Fairness Opinions in Canada: it’s about more than being “fair”
As we’ve learned from our previous articles, fairness opinions are not explicit requirements in corporate environments but such bodies of work represent the multitude of best practices that ensure that members of a board have their personal liability limited under certain circumstances like related-party transactions, proposed mergers and plans of arrangements.
In this article, we’ll review the relevant Canadian cases, securities regulations and corporate statutes that represent the body of evidence to support these best practices and describe the conclusions from the combined corpus of outcomes.
Corporate Law and Directors' Duties
In Canadian corporate law, directors have a fiduciary duty to act honestly and in good faith with a view to the best interests of the corporation. Obtaining a fairness opinion, typically from an independent financial advisor, is considered a key step for a board (or a special committee of independent directors) to demonstrate it has acted with due care and diligence in making an informed decision about a material transaction.
Role in Plans of Arrangement: Fairness opinions are nearly universal in transactions structured as a Plan of Arrangement under statutes like the Canada Business Corporations Act (CBCA) or provincial equivalents, which require court approval. Courts assess whether an arrangement is "fair and reasonable," and the presence of a robust fairness opinion is a factor courts consider in this assessment, as confirmed by the Supreme Court of Canada in BCE Inc. v. 1976 Debentureholders (more about this case later).
Expert Evidence Debate: Historically, there was debate about whether a fairness opinion needed to meet the stringent requirements of expert evidence in a court proceeding (e.g., in a final order hearing for a plan of arrangement). While some rulings have taken a stricter view (Re Champion Iron Mines), subsequent key decisions have generally upheld the established practice, holding that they primarily serve as evidence of the board's informed consideration. However, the rigor and independence of the opinion remain paramount.
So under current CBCA guidelines, the completion of a fairness opinion from a qualified financial advisor is a best practice for boards. Recent case law has created some determination of what comprises a qualified financial advisor and the role that they play in the transaction.
Canada Securities Regulations and Disclosure
Canadian securities regulation as published by the Canadian Securities Administrators, relates specifically in conflicted transactions (such as related-party events), sets specific requirements for valuations and disclosures that influence the use and content of fairness opinions.
Multilateral Instrument 61-101 (MI 61-101)
This instrument, Protection of Minority Security Holders in Special Transactions, applies to transactions that pose increased risk to minority shareholders, such as insider bids, issuer bids, and certain related party transactions.
Formal Valuation Requirement: In most transactions covered by MI 61-101, the issuer is required to obtain a formal, independent valuation (not just a fairness opinion) from a qualified valuator, subject to certain exemptions. This formal valuation must disclose a specific valuation range.
Disclosure Standards: Canadian Securities Administrators (CSA) Staff Notice 61-302 provides guidance on disclosure relating to fairness opinions, even when a formal valuation is not required. Disclosure should include:
The compensation arrangement with the financial advisor (e.g., flat fee, success fee), though not the actual dollar amount.
A summary of the methodology, information, and analysis used to allow a reader to understand the basis for the conclusion. (we’ll talk more about this later)
CIRO Dealer Member Rules
The Canadian Investment Regulatory Organization (formerly Investment Industry Regulatory Organization of Canada, or IIROC) rules govern disclosure for dealer members providing fairness opinions for transactions subject to MI 61-101. These rules stipulate that a fairness opinion must contain sufficient disclosure for the directors and security holders to understand the principal judgments and underlying reasoning of the opinion provider.
CSA Staff Notice 61-302 - Process & Protection of Minority Shareholders
Staff notices are issued to allow for provincial securities regulators and issuers to understand and unify execution and enforcement procedures for a specific section of securities law and regulations. This particular case, 61-302 provides the operational framework for how 61-101 will be implemented.
In particular, 61-302 is focused on protecting the rights of minority shareholders with the following:
The creation of a Special Committee of the Board
The intention of this committee is for it to be independent of those directors who are free from conflict and are actively engaging in the negotiation of transaction terms
This committee has the ability to retain it’s own independent legal and financial advisors
Enhanced disclosure documents, in order for the minority shareholders to make an informed decision there should be sufficient transaction disclosure such that
They understand the context and background of the transaction
The review and approval process is overseen by the Special Committee
The reasoning and analysis of the board/special committee regarding the transactions desirability and fairness
All reasonable alternatives have been examined and reviewed
Guidance, Financial Advice & Fairness Opinion
The company circular about the transaction must disclose the type of compensation that the financial advisor is receiving (performance-based or fixed) and the board's consideration of the transaction
If a Fairness Opinion is attained, that the circular must provide sufficient disclosure regarding the methodology and analysis so that the reader (ie. minority shareholder) can understand the judgements and reasoning being the fairness opinion.
Canadian Case Evidence
As described briefly in our first article about fairness opinions (Fairness Opinions: Session1) the most recent Canadian case law related to fairness opinions is from the case entitled InterOil v. Mulacek.
Summary of the facts:
ExxonMobil won a bid to purchase InterOil (then a NYSE listed company) whose primary assets comprised of a major Gas field off the coast of Papua New Guinea. As part of the closing process ExxonMobil approached the Yukon Court (where InterOil was incorporated) to review and approve a Plan of Arrangement (typical in most large Acquisition transactions).
Morgan Stanley was InterOil’s financial advisor to the transaction and provided a fairness opinion to InterOil’s board stating that ExxonMobil’s offer price was fair and reasonable. InterOil held a special shareholders meeting to approve the transaction and over 80% of shareholders (including 42% owned by ExxonMobile) approved the transaction.
