In most Canadian M&A transactions, shareholders are entitled (either by statute or court order) to dissent from a transaction and be paid the fair value of their shares. Most dissent and appraisal cases settle, with the result that there are relatively few court decisions of note. Absent settlement, a court must determine the fair value (FMV) of the shares. In the mining context, this task may be complicated by the prospect of valuing exploration lands unsupported by a “NI 43-101” (Standards of Disclosure for Mineral Projects) report or data demonstrating economic mineralization.
In Re Nord Gold SE,1 the Ontario Superior Court decided a valuation case in the junior mining context. Shareholders of Northquest Ltd. representing 0.86% of its common shares dissented from a plan of arrangement following the company’s takeover by Nord Gold SE. There are a number of takeaways from this case:
- If court proceedings become necessary, the company should file first unless there are good reasons to not do so. Under most Canadian corporate statutes,2 the company is obliged to initiate a proceeding within a specified time for the court to determine the FMV of common shares. Otherwise, any dissenting shareholder may bring a proceeding to determine FMV and may be awarded their costs notwithstanding the outcome of the litigation. Nordgold was in ongoing negotiations with the dissenting shareholders that continued beyond the time for Nordgold to commence a FMV proceeding. Without warning, the dissenters commenced litigation. Nordgold immediately commenced a FMV proceeding in which it explained its rationale for not rushing to court. Throughout the ensuing proceeding, Nordgold moved first during every litigation milestone.
- The parties should retain independent and qualified experts to opine on FMV. In a dissent proceeding, although no party has the onus of proving FMV, the court relies exclusively on the parties’ evidence – typically, expert evidence.
- The dissenters unsuccessfully challenged the independence of Nordgold’s valuation expert. Nordgold had retained the investment bank that had provided a valuation opinion for Northquest’s board. In other words, Nordgold retained the expert who was on the other side of the transaction when it was contested, thus providing it with an additional ground to successfully argue that the expert was indeed independent.
- Nordgold successfully challenged the admissibility of the dissenters’ valuation opinion. Despite retaining an expert, the dissenters tendered a “group opinion” through the affidavit of one of the dissenters. The Court determined that the opinion of an interested party was not independent and therefore, not admissible.
- Nordgold successfully argued that the dissenters’ expert in “mineral property valuation” was not a business valuator and thus, not qualified to opine on the FMV of shares.
- The valuation opinion must rely on relatively current exploration results. These results may be filed as part of a NI 43-101 report or an affidavit from a company employee acting as a “participant expert”.3 The latter approach is more cost-effective and reasonable if there are no material changes to resource estimates since the last NI 43-101 report. In Re Nord Gold SE, the Court rejected the dissenters’ argument that Nordgold’s exploration manager lacked the independence to opine on the significance of recent drilling results.
- CIMVal is only one of several methodologies that may be used to value common shares. The dissenters argued that Nordgold’s valuation opinion was not reliable because it did not apply CIMVal standards. The Court accepted Nordgold’s argument that CIMVal is only one of several tools available to a valuation expert and is not a mandatory valuation methodology in dissent proceedings.
- Non-economic mineralization will likely be excluded without compelling expert evidence. The dissenters unsuccessfully argued that the FMV of their common shares should include the purported value of mineralization outside the “Whittle Pit” model and unexplored land with no demonstrable economic mineralization. In the circumstances of this case, the court accepted evidence applying a standard of whether there were “reasonable prospects for eventual economic extraction” to determine whether mineralization should inform FMV.