When fairness matters, more disclosure is key


Financier Worldwide Magazine

June 2019 Issue

While voluntary under Canadian law, fairness opinions permeate the Canadian mergers and acquisitions (M&A) landscape. They are used to help demonstrate to stakeholders, directors, market participants and courts the fairness of a proposed transaction (and in the case of directors, the exercise of their fiduciary duties). In recent years, the use, quality and level of disclosure in these opinions has been scrutinised by both courts and regulators. So, in light of this, how does an issuer get the most out of a fairness opinion?

That courts may consider ‘the presence of a fairness opinion from a reputable expert’ in determining whether a transaction is ‘fair and reasonable’ is a good law in Canada, having been confirmed by the Supreme Court of Canada in BCE Inc. v 1976 Debentureholders. Following this decision, it was common practice to include in proxy materials, particularly in relation to plans of arrangement, a fairness opinion, the substance of which was essentially just that – an opinion as to the transaction’s fairness to the addressed stakeholders from a financial point of view, without any description of the material analysis supporting that conclusion.

This practice was challenged in Champion Iron Mines Limited (Re). Justice Brown, while approving the plan of arrangement in the case, gave no weight to the fairness opinion, holding that it contained only the “standard” statement as to fairness, did not disclose the “expert’s reasons for his or her opinion” and, therefore, did not meet the standard for admissibility of an expert report.

The potential effect of the decision in Champion on market practice, and as a result the market’s reaction, was mitigated by both the court’s decision to approve the plan of arrangement, absent reliance on the fairness opinion and two subsequent decisions of the same court, Re Bear Lake Gold Inc. and Re Patents Royal Host Inc. Issued within days of one another, Bear Lake Gold and Patents Royal Host concluded that a fairness opinion is not an expert report but is “an indicia of the fairness and reasonableness of the proposed transaction” and that there was “no compelling reason to depart from the existing practice regarding the use of fairness opinions”. As a result, the use and form of fairness opinions remained relatively consistent notwithstanding the comments in Champion.

The reliance on fairness opinions was again challenged when the Yukon Supreme Court in Re Interoil Corporation questioned the appropriate level of disclosure that a fairness opinion requires to support a position. Fairness opinions, in the court’s view, should be “robust, rigorous and independent opinions from reputable experts to discharge the fiduciary duty of special committees of independent directors and to assist the shareholders in their evaluation of the fairness of an arrangement”.

Without supporting reasons and analysis, the court held the opinion was inadmissible for the purpose of supporting an argument of fairness before the court. A key fault in this case was the failure to disclose that the fee payable for the fairness opinion was contingent on the success of the transaction. A fairness opinion from an independent financial adviser retained on a flat fee is an important factor to assist the court in scrutinising the efficacy of the opinion and the arrangement. Notwithstanding the finding of the court, the arrangement was approved as fair and reasonable.

On appeal, the analysis of the lower court in Interoil was reiterated by the Yukon Court of Appeal, with the court focusing in particular on the need for flat fee arrangements. The Court of Appeal denied the transaction approval. This case received the attention of the market as a warning of how the court might interpret the standard of good disclosure when it comes to fairness opinions.

Following this series of cases, and the shifting burdens placed on fairness opinions, what should an issuer look to include in its disclosure documents? Is a fairness opinion still of merit? And, if so, what should be included in the opinion in order to successfully rely on its conclusion? Our view is, and if market practice is an indication, the view of Canadian counsel more generally is, yes. Fairness opinions continue to form a part of many proxy packages and, to varying degrees, the market has taken the guidance of the courts in Interoil.

A random sample of two dozen proxy circulars issued pre-Interoil, compared with a similar number dated 1 January 2018, reflects that the market standard is shifting to include greater focus on fixed fees and greater reference to the independence of the author of the opinion. To a lesser extent, there has been a shift to more substantive and in-depth disclosure about the approach and the analysis underpinning the opinion. In our view, this practice of focusing more solely (or largely) on the author’s independence and fixed fee requirements in respect of fairness opinions, ignores the case history and comments of the lower courts, and, given the right (or wrong) set of facts, could lead to a transaction being challenged by a court.

What then should an issuer do when the issuer is looking for the greatest chance of their fairness opinion being accepted?

Some guidance may be found in a 2017 staff notice of the securities regulatory authorities in each of Ontario, Quebec, Alberta, Manitoba and New Brunswick. While the note relates primarily to formal valuations in the context of self-dealing transactions, the regulators note in passing that “the board has a responsibility to determine whether a fairness opinion is necessary to assist in making a recommendation to shareholders on a proposed transaction”. The notice further states that, where a fairness opinion is obtained in the case of a formal valuation, the disclosure document provided to shareholders should, among other things: (i) disclose the compensation arrangement (whether a flat fee, a fee contingent on delivery of the final opinion or a success fee) and how the board took that fee arrangement into account; and (ii) a clear summary of the methodology, information and analysis (including, as applicable, financial metrics and not merely a narrative description) underlying the opinion sufficient to enable a reader to understand the basis for the opinion.

In this notice from regulators, we see the regulator mirroring the concerns of the courts with respect to the need for fixed fees and enhanced disclosure, as well as increased quantitative disclosure. The regulator’s view is of course not binding on courts, though, with this guidance, and the history in courts, there is a risk that the practice of focusing largely on the disclosure of independent and fixed fees and not on adequate discussion of the financial metrics and analysis, could be inviting a challenge.

It would seem that for the time being, when dealing with fairness opinions, more is more – more disclosure, more methodology and more analysis. We can see no compelling reason why an issuer seeking to rely on a fairness opinion should include anything less than an opinion, prepared by an independent author, on a flat fee basis that includes, in addition to a discussion of how independence was determined, a fulsome summary of the methodology, information and analysis (including the relevant assumptions, sensitivities and critical factors impacting the determination).

Going forward, this area of law continues to evolve and the Interoil transaction, in particular, continues to be litigated. Most recently, in February 2019, the court in Carlock v. ExxonMobil Canada Holdings ULC awarded Carlock – a dissenter to the plan of arrangement in Interoil – a significant amount of additional consideration to that provided for under the plan of arrangement. While this case has been appealed and did not turn on the matter of the fairness opinion specifically, in light of the case’s focus on fair value and the methodology used to determine it, perhaps more is to come in the evolving practice of defining and defending the fair value of a transaction. An evolution that is sure to change, yet again, how we think about, prepare and use fairness opinions.


Martin E. Kovnats and Sean Mason are partners at Aird & Berlis LLP. Mr Kovnats can be contacted on +1 (416) 865 3419 or by email: Mr Mason can be contacted on +1 (416) 865 4731 or by email:

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