Decisions on corporate plans of arrangement tend to be of two varieties. Most are fairly straightforward decisions, where the applicant proves that it complied with the interim order already issued by the court, shows that a meeting of shareholders was held and shareholders approved the plan, and the plan is fair and reasonable. Endorsements tend to be short and hearings are often done in chambers.
Other times, much more infrequently, they turn into blockbusters. The plan of arrangement in BCE went to the Supreme Court of Canada, for example, and both the case and the ultimate decision was the focus of the business community for months. And recently, the Superior Court of Justice's decision in Champion Iron became the talk of the town because it called into question the manner in which fairness opinions were provided to the Court.
Two decisions – one by Justice Wilton-Siegel, and one by the head of the Commercial List, Justice Newbould – have called into question the correctness of Champion Iron.
The Issue of Fairness Opinions
In Canada, corporate mergers can be effected by way of a straight takeover bid, or by way of a plan of arrangement. Plans of arrangement are effected through a two-step process in the courts.
First, the court issues an interim order, which calls a meeting of shareholders, sets out the quorum requirements and the manner in which the meeting will be held, and approves in general terms the meeting material to be sent to shareholders. The purpose of an interim order was described in First Marathon Inc. (Re),  O.J. No. 2805 (S.C.J.) as follows:
The purpose of such Orders is simply to set the wheels in motion for the application process relating to the arrangement and to establish the parameters for the holding of shareholder meetings to consider approval of the arrangement in accordance with the statute.
Following the interim order, the company will send the meeting materials out to various stakeholders in accordance with the terms of the initial order, hold the meeting, and shareholders will vote on the meeting.
This leads to the second court attendance, the final order hearing. Materials filed on such a motion tend to be brief, with a short affidavit explaining the mailing process and describing the results of the vote. At the final order hearing, the Court will consider whether the arrangement is fair and reasonable.
The content of the meeting material will vary depending on the nature of the arrangement. Where the company is required to obtain a majority of the minority vote, the meeting materials will typically include a valuation. And in most cases the applicant will include a fairness opinion in the meeting materials.
Fairness opinions in this country tend to be succinct in their analysis. The analysis tends to be boiled down to a single sentence:
Based upon and subject to the foregoing and such other matters as we considered relevant, it is our opinion, as of the date hereof, that the Consideration payable to Shareholders of ABC Co. pursuant to the Proposed Transaction is fair, from a financial point of view, to the Shareholders of ABC Co.
There is always much, much more analysis behind these opinions, which analysis is provided to the Board. But that analysis is not shared in the publicly-filed fairness opinion, generally because of the competitive and confidential nature of that information. Under IIROC Rules, even where additional disclosure is needed for insider bids, issued bids, going private transactions or related party transactions, such information can be deleted from the publicly filed version of the opinion.
Fairness Opinions Questioned in Champion Iron
The prevailing practice with respect to fairness opinions was called into question in Justice D.M. Brown's decision in Champion Iron Mines Limited (Re.), 2014 ONSC 1988. In that case, the applicant sought a final order from the Court, having complied with the interim order, having held a shareholder meeting where the arrangement was approved by more than 99 percent of the votes cast by shareholders. Nobody opposed. By all accounts, this final order hearing had been shaping up to be a straightforward affair.
Unsurprisingly, Justice Brown granted the final order. Surprisingly, he did so with some additional comments in his reasons. In a section entitled "Two concluding comments", Justice Brown took issue with: (a) the content of the fairness opinion; and (b) a "feeling that corporate lawyers regard the role of courts in the whole plan of arrangement process as nothing more than one box to check off on a closing agenda."
First, Justice Brown refused to give any weight to the content of the fairness opinion tendered in that case. He said:
The Fairness Opinion simply asserted an opinion, without disclosing the reasons for it. On its face, it was devoid of analysis which a reader could follow in order to understand how the opinion was reached and what, if any, weight should be given to the opinion. Accordingly, I concluded that the Fairness Opinion, as written, was inadmissible for purposes of the final order application and I ignored it.
Second, as it concerned the perception of the court serving as a rubber stamp, Justice Brown stated plainly that, "[a] court is not a boardoom", and that dealmakers should build in a gap of at least one business day between the shareholder meeting and the final order date.
The business community took notice. In addition to the usual updates one expects on law firm websites, the decision actually made the national press, receiving coverage in the Globe and Mail and the National Post.
