Ontario Court Finds Deal Price to be Strong Evidence of Fair Value

Decision reinforces approach to “fair value” determination previously established by the Yukon Court of Appeal

In a recent decision regarding Baffinland Iron Mines Corporation, an Ontario Superior Court ordered that the “fair value” of shares held by shareholders dissenting from a takeover bid transaction was the market value of the shares used in the bid.

The decision is consistent with the approach recently taken by the Yukon Court of Appeal, and supports the importance of the transaction price in court determinations of “fair value” for the shares of dissenting shareholders.

Dissent rights have been a high profile issue recently in the landscape of Canadian shareholder activism. In 2022, SkyLaw was engaged by a shareholder who wished to exercise statutory dissent rights in connection with a controversial plan of arrangement involving Turquoise Hill Resources Ltd., then a TSX-listed mining company, that would result in Rio Tinto plc acquiring the 49% of the outstanding shares of Turquoise that it did not already own for CAD$4.24 billion.

Rio Tinto offered two dissenting shareholders unique deal terms with respect to dissent and dispute resolution processes, including immediate payment of 80% of the transaction price, if they withheld their votes at the shareholder meeting to approve the transaction, rather than voting against it.

We worked with our client to make submissions to Turquoise Hill and the securities commissions in Quebec and Ontario. Our filing can be found here. Among other things, we submitted that the arrangements with the large dissenting shareholders were contrary to the general securities law principles of fairness and equal treatment of shareholders.

After a review by the securities commissions, Rio Tinto then made the same deal terms available to all dissenting shareholders, and the transaction closed. It remains to be seen whether this transaction will set a precedent in cases where there could effectively be a two-tiered system for determining the price to be paid for shares.

Background

Baffinland Iron Mines Corporation was a TSX-listed exploration-stage mining company whose principal asset was the “Mary River” mine on Baffin Island, Nunavut, one of the northernmost mines in the world. While the company boasted that the mine was one of the richest iron ore deposits ever discovered, there would be significant costs and logistical challenges in bringing the ore to market. Baffinland could not do it alone.

A review of potential solutions culminated in competing bids, and eventually a joint bid, by ArcelorMittal S.A. and Nunavut Iron Ore Acquisition Inc. at $1.50 per share. There were no other bidders despite a canvas of the market, and a fairness opinion found that the bid price was within a range of fair values.

Baffinland’s shareholders seemed to agree: 93% of the outstanding shares of Baffinland were initially tendered to the joint bid. In the second step of the business combination, the acquirors purchased the remaining shares of Baffinland that they did not already own by way of a plan of arrangement under the Business Corporations Act (Ontario).

A small number of shareholders dissented from the resolution approving the plan of arrangement. Pursuant to the Act, a dissenting shareholder who does not tender to a bid is entitled to be paid the “fair value” of its shares as of the day before the resolution is adopted, and if the dissenting shareholder and the corporation cannot agree on what constitutes “fair value”, the corporation may apply to the court to fix a fair value, a solution known as the appraisal remedy. It was on this basis that Baffinland brought its application.

The plan of arrangement closed in 2011, but this application was only decided recently as a result of being subject to a significant stay of proceedings to address a class action arising out of the takeover.

Baffinland claimed that the fair value of its shares was the value assigned to them in the acquisition: $1.50 per share. The dissenting shareholders, citing the scope and quality of the iron ore deposits at the mine, submitted that the fair value was in fact $8.91 per share. The dissenting shareholders also sought interest on the share price for the period since the plan of arrangement closed.

Fair Value

The court found that the “fair value” of Baffinland’s shares was $1.50, the negotiated deal price used in the takeover transaction. Although both sides presented expert reports on Baffinland’s value, the court found that the value assigned in the consummated market transaction was an “important and accurate” indication of the fair value of the shares.

Determining Fair Value

The Act does not set out a test for determining the fair value of shares. There are a number of ways to value shares, including the market value (based on quotes from the stock exchange), the net asset value (taking into account the current value of the company’s assets), and the investment value (relating to the earning capacity of the company), or a combination of the foregoing.