InterOil’s former CEO, Philippe Mulacek, objected to the proposed acquisition on the basis that, among other things, the process undertaken by InterOil demonstrated deficient corporate governance and inadequate shareholder disclosure and the proposed acquisition was neither fair nor reasonable.
Legal Outcomes:
In September 2016, the Yukon Supreme Court held a fairness hearing to consider the application for approval of the plan of arrangement. Despite noting that the process undertaken by the InterOil board of directors demonstrated “deficient corporate governance and inadequate disclosure,” the Yukon Supreme Court ultimately approved the Exxon Arrangement as being fair and reasonable, citing the results of the shareholder vote and an increase in the InterOil share price following news of the proposed transaction. Mr. Mulacek appealed this decision to the Yukon Court of Appeal.
On November 4, 2016, the Yukon Court of Appeal found in favour of Mr. Mulacek on the appeal, dismissing the application for approval of the Exxon Arrangement on the basis that it had not been established to be fair and reasonable.
More importantly the Yukon Court of Appeal based their findings on the exclusion of any valuation of the contingent portion of the consideration under the ExxonMobil transaction and the contingent success fee payable to the financial advisor (Morgan Stanley) “undermined the utility of the fairness opinion to the directors, the shareholders and the Court.” In addition, the Court of Appeal found that a fairness opinion, which contained no information on the valuation analysis, provided no real assistance to the shareholders or the court in evaluating the transaction.
The fairness opinion relied on by InterOil from Morgan Stanley was contrasted with an opinion on financial fairness obtained by Mr. Mulacek from Paradigm Capital, which contained detailed analysis, including multiple valuation methodologies, and concluded that the consideration being offered by ExxonMobil was “inadequate from a financial point of view, to the shareholders of InterOil.”
Following the decision, the transaction was renegotiated and resubmitted for court approval as an amended arrangement. This time, the board corrected the deficiencies by:
Obtaining a Second Opinion: A new financial advisor was retained to provide a fairness opinion on an independent, fixed-fee basis.
Long-Form Disclosure: The new opinion was a "long-form" document that included detailed financial analysis, methodologies, and valuation ranges.
The Yukon Supreme Court then approved the amended arrangement, noting that the fixed-fee, long-form fairness opinion set a "minimum standard" or "useful template" for disclosure in future public M&A plans of arrangement.
Other important Canadian Cases:
White InterOil is the most recent and important case for Canadian boards to consider, there are three other cases that have varying degrees of importance:
1. BCE Inc. v. 1976 Debentureholders (2008)
This is the foundational Supreme Court of Canada decision that sets the overall legal test for court approval of a Plan of Arrangement.
Key Principle: The SCC confirmed that for an arrangement to be approved, the court must be satisfied that it is "fair and reasonable."
Relevance to Fairness Opinions: The Court explicitly recognized that "the presence of a fairness opinion from a reputable expert" is an indicia (an indicator) of the transaction's fairness to security holders. This established the legal value of the opinion as evidence of the board's informed decision-making process.
The quality of the report and author is discussed in Champion and Bear Lake Gold below.
2. Re Champion Iron Mines Ltd. (2014)
This Ontario Superior Court decision temporarily introduced significant uncertainty into the established practice.
Key Issue: The court refused to give any weight to the fairness opinion because it failed to satisfy the technical requirements of an expert report under the provincial Rules of Civil Procedure (specifically, not disclosing the expert's reasons or analysis).
Impact: This decision suggested that the long-standing "short-form" fairness opinion used in Canada might be inadmissible as evidence in court, causing an initial upheaval in M&A practice.
As a result of this case, most fairness opinions that are presented to boards must be complete in their analysis and not boilerplate letters or powerpoint presentations.
3. Re Bear Lake Gold Ltd. and Re Royal Host Inc. (2014)
These two subsequent decisions, from the same Ontario Superior Court, immediately mitigated the impact of Champion Iron Mines.
Key Principle: The courts held that fairness opinions in M&A transactions do not have to meet the full requirements of expert evidence. Their primary role is (1) to provide evidence of the board's due care and (2) to inform shareholders (as an "indicia of fairness").
Relevance: These cases confirmed the existing, more flexible Canadian practice, pushing back against the stricter Champion Iron Mines rule, but they did not settle the debate on content or independence.
So while boards still don’t need an “expert” to present the analysis, boards still need a full analysis for them to review and approve in order to maintain their independence.
4. HudBay Minerals Inc. (2009) (Securities Regulatory Guidance)
While not a court case regarding an arrangement's fairness, this Ontario Securities Commission (OSC) proceeding offered a strong caution often cited by courts.
Key Issue: The OSC expressed the view that a fairness opinion prepared by a financial advisor who is paid a success fee does "not assist directors comprising a special committee of independent directors in demonstrating the due care they have taken" in complying with their fiduciary duties.
Relevance: This regulatory view on independence and success fees laid the groundwork for the more forceful judicial pronouncements in the later InterOil decision.
As a result of this guidance and the InterOil decision, it is a best practice that the fee paid to the financial advisor preparing the fairness opinion be a flat vs performance-based fee.
In Summary
Boards of Canadian companies who have minority shareholders and engage in related party or material transactions should continue the practice of engaging a financial advisor to provide them with a fairness opinion of the transaction. In Canada, the case law and securities regulations suggest:
The advisor be paid a fixed fee for the fairness opinion
The advisor does not necessarily need to be considered an “expert” as under the rules of Civil Procedure but is a competent firm and individual
The advisor prepare a completely analysis and presentation for the board to use in its deliberations that forms part of the board minutes and then, at the board’s request, another letter which provides the appropriate level of disclosure for minority shareholders to review
