The Yukon Court of Appeal recently released its decision in Carlock v. ExxonMobil Canada Holdings ULC,1 overturning the Supreme Court of Yukon's unexpected decision to award dissenting shareholders a 43% premium over the negotiated deal price in ExxonMobil Canada Holdings ULC's ("ExxonMobil") acquisition of InterOil Corporation ("InterOil") in 2017.
The Court of Appeal's decision confirms that courts can (and probably should in an open and unrestricted market) rely on a negotiated transaction price as objective evidence of fair value. This decision re-aligns Yukon law with that of other Canadian and American jurisdictions and reduces the potential uncertainty regarding share valuation in public M&A transactions introduced by the lower court decision.
The Yukon Court of Appeal's decision is the latest (and likely final) decision in the long-running saga of ExxonMobil's acquisition of InterOil.
On July 21, 2016, the first arrangement agreement between ExxonMobil and InterOil received court approval. ExxonMobil agreed to pay US$45 per InterOil share paid in ExxonMobil shares plus a contingent resource payment ("CRP").
That approval order was later set aside by the Yukon Court of Appeal in InterOil Corporation v. Mulacek (November 4, 2016) on the basis that the arrangement had not been shown to be "fair and reasonable" as required by the Yukon Business Corporations Act. The Court of Appeal pointed to, among other things, the absence of a fairness opinion from an independent expert, the fact that the CEO was in a position of conflict and the probability that the "independent" special committee was not independent of management.
The decision focused on the process followed by InterOil's Board of Directors in negotiating the sale of its assets and determining the fair value of InterOil's shares. Following the Court of Appeal's decision, InterOil reconvened its special committee, which retained Fasken to assist the committee in its review of the Yukon Court's decisions and to provide recommendations to the InterOil Board regarding the strategic options available to InterOil. Ultimately, the InterOil shareholders approved the arrangement for a second time, with 91% of votes cast in favour of the arrangement.
Certain shareholders dissented and, in 2019, the Supreme Court of Yukon rendered the extraordinary decision under appeal in this most recent case, rejecting the transaction price as indicative of fair value. The court awarded a significant premium (43%) to the dissenting shareholder, despite: (a) a board-supervised sale process with multiple bids; (b) approval of over 80% of InterOil's voting shareholders at first instance; and (c) a second vote with 91% in favour after the implementation of enhanced corporate governance practices and an increase to the value of the CRP.
Ultimately, the lower court focused considerably on the sales process prior to the first Court of Appeal decision. Most notably, the Court emphasized that although InterOil implemented significant corporate governance enhancements in response to the Court of Appeal's decision, "the transaction price, borne of a flawed process, cannot be resurrected as the "fair value" as defined by the experts."
ExxonMobil appealed the decision.
The Court of Appeal allowed ExxonMobil's appeal and set fair value of the dissenting shareholders' shares at the negotiated deal price of US$49.98. The Court held that the lower court judge erred in finding that the defects in the first arrangement precluded him from effectively giving any weight to the transaction price in assessing fair value of the InterOil shares.
The Court of Appeal found that it was open to InterOil to remedy the earlier deficiencies and properly inform and advise shareholders of the merits of the transaction and to ensure that such advice was adequate, objective and not undermined by conflicts of interest. With InterOil having done so, the lower court ought to have given adequate weight to objective evidence as to value and wrongly overvalued the theoretical valuation of the dissenting shareholder's expert.
The Court of Appeal summarized the various factors which supported utilizing the negotiated deal price as fair value in the present case: 2
- The transaction price reflected a negotiated price in a competitive market consisting of well-informed and sophisticated parties.
- There was no indication that any other process could have led to a higher price.
- All potential purchasers or partial investors were fully informed.
- There was no impediment to other potential purchasers outbidding Exxon.
- The deal price was at a substantial premium to the pre-deal stock price.
- The shares were widely traded and held by large and sophisticated investors, expert in assessing value, none of whom dissented.
- Share value was driven by an asset in the early stages of development, the future prospects of which were highly uncertain.
- Theoretical derivations of value were rife with uncertainty and speculation. Such assumptions were surely factored into the decision by institutional investors to accept the deal price.
While a robust sales process will, as ever, remain necessary, the Yukon Court of Appeal's decision should provide comfort to capital market participants that a deal price borne of such a process will generally be recognized as representative of fair value.
1 2020 YKCA 4 ["ExxonMobil C.A."].
2 ExxonMobil C.A., supra, at para. 45.
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