However, the court observed that there is no particular set of factors or rules which must be followed: it is a fact-based analysis. In each case, a court must consider all the evidence that might be helpful and the particular factors of the case, and exercise the best judgment that can be brought to bear on all of the evidence and all of the factors.

The court also observed that the appraisal remedy is a “safeguard, not a bonus”; dissenting shareholders are not entitled to a better value than other shareholders simply because they are dissenting.

The court rejected the submissions of the dissenting shareholders that the joint bid effectively truncated the bidding war that had preceded it, and found that there had been ample market exposure of Baffinland to other potential buyers during the four months when it had been “in play”, supported by all of the disclosure requirements of the TSX. The court also rejected the discounted cash flow analyses presented by each of the parties as being too speculative to be of value.

Interest

Although the dissenting shareholders supported the lengthy stay of proceedings that led to the delay in the resolution of this application, the court found no evidence to suggest that such support was unreasonable. The dissenting shareholders were therefore entitled to simple interest on the amounts payable to them during the period during which the stay was in effect.

Real Markets vs. Theoretical Markets: the Yukon Court of Appeal’s determination

The Ontario Superior Court’s approach in Baffinland is consistent with the 2020 decision of the Yukon Court of Appeal in Carlock v ExxonMobil Canada Holdings.

In that case, ExxonMobil had agreed to acquire InterOil Corporation for $49.98 per share. In an application for the appraisal remedy, a trial judge found that deficiencies in InterOil’s corporate governance had compromised the bid negotiation process, that the transaction price that did not reflect the fair value of the shares, and that the fair value of shares held by dissidents was in fact $71.26 per share.

The Yukon Court of Appeal allowed ExxonMobil’s appeal and confirmed that the deal price of $49.98 represented the actual fair value of the shares held by the dissident shareholders. The Court of Appeal found that the trial judge had placed too much weight on a discounted cash flow methodology (what the appeals court called “an inherently frail valuation technique”), and insufficient weight on objective market evidence. The court noted that:

• There is no indication that any other process could have led to a higher price. All potential purchasers or partial investors were fully informed;
• There was no impediment to other potential purchasers outbidding Exxon;
• The deal price was at a substantial premium to the pre‑deal stock price;
• The shares were widely traded and held by large and sophisticated investors, expert in assessing value, none of whom dissented; and
• Share value was driven by an asset in the early stages of development, the future prospects of which were highly uncertain. Theoretical derivations of value were rife with uncertainty and speculation. Such assumptions were surely factored into the decision by institutional investors to accept the deal price.

The Court of Appeal confirmed that “Where… there is an open market for shares or other evidence indicative of arms-length conduct of numerous market participants acting in their own self-interest and settling on a price, such evidence is particularly reliable as an indicator of fair value.”

In other words, “The behaviour of a real market is better evidence of value than a theoretical market.”

Key Take-Aways

Corporate law provides for the appraisal remedy as a safeguard for dissident shareholders, but a negotiated transaction between sophisticated parties will be a strong indication of the “fair value” of shares.

If you are an acquiror:

• Good governance can help keep shareholder activism, including dissents, at bay. This includes getting a fairness opinion, engaging in a market check, and taking other sensible steps throughout a transaction to support the position taken about the fair value of your company’s shares.
• Take a look at our key take-aways for companies in the context of shareholder activism.

If you are a shareholder considering a dissent:

• Undertaking a dissent process can offer strategic advantages in certain circumstances, but shareholders should be prepared for an uphill battle in challenging the deal price.
• Dissents are very technical and carry strict requirements and deadlines. The rules can vary per jurisdiction, and some courts will require a dissenting shareholder to appear in person to present their case.
• Generally, a dissenting shareholder should be prepared to present evidence of fair value to the court. Be wary of discounted cash flow analyses or other speculative value propositions.
• Take a look at our key take-aways for potential activists.