Exxon Mobil can now proceed with its acquistion of InterOil. REUTERS/Mike Blake
IF THE COURT OF APPEAL OF YUKON'S decision in InterOil Corporation v. Mulacek last November came as a shock to Canada’s M&A community, the follow-on ruling from the territory’s Supreme Court in February — which allows for the purchase of InterOil Corp. by Exxon Mobil Corp. — can only be described as a surprising aftershock.
The decisions called into question longstanding practices regarding fairness opinions in plans of arrangement. Generally speaking, there is no legal requirement in Canada for a board to obtain a fairness opinion.
“Fairness opinions are typically obtained to inform and support the board's business judgment in connection with its evaluation of a proposed M&A transaction and its consideration of whether to approve and recommend a transaction to shareholders,” says John Emanoilidis of Torys LLP in Toronto.
What boards receive is a detailed financial analysis supporting the fairness opinion. The court-sanctioned practice, however, makes clear that shareholders were not entitled to the details behind the opinion, but merely the conclusion.
This “one-line” document was all that InterOil Corp. provided to its shareholders. Nonetheless, more than 80 per cent of shareholders approved the transaction.
InterOil sought approval for the plan of arrangement. Over the objections of Philippe Mulacek, a founder and former chairman of the company and holder of 5.5 per cent of its shares, the Supreme Court of Yukon approved the plan.
Mulacek appealed and the Court of Appeal reversed. The tremor in the judgment that initially shook the business community was the unanimous court’s suggestion that the single-line conclusion as to fairness found in the opinion did not put the shareholders in a position to “make an informed choice” about the transaction, particularly when the sole financial advisor retained by the board, Morgan Stanley, had a success fee included as a term of its engagement.
The parties tried again. The acquirer, Exxon Mobil, agreed to a modest contingent increase in the purchase price. InterOil hired a second financial adviser, BMO Capital Markets, on a flat-fee basis. BMO’s fairness opinion provided considerably more detail than had been common practice in these types of transactions.
After shareholders voted in favour of the deal at a level even greater than the 80 percent who approved the original transaction, the plan went back to the Supreme Court for consideration.
Justice Veale approved the new iteration. But that wasn’t the aftershock; that came when he suggested that an independent fixed-fee long-form fairness opinion and a report from the independent transaction committee “provide a minimum standard for interim orders of any plan of arrangement.”
Many commentators have limited the InterOil decision to cases involving the type of “red flags” that caused the Court of Appeal to reject the transaction. These included the potential conflict created by Morgan Stanley’s success fee; the passivity of the special committee overseeing the transaction; the failure to retain a second, independent adviser; the lack of information provided to shareholders; and a CEO leading the negotiations who stood to gain some $35 million in termination pay and share awards if the deal went through.
But Wendy Berman of Cassels, Brock and Blackwell LLP, who represented Mulacek, says that, going forward, the impact of the decisions will not be limited to this “perfect storm” of facts.
“What the Court of Appeal was saying was that it would not regard as independent an advisor who was being paid in a way that included a success fee,” she said. “Without that independent advice, the court cannot give deference to the board’s work.”
As for the extent of disclosure now required, Berman believes that the decisions don’t set out a bright line.
“What they say is that the board can’t approach the issue of disclosure in a perfunctory way,” she says. “The must ask themselves how much disclosure is necessary and the answer will vary with the nature of the deal.”
For his part, Emanoilidis does not believe that InterOil will deter parties from using the plan of arrangement process to implement a friendly public M&A.
“Arrangements are a particularly advantageous structure where the transaction may be contentious since the court approval process helps the target control opposition and the litigation process,” he says.
Where InterOil will come into play is where proposed arrangements are stirring up shareholder opposition. In such cases, Emanoilidis says, the target should carefully consider whether the circumstances warrant an opinion from an independent adviser who is not entitled to a success fee.
“Target boards may also need to submit more elaborate evidence in court on the fairness of the proposed transaction in order to address potential opposition to the deal,” the lawyer adds. “Post InterOil, market practice in proxy circulars may shift to enhanced disclosure which highlights information that has been provided by financial advisers or conclusions reached by the board based on financial advice — a shift that would be consistent with the approach in the United States.”
This said, Emanoilidis believes that Canadian boards should, where appropriate, still be able to rely on a fairness opinion that includes a success fee without having to seek a second opinion.
‘The Ontario Securities Commission is considering additional guidance on the disclosure issue,” he says. “Until then, we don’t expect significant change in market practice in most cases.”