A recent decision of the Ontario Superior Court of Justice (Commercial List) brought to the fore the role of fairness opinions in solvent arrangement transactions. In Re Champion Iron Mines Limited the court approved the arrangement, but deemed the fairness opinion to be inadmissible on the basis that it failed to disclose the reasons underlying its conclusion. The case represents a small but important shift in the judicial approach to fairness opinions and, on a broader level, a reproach to what Justice Brown described as the view of the corporate bar that the courts represent no more than a "box to check off on a closing agenda".
The framework for court approval of a plan of arrangement was established in BCE Inc v 1976 Debentureholders.(1) The Supreme Court of Canada held that the applicant bears the onus of showing that:
- statutory procedures have been met;
- the application has been put forward in good faith; and
- the arrangement is fair and reasonable.
With respect to the latter, the court looks to whether the arrangement has a valid business purpose and whether it resolves the objections of those whose rights are being arranged in a fair and balanced way. It is in connection with this last inquiry that a fairness opinion from a "reputable expert" is sometimes put forward by the applicant in an effort to demonstrate the fairness of the transaction.
In Champion the target obtained a fairness opinion from a financial adviser which concluded that, from a financial point of view, the transaction was fair to shareholders. The report included no specifics with respect to the underlying analysis that was performed in preparing the opinion; nor was there any mention of the fees paid to the financial adviser, which could have indicated the amount of work performed.
The fairness opinion was relied on by the board of the target and provided to shareholders in connection with the proxy circular for the meeting to approve the arrangement.
The court found that, from an evidentiary perspective, an opinion adduced as expert evidence is admissible only if it is accompanied by the reasons that informed the opinion. These included the factual assumptions on which the opinion is based, a description of any research that led the expert to the opinion and a list of every document relied on by the expert in forming the opinion.
In this case, the fairness opinion was criticised as "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, the fairness opinion was ignored in conducting the fairness analysis.
The court also criticised the tight timeframe that counsel proposed for receipt of the final order. Justice Brown suggested that this type of expectation did not show proper respect for the "adjudicative function of the court" and implied that the deal makers saw the court as performing a mere "rubber-stamp" function in the transaction. He suggested that counsel should adopt a scheduling approach that provided the court with "adequate time" to consider the application and that, in this instance, at least one business day would have been appropriate.
The ruling has important implications for the disclosure in fairness opinions and raises doubt as to whether the existing 'cookie-cutter' structure, which excludes any reference to the underlying financial analysis will be admissible going forward. It also elicits more fundamental questions about how to characterise fairness opinions and whether decisions in different areas of the law could inform this analysis. In other contexts, courts have distinguished between expert reports prepared exclusively for the purposes of litigation, which must conform strictly with the Rules of Civil Procedure, and those prepared for some other purpose but nonetheless produced at trial, which are given more latitude.(2)
By extension, a fairness opinion delivered for the benefit of the board of directors could attract less scrutiny than an expert report prepared solely for the purposes of litigation. Moreover, if fairness opinions are properly characterised as expert reports and subject to the full rigour of its evidentiary standard, what further obligations might attach? Although it is standard practice, for example, for counsel to comment on draft fairness opinions in the arrangement context, this practice has been condemned in other contexts.(3)
In short, by making explicit the characterisation of fairness opinions as expert reports, Champion sets the stage for a number of trends outside of arrangement transactions to influence the way that the courts consider fairness opinions.
For further information on this topic please contact Colin Cameron-Vendrig, Alfred LJ Page or David Surat at Borden Ladner Gervais LLP by telephone (+1 416 367 6000), fax (+1 416 367 6749) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Borden Ladner Gervais LLP website can be accessed at www.blg.com.