A recent decision of Justice Brown of the Toronto Commercial List Court provides a good reminder of the role of both fairness opinions and the Court in plans of arrangement.1 The decision related to a plan of arrangement among Champion Iron Mines Limited (Champion Iron), Mamba Minerals Limited and 2401397 Ontario Inc.
The Role of Fairness Opinions in Plans of Arrangement
It is standard practice for the board of directors of a target company to obtain a fairness opinion stating that the transaction is fair from a financial perspective. This was reinforced by the decision in BCE Inc. v. 1976 Debentureholders,2 where the Supreme Court of Canada noted that in conducting an analysis as to whether a plan of arrangement is fair and reasonable, courts may consider "the presence of a fairness opinion from a reputable expert".3
Although Justice Brown ultimately concluded that the arrangement was fair and reasonable, he noted that he placed no weight on the fairness opinion included in Champion Iron's management proxy circular. He pointed out that the fairness opinion did not disclose the specifics of the actual analysis performed by the financial advisor, which could "inform a reader on the issue of whether the offered consideration was within a minimum range that otherwise could have been obtained in a market-based transaction process."4 Justice Brown observed that "opinion evidence may only be received by a court if adduced through a qualified expert witness (subject to certain exceptions which have no application to this case)",5 and concluded that the fairness opinion did not comply with many of the content requirements of an expert report,6 specifically with respect to the requirement that an expert's report contain such expert's reasons for his or her opinion. Justice Brown found that the fairness opinion simply asserted an opinion without disclosing the reasons for it and, accordingly, was inadmissible for purposes of the application.
This decision serves as a reminder of the purpose of fairness opinions, and that they are not meant to be expert evidence at trial nor are they meant to be determinative or conclusory in nature. Fairness opinions provide assistance to boards of directors in reaching an informed decision on a proposed arrangement, as part of the proper exercise of their fiduciary duty. This decision- making process should include a presentation to the board by the financial advisor rendering the fairness opinion, where further details and financial analyses underlying the opinion are presented to supplement the board's understanding. We would continue to emphasize the importance of fairness opinions to boards in the context of plans of arrangement. In addition, we continue to believe that the presence of a fairness opinion from a reputable expert (together with reference to the fact that financial analyses underlying the opinion was presented to a board) should be emphasized in affidavits supporting an application for a final order approving a plan of arrangement, which may prove helpful in obtaining a final order.
Proxy Circular Disclosure Relating to Financial Analyses and Fees
Although Champion Iron's management proxy circular disclosed that Champion Iron had agreed to pay a fee to its financial advisor for its services, including fees for the delivery of the fairness opinion, the actual amount of the fees was not disclosed. Justice Brown remarked that this made it difficult to ascertain the amount of work the financial advisor performed in preparing the fairness opinion.
Of note is the disclosure relating to fairness opinions in proxy statements filed with the United States Securities and Exchange Commission, including those filed by certain Canadian-incorporated issuers in connection with plans of arrangement.7 These proxy statements typically include summaries of the underlying financial analyses performed by the investment bankers and presented to boards, as well as summaries of the fee arrangements (both recent and current). While this practice is informed by guidance provided by the Securities and Exchange Commission in its review of these proxy statements, it would not be surprising to see this practice ultimately being adopted in Canada.
Courts are not "Rubber Stamps"
Justice Brown's second comment relates to the role of courts in the plan of arrangement process. He noted that a court is not a boardroom; its function is judicial and it is not merely a closing agenda item to check off in the course of a transaction. He took issue with plan of arrangement applications that impose tight schedules and require orders within 24 hours, and noted that judges require time to read, understand and assess the evidence put before them in order to discharge their judicial adjudicative function – they are not "rubber stamps".
In this case, Justice Brown found no reason why there could not have been a gap of at least one business day between the date of the shareholders' meeting and the final hearing. He suggested that counsel must adopt a scheduling approach which provides judges with sufficient time to review and weigh the evidence and arguments put before them.
While the order was granted despite the short timeframe, the Champion Iron decision is a helpful reminder to all parties involved in a plan of arrangement that there is a risk in not providing sufficient time for a court to properly perform its function.