It’s more than just optics

In November 2016 the Yukon Court of Appeal (comprised of judges from the British Columbia Court of Appeal) unanimously overturned the decision of the Supreme Court of Yukon approving the proposed $2.3b acquisition of InterOil Corporation by ExxonMobil Corporation by way of a plan of arrangement.

This was a landmark ruling which brought to light the current shortcomings in process and governance with transactions of this nature. In fact, this decision has the potential to significantly impact current market practices in terms of fairness opinions, disclosure and corporate governance with public company sale transactions, particularly in the case of plans of arrangement.

Subsequent to the Court of Appeal decision in the InterOil case, an amended arrangement was agreed in December 2016 and subsequently approved by the Yukon Supreme Court in February 2017. Mutual agreement between InterOil and Exxon was arrived at after a number of changes were implemented, including introducing the production of a new independent fixed fee long form fairness opinion which contained significant additional detail and analysis.

While the court’s findings and recommendations relating to the InterOil case reflect only the law in the Yukon and no other jurisdictions, we anticipate - and have seen – that companies will factor in the potential for conflict and bolster their transactions with independent fixed fee fairness opinions. In some cases this may mean obtaining a second independent fairness opinion where one already exists from a financial advisor.

While we recognise that boards see value in obtaining a fairness opinion from their financial advisor, when that financial advisor is being paid a success fee, we expect boards will request a second, independent fairness opinion. 

Potential deficiencies

Having a fairness opinion isn’t enough. Stakeholders are increasingly scrutinizing the meaningfulness of the fairness opinion and the independence of the provider. With growing scrutiny comes a rise in the potential for failed or delayed deals, and costly lawsuits, making solid, reliable financial advice a priority. Examples of red flags:

- A lack of facts and information in the fairness opinion making it difficult for the user to understand how the fairness conclusion was reached. The original fairness opinion in the InterOil transaction contained pages of disclaimers and a one sentence conclusion that the arrangement was fair to the holders of the common shares. Limited other information was provided.

- Fairness opinions prepared by financial advisors that are being paid a success fee for a successful outcome. These are not viewed by the courts or regulators as independent.

Full disclosure

There are significant time and cost delays to transactions, associated with inadequate reports and disclosure. Getting it right the first time will help to ensure the success of the deal in addition to keeping the transaction on schedule and being less costly. Accordingly, the argument for a flat fee is simple: if the financial advisor providing the fairness opinion has nothing to gain from the completion of the transaction, then the advice they provide should be objective, credible, fair and independent, helping to minimize uncertainty and potential lawsuits.

It is our view that we’ll start to see changes in fairness opinions that improve the corporate governance and financial advice boards receive on transactions:

  • a move to fairness opinions prepared by truly independent financial advisors receiving a flat fee
  • multiple fairness opinions on transactions, including from both success fee based financial advisors on the transaction and truly independent fixed fee based experts
  • improved disclosure in fairness opinions so that the user can understand the scope of the advisor’s review and the process, analysis and findings behind the advisor’s opinion
  • more independent, fixed fee fairness opinions on plans of arrangement.

These can assist the courts in determining the fairness of the proposed plan, thus contributing to its likely success. These changes will not only improve the credibility of the fairness opinion, they will also contribute to the success of the transaction.

Few deals of any size in Canada are completed without a fairness opinion.