A recent decision of the Yukon Court of Appeal, InterOil Corporation v Mulacek, has potentially significant consequences for corporate governance practices in the context of plans of arrangement.

Fairness opinions in plans of arrangement

When a corporation proposes a plan of arrangement to its shareholders, it is generally considered a best practice of corporate governance to obtain a fairness opinion that assesses the financial fairness of the arrangement for affected shareholders. The fact that the directors sought expert financial advice evidences compliance with their fiduciary duties and, when applying for court approval, is an important factor in persuading the court that the plan is “fair and reasonable”.

InterOil Corporation v Mulacek: Yukon Supreme Court decision

The decision in InterOil Corporation v Mulacek suggests that unless the fairness opinion is thorough, balanced and independent, it may be of limited use as evidence that an arrangement is fair and reasonable.

At first instance, the chambers judge approved an arrangement involving the exchange of the shares of InterOil Corporation for shares of Exxon Mobil Corporation valued at $45 per share, plus a capped “contingent resource payment” (CRP). The judge reviewed InterOil’s board process and the fairness opinion obtained from its financial advisor. With respect to the fairness opinion, the judge found that it:

  • Lacked independence because the expert’s fee was contingent on the success of the arrangement;
  • Failed to disclose the details of the contingency fee;
  • Failed to address the value of the resource assets and the impact of the cap on the CRP so that shareholders could consider whether the arrangement reflected that value;
  • Failed to account for the CEO’s significant financial incentive for the arrangement to proceed; and
  • Was otherwise deficient because it failed to refer to specific documents or facts to indicate what the opinion was based on and lacked analysis of that information.

Despite these findings, the judge found the arrangement “fair and reasonable”. 80% of InterOil’s shareholders voted in favour of it and many of the details lacking in the fairness opinion were evident in the information circular.

InterOil Corporation v Mulacek: Yukon Court of Appeal decision

The Court of Appeal reversed this finding. It held that the shareholders were not in a position to make an informed choice as to the value they would be giving up and the value that they would be receiving. For the reasons outlined above, the fairness opinion was inadequate for that purpose.

In addition to the fairness opinion problems, other facts put the fairness of the arrangement in doubt: the CEO was in a position of conflict; the “independent” special committee likely was not independent; and the arrangement was not a “necessity”. Therefore, the inadequacy of the fairness opinion was not the only basis for the decision. However, the Court’s decision still serves to elevate the importance of a robust and independent fairness opinion, particularly where there may otherwise be some question whether the plan is “fair and reasonable”.

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