Bear Lake Gold Ltd. was acquired by Kerr Mines Inc. The principal purpose of the arrangement was to provide for sufficient funding to complete a feasibility study on one project and to enhance the exploration potential of another. The board of Bear Lake recommended the deal to shareholders, and obtained a fairness opinion. Dissent rights were provided. And, 97.9 percent of the votes cast at the shareholder meeting voted in favour of the arrangement.
All told, Bear Lake was shaping up to be a fairly ordinary plan of arrangement. But as was the case in Champion Iron, the judge hearing the matter decided to take up the issue of fairness opinions. In his reasons reported at 2014 ONSC 3428, Justice Wilton-Siegel referred to Champion Iron, and said:
I do not share this concern [of Justice Brown] in the context of M&A transactions involving the acquisition of securities of an issuer by a third party. In such circumstances, I consider that a fairness opinion is properly included as an indicia of a good faith transaction as well as of the fairness and reasonableness of the proposed transaction in the manner described below.
Justice Wilton-Siegel commented that fairness opinion are usually the subject of a detailed presentation to the directors, but those details are not usually provided in the fairness opinion itself. He did not view the fairness opinion to be "expert evidence" in the sense described in Champion Iron, but rather:
Instead, the fairness opinion is of relevance to the court in two respects. First, it is evidence that the special committee or board of directors has considered the fairness and reasonableness of the proposed transaction on the basis of objective criteria to the extent possible. Second, the publication of the fairness opinion in the information circular allows the shareholders to reach their own conclusions regarding the integrity of the directors' recommendations and regarding the fairness of the transaction to them from a market perspective.
Justice Wilton-Siegel concluded that "there is no compelling reason to depart from the existing practice regarding the use of fairness opinions for the purpose of court approval of statutory arrangements involving M&A transactions where there is no valuation opinion."
Royal Host Inc. sought an interim order in connection with a CBCA plan of arrangement, wherein holders of Royal Host shares would receive a combination of cash and shares of Holloway Lodging Corporation. Justice Newbould, who is the head of the Commercial List in Toronto, issued reasons on June 6, 2014, reported at 2014 ONSC 3323 in connection with the interim order.
First, Justice Newbould took issue with another recent decision of the Court, Re Tigray Resources Inc., 2014 ONSC 1979, in which the applicant was cautioned that if only a small number of shareholders attend the meeting (quorum was set by the by-laws to be five percent), then the Court would not give much weight to the vote. "I do not share the same concern. … What the quorum is for the meeting is not relevant to that issue. So long as the quorum is in accordance with the company's by-laws, I do not think a court should have concern with the quorum for the meeting." In Royal Host, the required quorum was 20 percent.
Second, Justice Newbould commented that Royal Host indicated in its affidavit material that the fairness opinion was being tendered not to show that the arrangement is substantively fair, but rather "it will be used to show that the directors have put forward the arrangement in good faith and that the shareholder vote, when taken, will have been informed by, among other things, an independent opinion of a third party financial advisor."
On this, Justice Newbould said:
The position proposed to be taken by Royal Host regarding the fairness opinion appears reasonable, although ultimately it will be a matter for the court hearing the application for approval of the arrangement to consider, assuming the votes put forward support the arrangement. The purpose of a fairness opinion is a commercial one. It is an opinion to be considered by the board of directors and the shareholders in a commercial context. It is not an expert report in a litigation context. If the board or the shareholders are not satisfied with the report, they can vote with their feet and not proceed with or approve the arrangement.
Justice Newbould then commented on Bear Lake and stated that "I agree with [Justice Wilton-Siegel's] analysis and opinion on this issue."
There will clearly be times when expert evidence is needed in connection with an arrangement. In BCE, the parties adduced a large amount of expert evidence on the nature of debentures and standard covenants. In ID Biomedical, the parties adduced expert evidence on the intrinsic value of warrants. Justice Wilton-Siegel's opinion in Bear Lake recognizes that in contested situations, the court may well need expert opinions, properly qualified. However, absent a contested situation, it is difficult to see how a financial opinion, provided in the form of an "expert opinion" would be assessed by a court, particularly given the court's stated reservations about entering into matters of "business judgment", which typically attract deference.
It is likely too early to state categorically how companies should proceed with fairness opinions and, of course, applicants in plans of arrangement will take advice on the matter. One has the sense that there is more to come from the Commercial List on the issue.