The fair value assessment of the shares of an early-stage public oil sands company was at stake in a long-awaited decision of the Court of Queen’s Bench of Alberta in Deer Creek Energy Limited v. Paulson & Co., Inc. et al. Three groups of shareholders holding approximately 8.8 million shares, or 16.2 per cent of the Deer Creek shares, had exercised their rights to dissent.
The transaction that gave rise to dissenting shareholder rights was the amalgamation of Deer Creek with a newly incorporated company under the Alberta Business Corporations Act (ABCA) in a second-stage transaction a few months after a takeover bid. The bidder, Total E&P Canada Ltd. (Total), acquired 82.4 per cent of the Deer Creek shares through the bid at $31 per share. The bid was commenced in August 2005 and completed on October 11, 2005. In the second-stage amalgamation transaction, completed on December 12, 2005.
Total acquired all of the remaining shares. Deer Creek submitted that the shares have a fair value of $31 per share as at the valuation date of December 9, 2005, or roughly $270 million. The dissenting shareholders submitted that their shares should be valued at between $110 per share and $200 per share, for a total of approximately $1 billion.
At issue were (i) the appropriate valuation methodology, (ii) the adequacy of the process undertaken by the board of Deer Creek in testing the price offered against the value of the company, (iii) the role of hindsight in fair value assessments, (iv) the implications of certain presentations that had been made to investors, and (v) the question of whether synergies and benefits that may have arisen from the acquisition of a control position by Total in the takeover bid either affected the fair value of Deer Creek or should enure to the benefit of the dissenting shareholders.
The trial judge found that the fair value of the Deer Creek shares as of the valuation date was $31 per share. The court concluded that, in this case, the appropriate valuation technique was the market value approach as suggested by the expert valuation witness called by Deer Creek. That value was confirmed by the net asset value approach as calculated by that witness. The trial judge preferred this opinion over the discounted cash flow approach taken by the expert valuation witness called by the dissenting shareholders.
The trial judge noted that the determination of fair value pursuant to the statutory right set out in the ABCA and similar legislation is highly factspecific. Citing precedent case law, the trial judge observed that the court must consider all the evidence that might be helpful, as well as such methods of determining value that might provide guidance — but that in the end it is up to the court to exercise judgment to determine fair value.
The court commented that generally, neither the parties nor the court may rely on hindsight evidence. Events that were not known as of the valuation date or that occurred afterwards are not relevant to determination of fair value on the valuation date.
The trial judge found that the Deer Creek board followed a more than adequate process to market the company and to test the market, and that it was neither outmanoeuvred nor out-negotiated. The court concluded that the results of the marketing efforts were relevant and persuasive evidence of fair value.
The court dismissed submissions by the dissenting shareholders that investor presentations by Deer Creek were indicative of the fair value. The trial judge noted that the investor presentations must be viewed in context and were expressed to be subject to risks, assumptions, uncertainties and disclaimers.
On the final question in issue, the court found that the $31 price, established through negotiation and a counter-bid of a major competitor of Total, captured some (if not all) of the additional benefits attributable to Total acquiring control of Deer Creek. The trial judge was not satisfied that either fairness or policy considerations should lead her to find that the dissenting shareholders are entitled to any additional benefit that might have accrued in the brief period between the date the Total takeover bid closed and the valuation date. She was also not satisfied that the Deer Creek shares had increased in value during that period.
All of the dissenting shareholders have filed appeals of the entire judgment.