the history of the transaction and a summary of the law of fair value, the Court summarized the positions of the two experts, noting that "the crux of this 'fair value' dispute is the different conclusion reached" by the two experts, where "both experts employed the discounted cash flow methodology."12

While both experts may have employed a discounted cash flow approach, the expert for Exxon in fact relied on and strongly favoured a market value approach, as might be expected in this type of situation, presumably using the discounted cash flow approach only as a check. Further, the Court analyzed the factors militating in favour or against the deal price only after calling the experts' differing conclusions on the discounted cash flow the "crux" of the matter , and only in the context of an initial statement that "considerable attention must be paid to the sales process prior to the Court of Appeal decision and the commercial or partial sale process which was followed by the whole company transaction."13 It therefore appears that the "starting point" of the Court's analysis may have been the experts' discounted cash flow analyses, and that the market value approach was summarily rejected on the basis that the governance issues relevant to the "fairness and reasonableness" of the first arrangement were severe enough to undermine the market price not only as a "starting point", but as a reliable indicator of value.

Keeping in mind the importance of the factual matrix and the Court's discretion in making a judgment as to fair value, it is worth putting the governance deficiencies that originally affected the InterOil arrangement in context. They were undeniably a factor in determining the appropriateness of the arrangement as a matter of the Act's arrangement provisions: the Court of Appeal had found that because of those deficiencies, the transaction did not meet the Act's test of "fair and reasonable". However, the Court of Appeal's suggestion that the willingness of the shareholders to accept the deal price could not vitiate the Court's mandate to apply the "fair and reasonable" test does not necessarily mean that the willingness of the shareholders - in fact, an even more overwhelming majority of them, now more fully informed - to accept the deal price should not play a completely different role, and be given a completely different weight, under a determination of "fair value." In other words, particularly given the numerous other factors that would normally bring the market value approach to bear, such as the number of parties contacted, the multiple bids, the superior proposal with non-abnormal deal protections and the fixed fee fairness opinion, it should not necessarily follow that the same governance deficiencies allowed the InterOil board to negotiate a deal price that did not represent "fair value".14

Adoption of Expert Evidence and the Discounted Cash Flow Approach

Further, even if the governance deficiencies did suppress a higher deal price, it does not follow that a dissenter's expert's discounted cash flow analysis is the only other option before the court. As noted, a fair value determination involves judgment in choosing a valuation method, in applying that method and in the final result,15 and a court is not bound by, and should in fact be wary of, partisan expert evidence.16

Further, Canadian courts have recognized the difficulties in applying a discounted cash flow analysis, noting that "the discounted cash flow approach to valuation is highly sensitive to the assumptions relied upon"17 and that "the discounted net cash flow method must always be viewed with care where there is no historical cash flow to use as the basis of the calculation."18 Recent decisions by the Delaware Court that have rejected the deal price have used their own discounted cash flow analyses to generate fair values below the deal price, taking into account synergies generated by the deal.19

In other words, absent more detailed reasons, and in light of the Canadian and other authorities and the many factors militating in favour of the deal price as a more appropriate starting point, it is difficult to explain the Court's reasoning in adopting one expert's valuation wholesale.

Possible Implications

While the ultimate impact of the InterOil saga on the M&A landscape is not yet fully clear, this fair value decision, if not appealed, may have an impact at least in Western and Northern Canada. The Yukon Court of Appeal's decision to strike down the arrangement appears to have had a more profound effect on Yukon and British Columbia transactions - particularly in relation to their use of fairness opinions - than elsewhere in Canada.20 Nonetheless, market participants across the country should consider the implications of a Canadian court awarding such a significant premium to the deal price. Investors, including those with "appraisal arbitrage" strategies, may be encouraged by a decision from a Canadian court awarding such a significant premium to dissent in corporate transactions. Arrangement agreements may see increased thresholds in the condition precedent based on the number of dissenters. More generally, targets should consider whether the wellestablished processes in Canadian public M&A transactions, which have evolved to satisfy the requirements of corporate and securities laws, need to be considered more closely through the lens of "fair value".


1 InterOil Corp. v. Mulacek, 2016 YKCA 14 at para. 43.

2 2019 YKSC 10 ("Carlock")

3 Brant Investments Ltd. v. KeepRite Inc., 1987 CarswellOnt 135 at para. 134

4 Carlock, supra note 2 at para. 11, paraphrasing Cyprus, infra note 5 at para. 53

Cyprus Anvil Mining Corporation v. Dickson et al., 1986 CarswellBC 362 ("Cyprus") at para. 54.

6 Domglas Inc. v. Jarislowsky, Fraser & Co., [1980] Q.J. No. 89. See also Brant Investments Ltd. v. KeepRite Inc., 1991 CarswellOnt 133 at para. 112: "[t]he Court is to be guided by the evidence given by the experts but is not bound by their opinions."

7 Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., 177 A (3d) 1 at 26 (Del. 2017) ("Dell")

8 Cyprus, supra note 5 at paras 62-63. See also Deer Creek Energy Limited v. Paulson & Co. Inc., 2008 ABQB 326 (Alta. Q.B.). In Delaware, see for example Dell, supra note 7, DFC Global Corp. v. Muirfield Value Partners, L.P., 172 A (3d) 346 (Del. 2017), and Verition Partners Master Fund Ltd. v. Aruba Networks, Inc. No. 11448-VCL, 2018 WL 922139 (Del. Ch. Feb. 15, 2018) ("Aruba")

9 Deer Creek Energy Ltd. v. Paulson & Co., 2009 CarswellAlta 1285 (Alta. CA)

10 Clarke Hunter, Q.C. and Clarissa Pearce, "'Fair Value'—A Common Issue with Surprisingly Sparse Canadian Authority" (2011) Ann Rev of Civ Lit, cited in Glass v. 618717 Ontario Inc., [2012] O.J. No. 225 and Robinson v. Realm Energy International Corp., 2015 BCSC 1437.

11 Aruba, supra note 8 at 95.

12 Carlock, supra note 2 at para. 46.

13 Ibid. at para. 59.

14 It is worth noting that the Court emphasized on numerous occasions that InterOil had not solicited "whole company" transactions, including adding a qualifying statement, after listing the three proposals received by InterOil to buy the whole company, that "none of these approaches had been solicited by InterOil as whole company transactions." In addition, the Court noted that there had been no disclosure of a "whole company transaction" until the Company entered into the first arrangement agreement, and that InterOil "never pursued a public auction for a whole company transaction." A formal auction would be a positive factor militating in favour of a market value approach, but is not a necessary element of that disposition. In this case, there were three offers for the whole company and a topping bid by Exxon for the whole company. Further, the Court noted that the non-solicitation provision in the arrangement agreement with the first bidder, prior to Exxon's bid, "prevented InterOil from soliciting or seeking out other bidders for a whole company transaction." While customary non-solicitation provisions prevent the target from "shopping" itself to other bidders, it should not - and in this case did not - prevent InterOil from accepting a superior proposal

15 Cyprus, supra note 5

16 See supra at notes 6 and 7

17 Paulson & Co. Ltd. v. Deer Creek Energy Ltd., 2008 ABQB 326 (Alta. Q.B.).

18 Cyprus, supra note 5 at para. 75

19 See for example, Aruba, supra note 8 and In re: Appraisal of AOL Inc., C.A. No. 11204-VCG, 2018 WL 1037450 (Del. Ch. Feb. 23, 2018)

20 Jamie van Diepen, "Fixed Fee Fairness Opinions - A One-Year Retrospective on InterOil" Goodmans LLP Update (3 April 2018) online: .

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.

Chat Ortved
Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please 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