The Yukon Court of Appeal recently allowed an appeal from a Supreme Court decision that awarded dissenting shareholders US$71.46 per share as fair value of their InterOil shares. The Court of Appeal found the transaction price of US$49.98 per share reflected fair value and reduced the award to this amount. The trial court decision had generally been viewed as an outlier in fair value case law, given that the award represented a significant premium over the transaction price. This Yukon Court of Appeal decision1 could serve as an important roadmap to Canadian courts in future dissent rights cases.
The matter arose from a transaction in which ExxonMobil Canada Holdings ULC acquired the entirety of InterOil's shares by way of court-approved plan of arrangement. The interim order rendered in the context of the arrangement provided for a right of dissent.
InterOil, a public company, had a significant joint venture interest in an overseas oil and gas field for which financing was required to build a liquefied natural gas export plant.
In that context, InterOil ultimately contemplated a whole-company sale transaction. InterOil received several bids, reached a tentative agreement with a company known as OilSearch, but ultimately retained a competing bid from Exxon. The board considered Exxon's offer to be superior, terminated its agreement with OilSearch and paid the negotiated break fee. InterOil then entered into an arrangement agreement with Exxon at US$49.98 per share.2
InterOil approved the arrangement with approximately 20% of the shareholders (including a former CEO of InterOil) voting against the arrangement. Although the Supreme Court of Yukon approved the arrangement as fair and reasonable, this decision was appealed and the Court of Appeal set aside the initial ruling due primarily to flaws in the board's governance and arrangement's approval process.
InterOil and its board addressed the governance measures deemed flawed by the Court of Appeal,3 and the company re-submitted the arrangement to shareholders on substantially the same commercial terms. The arrangement was once again approved by shareholders, this time with 91.24% of the votes cast, with some who initially opposed the transaction now having voted in favour. It was then approved by the Supreme Court as fair and reasonable and that decision approving the arrangement was not appealed.
However, certain shareholders (0.5%) exercised their dissent rights in the shareholder vote on the arrangement, entitling them to receive the fair value of their shares in accordance with section 193 of the Business Corporations Act (Yukon).
In keeping with what some view as a problematic developing trend in first-instance decisions, the Supreme Court of Yukon awarded the dissenters US$71.46 per share, representing a hefty premium to the deal price, primarily because the original price undervalued the shares due to the governance flaws in the first iteration of the agreement between InterOil and ExxonMobil, even though InterOil and its board addressed such matters in the second iteration of the transaction. The Court of Appeal reversed and overturned this first-instance decision and provided important guidance regarding the legal principles and approach that courts ought to adopt in dissent rights proceedings.
Court of Appeal decision
As a preliminary matter, the parties had agreed on the legal principles applicable to assessing the fair value of shares in the context of dissent proceedings and did not take issue with the judge's statement of those principles. The errors raised on appeal related instead to their application to the facts of the case.
The Court of Appeal found that the trial judge had improperly disregarded the transaction price as important and probative evidence of fair value of the shares. This resulted from the trial judge's finding that the previous Court of Appeal decision regarding the fairness of the initial arrangement effectively meant the share price it proposed could not be reflective of fair value, even though the governance flaws were subsequently addressed and corrected by InterOil and its board.
This error resulted in the first-instance judge placing undue reliance on other evidence of fair value, which the Court of Appeal deemed "highly uncertain," while also disregarding the "reliable and objective market evidence" provided by InterOil's share price traded on the stock market.
The Court of Appeal made a number of highly relevant and important remarks regarding the probity of evidence of fair value in the case at hand (which could also be relevant in other dissent rights matters), including:
- The transaction price reflected a negotiated price in a competitive market (even without a full auction) among well-informed and sophisticated parties.
- The transaction price represented a significant premium to the pre-announcement (and thus unaffected) stock price.
- Large sophisticated institutional investors who were InterOil shareholders, presumably experts in assessing value, accepted the deal price and voted in favour of the second plan of arrangement.
- Other interested bidders, such as OilSearch, chose not to increase their bids.
In closing, the Court of Appeal also noted the fair value set by the trial court at US$71.46 per InterOil share would have implied that a prospective purchaser of InterOil would have been willing to pay approximately US$1 billion more than the total amount Exxon paid for all the shares. The Court of Appeal agreed with Exxon it was unreasonable to believe, given the number of sophisticated parties involved in the transaction, that US$1 billion in value was simply "left on the table."
The Court of Appeal decision therefore underscores that fair value awarded in dissent proceedings must be rooted in "reliable and objective market evidence," where such evidence is available, which should not be set aside in favour of "theoretical derivations of value [that are] rife with speculation or uncertainty." This Yukon Court of Appeal decision could serve as an important roadmap to Canadian courts in future dissent rights cases.
1. Carlock v ExxonMobil Canada Holdings ULC, 2020 YKCA 4. The Court of Appeal cited with approval an article by Norton Rose Fulbright lawyer Clarke Hunter concerning fair value litigation: "Fair Value" – A Common Issue With Surprisingly Sparse Canadian Authority, (2011) Annual Review of Civil Litigation.
2. $US45 per InterOil share plus a contingent resource payment of US$4.98 per share.
3. In particular, the Court of Appeal had, found that the information provided to shareholders to enable them to assess the merits of the transaction has been inadequate.
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