On November 4, 2016, the Yukon Court of Appeal dismissed an application for approval of a plan of arrangement effectively blocking ExxonMobil Corporation proposed US$2.3 billion acquisition of InterOil Corporation.
Background
InterOil is a Yukon-based oil and gas company with assets comprised of interests in oil and gas properties in Papua New Guinea. The proposed transaction was an unsolicited “topping” offer to another prior bid by Oil Search Limited and was approved by approximately 80 per cent of the voting shareholders (representing approximately 58.2 per cent of the issued and outstanding shares) at a shareholder meeting on September 21, 2016. The share portion of the ExxonMobil bid represented a 42.2 per cent premium to the InterOil share price prior to the announcement of the prior offer.
Philippe Mulacek, the founder and former Chairman and CEO of InterOil, objected to the proposed acquisition on the basis that, among other things, the process undertaken by InterOil demonstrated deficient corporate governance and inadequate shareholder disclosure and the proposed acquisition was neither fair nor reasonable.
On September 27, 2016, the Yukon Supreme Court held a fairness hearing to consider the application for approval of the plan of arrangement. Despite noting that the process undertaken by the InterOil board of directors demonstrated “deficient corporate governance and inadequate disclosure,” the Yukon Supreme Court ultimately approved the Exxon Arrangement as being fair and reasonable, citing the results of the shareholder vote and an increase in the InterOil share price following news of the proposed transaction. Mr. Mulacek appealed this decision to the Yukon Court of Appeal.
On November 4, 2016, the Yukon Court of Appeal found in favour of Mr. Mulacek on the appeal, dismissing the application for approval of the Exxon Arrangement on the basis that it had not been established to be fair and reasonable.
The Court of Appeal criticizes InterOil’s corporate process and disclosure
In reversing the Yukon Supreme Court’s decision, the Yukon Court of Appeal agreed with the lower court findings on disclosure and governance deficiencies and found that these deficiencies raised serious question regarding the adequacy of information provided to shareholders and the reliability of the shareholder vote. The Court of Appeal found that the exclusion of any valuation of the contingent portion of the consideration under the ExxonMobil transaction and the contingent success fee payable to the financial advisor “undermined the utility of the fairness opinion to the directors, the shareholders and the Court.” In addition, the Court of Appeal found that a fairness opinion, which contained no information on the valuation analysis, provided no real assistance to the shareholders or the court in evaluating the transaction. The fairness opinion relied on by InterOil was contrasted with an opinion on financial fairness obtained by Mr. Mulacek from Paradigm Capital, which contained detailed analysis, including multiple valuation methodologies, and concluded that the consideration being offered by ExxonMobil was “inadequate from a financial point of view, to the shareholders of InterOil.”
The Court of Appeal noted that a substantial and independent fairness opinion was of particular importance in this case given the passive role taken by the board’s independent directors in connection with the negotiation of the transaction and the significant compensation that InterOil’s CEO and board stood to realize through change of control provisions in their employment contracts.
In making its determination on fairness, the Court of Appeal held that it had to be satisfied that the shareholders were in a position to make an informed decision on the merits of the proposed transaction, and determined that the deficient fairness opinion and inadequate disclosure left the shareholders insufficiently informed. In the circumstances of this matter, the Court of Appeal found that the “Board should have sought independent advice as the financial fairness of the transaction” as it was incumbent on the board to ensure that the arrangement acquisition negotiated by management reflected the fair value of the company. As such, the Court of Appeal found that the lower court erred in disregarding the corporate governance failures and relying on shareholder approval as a proxy for the substantive fairness of the arrangement.
The results of a shareholder vote are not enough to establish fairness
The Court of Appeal confirmed and clarified the importance of the court’s role in connection with plans of arrangement, which has frequently been described as a mere “rubber stamp” of approval following a successful shareholder vote. The Court stated:
It will almost always be the case in applications under s. 195 that the arrangement in question has been approved by a substantial majority of shareholders, who are obviously voting in what they see to be their own interests. The Court must be satisfied, however, that the arrangement is objectively fair and reasonable in a more general sense.
Conclusion
The corporate governance and disclosure deficiencies, coupled with the evidence tendered by Mr. Mulacek as to the inadequate consideration being offered by ExxonMobil, resulted in the Court of Appeal’s finding that the arrangement was not fair and reasonable. The appeal was allowed and InterOil’s application for approval of the plan of arrangement was dismissed.
Update
An amended and restated arrangement application was put forward by InterOil, and the interim order to allow the shareholder meeting was approved. In the new arrangement, the outside date of the transaction was set for March 31, 2017.
Counsel
Cassels Brock & Blackwell LLP acted for Philippe Mulacek with a litigation team that included Wendy Berman, Lara Jackson, Bill Burden, Derek Ronde, Carly Cohen and David Kelman with support from corporate solicitors, Gordon Chambers, John Christian and Jeffrey Roy.
Lamarche & Lang acted as local counsel for Philippe Mulacek with a team that included Graham Lang and Meagan Hannam.
Goodmans LLP acted for InterOil Corporation with a team that included Tom Friedland and Melanie Ouanounou.
Austring, Fendrick & Fairman acted as local counsel for InterOil Corporation with a team that included Greg Fekete.
Blake, Cassels & Graydon LLP acted for ExxonMobil Corporation with a team that included David Tupper, Michael Dixon and Mathew Good.