Canada: Fair Enough – New Commercial List Decisions Reverse Course On Fairness Opinions

Two recent Commercial List decisions have questioned the discussion of fairness opinions set out in (Re) Champion Iron Mines Limited,¹ and appear to have reset the court's position on the importance of fairness opinions in plans of arrangement.

Champion's fairness opinion analysis

Our recent bulletin entitled "Fair enough – the Commercial List reconsiders fairness opinions and the timing of plans of arrangement" discussed a decision of Justice Brown in (Re) Champion Iron Mines Limited.² In that decision, Justice Brown questioned the evidentiary value of conventional fairness opinions provided during corporate transactions conducted by way of plan of arrangement.

Justice Brown approved the transaction, ultimately finding it fair and reasonable to stakeholders. However, he expressly gave no weight to the fairness opinion that was provided to the board as part of its due diligence process. Justice Brown found the fairness opinion did not rise to the level of scrutiny required of expert evidence to be tendered in court.

Recent cases consider Champion's reasons

In two recent Commercial List decisions, a different approach was taken to the consideration of fairness opinions when considering plans of arrangement. In the first decision, Bear Lake Gold Ltd. (Re),³ Justice Wilton-Siegel addressed the Champion decision directly, stating he did not share Justice Brown's concern about requiring fairness opinions to meet the high standard of expert evidence. Instead, he explained the significance of the fairness opinion to the court in a commercial transaction as being two-fold:

First, it is evidence that the special committee or board of directors has considered the fairness and reasonableness of the proposed transaction on the basis of objective criteria to the extent possible. Second, the publication of the fairness opinion in the information circular allows the shareholders to reach their own conclusions regarding the integrity of the directors' recommendations and regarding the fairness of the transaction to them from a market perspective.⁴

Accordingly, Justice Wilton-Siegel stated that there "is no compelling reason to depart from the existing practice regarding the use of fairness opinions for the purposes of court approval of statutory arrangements involving M&A transactions where there is no valuation opinion." He did go on to note, however, that where a party seeks to qualify a fairness opinion as expert evidence, particularly in a contested transaction, the detailed analysis underlying a fairness opinion will be required if sought by dissenting shareholders.

The Bear Lake Gold decision was followed one day later by the reasons of Justice Newbould in Re Patents Royal Host Inc.⁵ In that case, the applicant addressed the Champion decision directly, stating in its supporting affidavit that the fairness opinion would not be relied on as expert evidence. Considering the necessity of this inclusion, Justice Newbould explained the significance of fairness opinions as follows:

The purpose of a fairness opinion is a commercial one. It is an opinion to be considered by the board of directors and the shareholders in a commercial context. It is not an expert report in a litigation context. If the board or the shareholders are not satisfied with the report, they can vote with their feet and not proceed with or approve the arrangement.⁶

Based on these two decisions, the Commercial List appears inclined to once again treat fairness opinions in the manner they are intended – to demonstrate evidence of the board's due diligence process and provide some information to help shareholders reach their own conclusions as to whether the arrangement is both fair and reasonable.

Footnotes

1 2014 ONSC 1988.

2 2014 ONSC 1988.

3 2014 ONSC 3428.

4 Bear Lake Gold, supra at para 15.

5 2014 ONSC 3323.

6 Patents Royal Host, supra at para 8.

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