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Fairness Opinions – Important Ontario Court Comment

In almost every Canadian M&A transaction, the board of directors of the target company, and often also the acquiring company, will expect their financial advisors to provide a fairness opinion to the effect that the price in the proposed transaction is fair to the company and its shareholders from a financial perspective. These opinions are not legally required, but they are commonly used by boards as evidence that the directors have met their duties in approving the transaction.

Typically, the opinion is relatively short and outlines the credentials of the financial advisor, the background material reviewed to prepare the opinion, and a conclusion that the proposed transaction is fair. The financial advisor will meet with the board of directors and review in detail the analysis it has performed to arrive at its opinion. In most cases, however, that analysis does not find its way into the actual written fairness opinion that is delivered to the board and often made available to the shareholders.

In a recent decision of the Ontario Superior Court of Justice, dated March 28, 2014, Mr. Justice David M. Brown made some important observations about the content of the fairness opinion before him. Justice Brown was being asked to approve a plan of arrangement pursuant to which Champion Iron Mines Limited, a TSX-listed company, would be acquired by Mamba Minerals Limited. He first outlined the well understood requirements for obtaining court approval of a plan of arrangement, which are that the applicant must satisfy the court that: (i) the statutory procedures have been met; (ii) the application has been put forward in good faith; and (iii) the arrangement is fair and reasonable. Justice Brown was satisfied that there had been compliance with the statutory requirements, that the application had been made in good faith with a valid business purpose, and that it was fair and reasonable. He noted, among other things, the 72% premium being paid to the shareholders of Champion Iron, the approval of over 99% of the shareholders, and the unanimous approval of the Champion Iron board of directors and its special committee. Accordingly, he granted the necessary order to approve the plan of arrangement.

Then, he offered some "concluding comments". One of which was that the fairness opinion submitted to him as evidence, and which had also been delivered to the board and to the shareholders, did not meet the Court’s requirements for an expert opinion. The fairness opinion was in the usual form for a Canadian M&A transaction. Justice Brown noted that under the Ontario Rules of Civil Procedure an expert report must 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". This fairness opinion, which simply asserted an opinion without disclosing the reasons for it, was inadmissible as evidence before the Court on an application to approve the plan of arrangement.

Most boards of directors and special committees in the context of an M&A transaction want a professional opinion from a respected firm to the effect that the price in the proposed transaction is fair from a financial point of view. Because the board and special committee have the benefit of several meetings with the financial advisors leading up to the delivery of the written opinion, they generally understand what work was done by the advisor and how they reached their conclusion. The board or the special committee might be content, therefore, to accept a short-form written opinion that does not describe the detailed analysis, because they have that information through presentations that have been made to the board. Following the Champion Iron decision, however, an Ontario Court assessing the fairness of a plan of arrangement is unlikely to take into account the submission of a fairness opinion from a financial advisor, unless that opinion or other related documentation, as delivered to the court, is sufficiently detailed for the court to understand the analysis that was done by the financial advisor.

We believe this will likely lead to more detail in fairness opinions going forward, which will be a significant change to the current practice in Canada.