On March 28, 2014, the Ontario Superior Court of Justice issued a decision relevant to the forms of fairness opinion commonly rendered by financial advisers in connection with plan of arrangement transactions, and affirming the substantive adjudicative role a court will play in approving such transactions.
PLAN OF ARRANGEMENT APPROVAL
In Champion Iron Mines Limited (Re), Justice David M. Brown considered an application by Champion Iron, an Ontario corporation listed on the TSX, for approval of a plan of arrangement with Mamba Minerals Limited under the Business Corporations Act (Ontario) whereby Mamba and its wholly owned Ontario subsidiary would acquire Champion Iron. Mamba is an Australian corporation listed on the Australian Securities Exchange.
The court confirmed that in seeking approval of a plan of arrangement, the applicant must satisfy the criteria (set out by the Supreme Court of Canada in its BCE Inc. v. 1976 Debentureholders decision) that the statutory procedures have been met, application has been put forward in good faith and arrangement is fair and reasonable. For a court to conclude that an arrangement is “fair and reasonable,” it must be satisfied that the arrangement has a valid business purpose and objections of those whose legal rights are being arranged are being resolved in a fair and balanced way.
Justice Brown found that the Champion Iron arrangement satisfied the plan of arrangement criteria. In particular, he concluded that the arrangement was “fair and reasonable” based on, among other factors, the significant premium being paid to Champion Iron’s shareholders and the fact that over 99 per cent of votes cast at the Champion Iron shareholders’ meeting were in favour of the transaction. Following his approval of the transaction, Justice Brown made two concluding comments that were critical of the process commonly undertaken by parties seeking approval of plan of arrangement transactions.
Champion Iron’s management information circular included a fairness opinion from a financial adviser which concluded that the consideration to be received by the shareholders of Champion Iron was fair – from a financial point of view – to such shareholders. The opinion included a description of the adviser’s engagement, credentials, independence, scope of review, assumptions and limitations, and approach to fairness. Justice Brown noted that the fairness opinion filed by Champion Iron closely resembled the form of opinions typically seen on plan of arrangement transactions.
Justice Brown held that the fairness opinion was inadmissible as expert evidence in support of the arrangement application for two reasons. First, the fairness opinion was not adduced through properly qualified expert affidavit or testimony. Rather, it was simply appended to the management information circular. Second, the fairness opinion did not meet the requirements governing the content of expert evidence before Ontario courts.
It was the second reason on which Justice Brown focused his analysis. He took issue with the fact that in the fairness opinion the financial adviser did not “disclose the specifics of the actual analysis which it had performed – the “number crunching,” so to speak – 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.”
The fairness opinion therefore did not meet the requirement in the Ontario Rules of Civil Procedure that an expert’s report contain the “expert’s reasons for his or her opinion, including, (i) a description of the factual assumptions on which the opinion is based, (ii) a description of any research conducted by the expert that led him or her to form the opinion, and (iii) a list of every document, if any, relied on by the expert in forming the opinion.” The fairness opinion “was 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.” As a result, in conducting his fairness analysis, Justice Brown expressly “placed no weight” on the opinion.
Justice Brown recognized that fairness opinions are prepared for multiple purposes, including to assist a special committee or board of directors in evaluating whether to recommend a transaction, and to assist shareholders in determining whether or not to vote in favour of such transaction. However, if the substance of a fairness opinion (rather than the mere fact that an opinion was obtained) is to be relied upon by a court as expert evidence in support of an arrangement, Justice Brown’s decision indicates that the fairness opinion must include sufficient substantive analysis to meet the court’s evidentiary requirements.
COURTS ARE NOT ‘RUBBER STAMPS’
Justice Brown went on to state, as a judge who regularly hears plan of arrangement applications, “one sometimes develops the feeling that corporate lawyers regard the role of courts in the whole plan of arrangement process as nothing more than one box to check off on a closing agenda.” He issued a reminder that a court is not a boardroom and it must play a judicial role in the plan of arrangement process and not “an agenda checklist-type role.”
Justice Brown also addressed the tight timing of the application for the order and short time-frame a judge typically has for reviewing arrangement materials. In Champion Iron’s case, the shareholders meeting to approve the arrangement had been held in the morning on the day before the hearing and final application materials were delivered to the court for review that afternoon. The applicant indicated that the final order was required by 1 p.m. on the date of the hearing to meet the planned corporate filing deadline. Justice Brown stated that this was not “a schedule which showed proper respect for the adjudicative function of the court” and suggested that a gap of at least one business day should have been added between the date of the shareholders meeting and the date of the court hearing. In Justice Brown’s view, counsel “must adopt a scheduling approach which affords judges adequate time to review and weigh the evidence and arguments put before them.”
While Justice Brown’s comments did not impact the outcome of the Champion Iron arrangement, they provide practitioners and financial advisers with a useful reminder that courts play a substantive adjudicative role in approving plan of arrangement transactions, and must be given sufficient time and evidence to do so.