When is a plan of arrangement fair and reasonable?

What is the role of a court in evaluating whether a plan of arrangement is fair and reasonable?  In InterOil Corporation v. Mulacek, 2016 YKCA 14, the Yukon Court of Appeal held that a court must ensure proper corporate governance has been conducted during an arrangement process and that shareholders have information that is adequate, objective and independent prior to exercising their shareholder vote.     

The target company entered into an agreement where all of its shares would be acquired.  Prior to the vote on that agreement, Exxon made an unsolicited bid at a higher price.  The company obtained a fairness opinion from Morgan Stanley, which received a fee largely contingent on approval of the plan, concluding it was fair and reasonable. 

At the court hearing, a dissenting shareholder argued that the plan was not fair and reasonable on a number of grounds, including that the fairness opinion was deficient.  The chambers judge noted that the board’s process in evaluating the plan had demonstrated “deficient corporate governance and inadequate disclosure”.  Further, the fairness opinion was “devoid of facts or analysis”.

Despite that, the chambers judge found the plan was fair and reasonable, particularly given the high (80%) shareholder support it received. 

The Court of Appeal noted that the decision about a plan belongs to shareholders, but the court retains a role to ensure that shareholders are in a position to make “an informed choice” on value they would be giving up and value they would be receiving.  The court noted that the financial advisor had not attributed any value to the company’s primary asset and the CEO and other members of the board would realize significant compensation if the plan was approved. All of this, along with the contingent fee agreement, undermined the utility of the fairness opinion.  The board should have obtained independent advice, including a second opinion, on a flat-fee basis.   

The chambers judge erred in ignoring the deficiencies of the fairness opinion and corporate processes engaged by the board, as well as failing to examine the “value” of the deal for shareholders. 

The court has a duty to ensure a shareholder vote is based on adequate and objective information that is free from conflicts of interest.  There were many factors which prevented shareholders from being properly informed in advance of the vote: absence of independent fairness opinion, failure of opinion to value chief asset, conflicts of interest of management, lack of independent special committee, and “lack of necessity for the deal”.  A court cannot blindly accept a shareholder vote without examining the basis upon which it was made. 

While accepting that “judges are not businesspeople”, the court held that it could not set aside the deficiencies it had identified and simply accept the shareholder vote.   Arrangements are generally approved by large majorities of shareholders.  However, a court has to be satisfied that the plan is “objectively fair and reasonable in a more general sense”.