Canada: Recent Case Affirms Competitive Bid Price As An Indicator Of Fair Market Value

Can dissenters in a public M&A deal expect to get a better valuation than a competitive public bid for their shares? While that was the suggestion made by dissenters in 1843208 Ontario Inc. v. Baffinland Iron Mines Corporation (Baffinland), the decision rendered by the Ontario Superior Court strongly suggests the answer is “no.”

In Baffinland, 1843208 Ontario Inc. brought an application to fix the fair value of shares in the acquisition of Baffinland Iron Mines Corporation at a substantial premium to the only bid procured after a lengthy and robust sales process. The decision demonstrates the weight courts will give to market pricing that results from a robust bid process and, going forward, should give parties more certainty when assessing fair value in dissent actions.

What Happened in the Case

The Baffinland decision is the most recent turn in a case that has been ongoing for well over a decade, triggered by a hostile takeover bid of Baffinland Iron Mines Corporation launched in 2010. The Baffinland board of directors rejected the offer and recommended a bid by a competitor. The two potential buyers then engaged in a bidding war which eventually ended in a joint bid of $1.50 per share. Financial advisors for Baffinland tried to interest 45 other potential bidders during the four-month bidding period, but generated no interest other than the two, who ultimately joined forces.

Although 93% of outstanding shares were tendered to this joint bid, a group of 57 shareholders formed a dissent group and started a proceeding requesting fair value for their 2.5 million shares. They asserted that the court should set a fair value price of $8.91 per share rather than the $1.50 per share price of the joint bid. Fundamentally, they argued that the joint bid created a premature and artificial end to the free-market auction and that it distorted normal market conditions. They wanted a value established by a discounted cash flow analysis rather than the market-based price of the deal.

The Court's Decision

The court, through Justice Osborne, began by noting that statutory provisions do not set out a test for determining the fair market value of shares in an M&A deal. He also noted that, while courts have developed factors that apply in determining fair market value, such determinations are always fact-specific, with factors that carry more weight in one case potentially carrying less or negligible value in others. While “the court is not obliged to accept any or all expert evidence tendered”¹, the question of value is still a matter of the court's judgment after considering and weighing all the evidence.

The court also stated that “evidence of an efficient, open market, consisting of multiple informed participants, is likely the best and most objective evidence of value and is more reliable than theoretical analysis based on assumptions about what a real market might do.”²

After considering over 10,000 pages of evidence, Justice Osborne concluded that the fair market price was the price of the joint bid – $1.50 per share. He noted that the chronology of the action in the case demonstrated that the joint bid price represented the “culmination of a market process” rather than an artificial end or distortion as the dissenters had claimed.³ Both potential buyers had submitted bids for less than $1.50 per share, and during the four month period of bidding, no other bidders were willing to take the risks of the investment, let alone offer a price higher than $1.50 per share. The facts showed that the bidding process was reaching a “natural market conclusion” when the joint bid was submitted.

Takeaways from the Case

The decision highlights a few issues that investors and companies alike ought to keep in mind. For example, when determining fair market value, courts will likely favour market-based evidence – such as deal price or share trading prices – over theoretical valuations. In other words, the deal price for a publicly-traded company, particularly after a thorough open-market sales process, often indicates the ceiling for “fair value”.

Footnotes

1. 1843208 Ontario Inc. v. Baffinland Iron Mines Corporation,  Paragraph 27

2. 1843208 Ontario Inc. v. Baffinland Iron Mines Corporation, Paragraph 27

3. Ibid, Paragraph 78.

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