June 9, 2014
On April 7, 2014, Osler commented on the decision of Justice David Brown of the Ontario Superior Court of Justice (Commercial List) in Re Champion Iron Mines Limited. In that case, the Court held that a fairness opinion from a financial adviser obtained by the board of directors in connection with a plan of arrangement was not admissible at the fairness hearing because it did not meet the requirements of the Rules of Civil Procedure applicable to expert evidence. As we noted then, the ruling called into question whether, in the future, courts would look for fairness opinions and disclosure documents that summarize fairness opinions to contain enhanced disclosure of the underlying financial analysis performed by, and fees paid to bankers, if the opinion is being put forward as evidence of the substantive fairness of the arrangement. In two recent decisions however, separate judges from the same Court have questioned the correctness of the decision in Champion Iron Mines and reverted to the Court’s traditional practice of considering “the presence of a fairness opinion from a reputable expert” as among the indicia of fairness when considering whether a proposed plan of arrangement is fair and reasonable.
In Re Bear Lake Gold Ltd., Justice Wilton Siegelheld that, “in the context of M&A transactions involving the acquisition of securities of an issuer by a third party,” a fairness opinion is admissible both as evidence that the plan of arrangement is being put forward in good faith, as well as evidence of the fairness and reasonableness of the proposed transaction. In particular, Justice Wilton-Siegel found that:
- a fairness opinion constitutes evidence that the board of directors considered the fairness and reasonableness of the transaction based on objective evidence; and
- the disclosure of the fairness opinion to shareholders as part of the management information circular and, in particular, the reaction of shareholders and the market can provide further evidence as to the fairness and reasonableness of the proposed transaction and the integrity of the board of directors’ process.
In Royal Host, Justice Newbould expressly adopted the reasoning of Justice Wilton-Siegel in Bear Lake Gold and added that, contrary to the ruling in Champion Iron Mines, the purpose of a fairness opinion was a commercial one and a fairness opinion is not intended to be an expert report in a litigation context.
Notably, in Bear Lake Gold, the Court stated that, in proposed plans of arrangement which did not involve the acquisition of securities of the issuer by a third party, but rather, for example, a reorganization of the interests of the existing securityholders, “if a party proposes to qualify a fairness opinion as expert evidence under the Rules of Civil Procedure, the detailed analysis that grounds the fairness opinion must be available if required by any objecting securityholders.”
As previously noted by Osler, these decisions highlight the continued utility to a board of directors of receiving expert financial advice and fairness opinions from reputable financial advisors as an important part of the process by which directors discharge their duty of care and make informed decisions in the M&A context. To date these decisions do not appear to have affected Canadian disclosure practices regarding fairness opinions and the underlying financial analysis.
Authored by: Emmanuel Pressman