Recent developments in Canadian public mergers & acquisitions

June 2017  | SPECIAL REPORT: MERGERS & ACQUISITIONS

Financier Worldwide Magazine

June 2017 Issue


The last 12 months have been characterised by a number of significant developments in the regulation and practice of Canadian public M&A. During the period there has been: (i) a substantial overhaul of the early warning reporting regime (the Canadian analogue to Regulation 13D reporting in the US); (ii) major amendments to the rules governing takeover bids, including changing the minimum bid period from 45 days to 105 days, resulting in (iii) a virtual end to the use of shareholder rights plans; and (iv) an important regulatory decision addressing the role of private placements as a defensive tactic in the context of contested transactions. Perhaps most significantly, however, was a recent decision rendered by the Yukon Court of Appeal in November 2016 in the proposed acquisition of InterOil Corp. by ExxonMobil, which cast doubt on longstanding market practice in Canada regarding fairness opinions and the role of financial advisers in Canadian M&A.

In the InterOil case, ExxonMobil’s acquisition of InterOil for $2.3bn was structured as a court-approved plan of arrangement, a common acquisition technique in Canada. Arrangements in Canada require court approval, in addition to shareholder approval. At the hearing called to consider the arrangement, the court must determine that the arrangement is fair and reasonable in order to approve the arrangement. All security holders in the company being arranged have the right to appear in court and to make submissions to the court as to whether the arrangement is fair and reasonable. Courts have tended to approve the vast majority of transactions negotiated between arm’s length parties where shareholders have approved the transaction by votes in excess of 67 percent.

In Canada, independent fairness opinions that include detailed intrinsic valuations and that are disclosed in substantial detail in the proxy materials sent to shareholders, are only mandated by securities laws in public company mergers or acquisitions that are related party transactions. In transactions not involving related parties, target public company boards have historically obtained fairness opinions from their financial advisers to the effect that the consideration to be received by shareholders in a transaction is fair to them from a financial point of view, in order to assist the directors in establishing that they have fully complied with their fiduciary duties in approving the transaction in question. Usually the financial advisers were compensated on the basis of a success fee contingent upon the completion of the transaction, among other reasons to reduce the cost burden on the company if the deal failed.

In contrast to US practice, where fairness opinions typically include a detailed valuation of the target company, and where the disclosure normally includes the amount and nature (either fixed or contingent on the success of the transaction) of the fee owed to the financial adviser, Canadian fairness opinions have typically been ‘short form’, in that the disclosure to shareholders did not address valuation methodology or specific valuation figures, nor did it disclose the amount or nature of the fees payable to the financial adviser. In contrast to this practice, the Yukon Court of Appeal concluded that a court considering the fairness of an arrangement could not rely on a fairness opinion delivered by a financial adviser who was paid a success fee contingent on the completion of the transaction, especially where the fairness opinion did not include an intrinsic valuation of the target, and the disclosure to shareholders did not include a detailed discussion of the methodologies used to arrive at a view on value. On the facts of the InterOil case, the Yukon Court of Appeal concluded that it had insufficient evidence to determine that the arrangement was fair and reasonable, notwithstanding that 85 percent of the shares had been voted in favour of the arrangement, and the dissident shareholder, who owned 10 percent of the shares, had dissent and appraisal rights available to him. The Court suggested that boards approving arrangements involving Canadian public company targets, even ones with no related party aspects, should obtain and fully disclose a detailed long form fairness opinion provided by a financial adviser on a fixed fee basis without any success fee – a suggestion that was affirmed in the Yukon Supreme Court’s approval of ExxonMobil’s second attempt to acquire InterOil in March 2017.

The Court of Appeal’s break from longstanding market practice has sparked considerable debate as to the ‘best practices’ applicable to fairness opinions going forward. Some suggest that long form fairness opinions, including a valuation of the target, provided on a fixed fee basis, would become the new norm. In InterOil’s second attempt to obtain court approval for its arrangement with ExxonMobil, it engaged a second, independent financial adviser on a fixed fee basis to provide a fairness opinion that included a detailed valuation.

However, elsewhere in Canada, practice has been mixed since the InterOil decision. Though some target boards have engaged a second independent financial adviser on a fixed fee basis to provide a long form fairness opinion, about half of the target boards involved in arrangements since InterOil have elected to engage a single financial adviser on a fixed fee basis to prepare a detailed opinion and have included in the proxy materials detailed disclosure of the advisers’ views on value and valuation methodology.

In addition, regardless of the nature of the primary financial adviser’s fee, most financial advisers are now being asked to provide a modified long form fairness opinion that reports on the valuation methodology used by the financial adviser. It is worth noting, however, that the Canadian practice in non-related party transactions has not yet evolved to the point of providing detailed, specific valuation figures, as is customary in the US.

Although disclosure in proxy materials has not yet adopted the practice of specifying the size of the fee payable to the financial adviser, each disclosure regarding fairness opinions since InterOil has disclosed whether the fee is contingent upon the successful completion of the transaction. In some cases the proxy materials disclose the proportion of the financial adviser’s aggregate fee that was contingent on the success of the transaction and the proportion that was fixed. While it is too early to draw definitive conclusions, the trend in Canada appears to be for target boards to engage a single financial adviser on a fixed fee basis not contingent on the completion of the transaction, and to request a fairness opinion that, while perhaps not including specific valuation figures, nonetheless sets out the valuation methodologies used in the financial adviser’s analysis. We suspect this trend will continue and become the norm in Canadian practice.

 

William M. Ainley is a partner at Davies Ward Phillips & Vineberg LLP. He can be contacted on +1 (416) 863 5509 or by email: wainley@dwpv.com.

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