On March 1, 2017, the Yukon Supreme Court, in its decision in Re: Interoil Corporation,1 approved InterOil’s amended plan of arrangement under which Exxon Mobil Corporation would acquire the common shares of InterOil. In its decision, the Court endorsed the heightened standard for fairness opinions articulated by the Yukon Court of Appeal2 (which comprises justices from the British Columbia Court of Appeal) in InterOil Corporation v. Mulacek.3 If adopted more broadly, this would represent a significant departure from current commercial practice with regard to fairness opinions in the context of plans of arrangement.
InterOil’s original plan of arrangement was rejected by the Yukon Court of Appeal due to its failure to satisfy the Court that the arrangement was fair and reasonable.4 The Court of Appeal’s objection to the arrangement in InterOil was partly based on several red flags it identified regarding improper corporate governance. These issues included the fact that the CEO of InterOil was in a position of conflict and turned on a number of questions surrounding the independence of the special committee.5 In addition to these matters, the Court’s decision was largely grounded in underlying deficiencies of the fairness opinion that the board of InterOil had obtained from Morgan Stanley.6 The Court found that these deficiencies prevented InterOil’s shareholders from making informed choices and, as such, it was unwilling to accept the over 80 per cent shareholder approval as a proxy for the fairness of the arrangement. Specifically, the Court identified the following deficiencies in the Morgan Stanley fairness opinion:
- Failure to address the value of InterOil’s primary asset;
- Failure to provide the shareholders with an independent fairness opinion on a flat fee basis;
- Failure to disclose the details of Morgan Stanley’s compensation which was contingent on the transaction being approved; and
- Failure to adequately disclose the underlying analysis to indicate what the opinion was based on.7
Responding to these concerns, InterOil’s amended application contained a fixed fee fairness opinion provided by Bank of Montreal (“BMO”). It outlined the facts and information forming the basis of the opinion, and included detailed financial analysis of InterOil’s value and how the consideration received by InterOil shareholders was apportioned.8 The Yukon Supreme Court concluded that the amended plan of arrangement was fair and reasonable.9 Accepting that the new fairness opinion addressed the deficiencies in the previous one, the Court stated that the BMO fairness opinion “provides a useful template for the detail that Fairness Opinions should provide to shareholders and to courts.”10 More importantly, the Court held that the minimum standard for interim orders of any plan of arrangement requires an independent flat fee fairness opinion and 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."11
In Canada, while it has become the best practice of corporate governance for a corporation to obtain a fairness opinion, there is no statutory or judicial requirement to do so.12 Fairness opinions are obtained by the directors of a corporation to show its shareholders and the courts that a financial expert has assessed the fairness of the proposed arrangement from a financial point of view. While concerns have been expressed prior to InterOil regarding the appropriate standard of fairness opinions,13 commercial practice has remained consistent. Prior to the InterOil decision, there was no requirement for fairness opinions to be provided on a flat fee basis, and it was common for financial advisors to receive a significant portion of their fee once the arrangement was approved. Furthermore, it is generally not required in Canada to disclose the detailed financial analysis underlying the opinion, unless the arrangement consists of a related party transaction that requires a formal valuation under Multilateral Instrument 61-101: Protection of Minority Security Holders in Special Transactions.14 The Investment Industry Regulatory Organization of Canada, a self-regulated regulatory body for the securities industry, has expressed that heightened disclosure requirements for fairness opinions are only necessary when dealing with “subject transactions.”15 Subject transactions include insider bids, issuer bids, going private transactions, and related party transactions. For these types of transactions there is an increased chance of shareholder prejudice due to uneven access to information, and this heightened risk of self-interested behaviour necessitates more substantial disclosure.
Since the decision by the Yukon Court of Appeal in InterOil, there has been extensive discussion about whether the heightened standard should be adopted, and what impact it would have on commercial practice. The Yukon Supreme Court, in its emphatic statement regarding the minimum requirements for fairness opinions, seems to have ignored the specific corporate governance concerns that existed in the InterOil decision. It has instead endorsed an enhanced standard for fairness opinions in all situations. Arguably, the Yukon Supreme Court’s approach is ill-advised, as it fails to take into consideration how the circumstances of each case provide useful insight in determining whether the processes followed were sufficient. It is telling that regulatory bodies have specifically turned their minds to different types of security transactions and determined that a higher standard for fairness opinions is not always necessary.
However, it remains to be seen what effect the InterOil and Re InterOil decisions will have on the commercial practice of obtaining fairness opinions in the context of plans of arrangement. Whether other jurisdictions follow Yukon’s lead and adopt a heightened standard for fairness opinions will be of significant interest for commercial players seeking to utilize the arrangement provision to implement fundamental changes.
* JD Candidate (University of Saskatchewan).
1 2017 YKSC 16 [Re InterOil].
2 Ibid at paras 15-16.
3 2016 YKCA 14 [InterOil].
4 Ibid at para 44.
5 Ibid at para 40.
6 Ibid.
7 Ibid at para 18.
8 Re InterOil, supra note 1 at para 17.
9 Ibid at para 19.
10 Ibid at para 18.
11 Ibid at paras 9-10.
12 See e.g. Magna International Inc. (Re), 2010 ONSC 4123 at paras 75, 201, 101 OR (3d) 736; BCE Inc. v 1976 Debentureholders, 2008 SCC 69 at para 152, [2008] 3 SCR 560.
13 See (Re) Champion Iron Mines Limited, 2014 ONSC 1988 at para 19, 119 OR (3d) 339.
14 Ontario Securities Commission (9 May 2016), online: <http://www.osc.gov.on.ca/documents/en/Securities-Category6/rule_20160509_61-101_special-transactions.pdf>, archived: <https://perma.cc/E2XL-JTHE>.
15 Investment Industry Regulatory Organization of Canada, Dealer Member Rule Book, Toronto: IIROC, rule 29.24, online: <http://www.iiroc.ca/RuleBook/MemberRules/RulesCollated_en.pdf>, archived: <https://perma.cc/35BX-TDUC>.