In the matter of a proposed plan of arrangement of Champion Iron Mines Limited et al.
Ontario Reports
Ontario Superior Court of Justice,
D.M. Brown J.
March 28, 2014
119 O.R. (3d) 339 | 2014 ONSC 1988
[Indexed as: Champion Iron Mines Ltd. (Re)]
Case Summary
Corporations — Arrangement — Court approving plan of arrangement under s. 182 of Ontario Business Corporations Act — Court placing no weight on fairness opinion in doing so — Fairness opinion constituting opinion evidence and not meeting admissibility requirements for such evidence as it did not disclose reasons for opinion.
The applicant sought court approval of a plan of arrangement under s. 182 of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16.
Held, the application should be allowed.
The plan of arrangement complied with statutory requirements, had a valid business purpose and was fair and reasonable. In reaching that conclusion, no weight was placed on a fairness opinion which stated that the transaction was fair from a financial point of view. Nowhere in the fairness opinion did the author disclose the specifics of the actual analysis it performed. The fairness opinion [page340] constituted opinion evidence and did not meet the admissibility requirements for such evidence as it did not set out the reasons for the opinion.
Cases referred to
BCE Inc. v. 1976 Debentureholders, [2008] 3 S.C.R. 560, [2008] S.C.J. No. 37, 2008 SCC 69, 52 B.L.R. (4th) 1, EYB 2008-151755, J.E. 2009-43, 301 D.L.R. (4th) 80, 71 C.P.R. (4th) 303, 383 N.R. 119, 172 A.C.W.S. (3d) 915
Statutes referred to
Business Corporations Act, R.S.O. 1990, c. B.16, s. 182 [as am.], (1)
Securities Act of 1933, 15 U.S. Code 77a, s. 3(a)(10)
Rules and regulations referred to
Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rules 4.1, 53.03(2.1)
APPLICATION for the approval of a plan of arrangement.
M. Kestenberg and A. McCoomb, for applicant.
E. Snow, for Mamba Minerals Limited.
D.M. BROWN J.: —
I. Approval of an OBCA Plan of Arrangement; Fairness Opinions; and the Timing of Final Order Applications
1Champion Iron Mines Limited sought approval of a plan of arrangement amongst itself, Mamba Minerals Limited and 2401397 Ontario Inc. pursuant to s. 182 of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16 ("OBCA"). Earlier today, I approved the plan of arrangement. These are my reasons for so doing.
II. The Proposed Plan of Arrangement and the Interests Being Arranged
A. Champion Iron and its share structure
2Champion Iron is an OBCA corporation. Its business focuses on mineral exploration and development, particularly iron ore deposits in northeastern Quebec and Newfoundland and Labrador. Its shares are listed on the Toronto Stock Exchange. As at January 28, 2014, the issued securities of Champion Iron consisted of common shares, common share options and common share warrants.
B. Mamba Minerals Limited
3Mamba Minerals Limited is incorporated under the laws of Australia. It recently incorporated a wholly owned subsidiary, 2401397 Ontario Inc. (now known as Champion Exchange Limited), for the purpose of effecting the proposed plan of arrangement. [page341]
C. The arrangement
4Under the arrangement agreement, Mamba Minerals, together with Champion Exchange, will acquire all of the outstanding common shares of Champion Iron in exchange for ordinary shares of Mamba Minerals or exchangeable shares of Champion Exchange according to a fixed exchange ratio. Champion option-holders will receive replacement options entitling them to acquire shares of Mamba Minerals in accordance with a negotiated exchange ratio. Champion Iron Warrants will be adjusted in accordance with their terms so that the holder will be entitled to acquire Mamba Minerals pursuant to an exchange formula.
III. Governing Principles
5The applicable legal principles were set out by the Supreme Court of Canada in BCE Inc. v. 1976 Debentureholders.1 In seeking approval of a plan of arrangement, the corporate applicant bears the onus of satisfying 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. In reviewing the directors' decision on the proposed arrangement to determine if it is fair and reasonable, courts must be satisfied that (a) the arrangement has a valid business purpose, and (b) the objections of those whose legal rights are being arranged are being resolved in a fair and balanced way.
IV. Analysis
A. Compliance with statutory requirements and the interim order
6The applicant has met the statutory requirements in that the arrangement falls within the definition of an "arrangement" under OBCA, s. 182(1) — it provides for an exchange of securities of a corporation for securities of another corporation. Wilton-Siegel J. made an interim order on February 7, 2014, in respect of the meeting of shareholders on March 27, 2014. The evidence disclosed that Champion Iron complied with the requirements of the interim order. [page342]
B. Has the application been put forward in good faith?
7The evidence disclosed that Champion Iron negotiated an arm's-length transaction with Mamba Minerals in order to develop its mining business more effectively. Champion Iron struck a special committee of independent directors to supervise the negotiations with Mamba Minerals and the negotiated arrangement would provide a significant premium to the shareholders of Champion Iron. As these are all indicia of good faith, I concluded that Champion Iron had put forward the application in good faith.
C. Does the arrangement have a valid business purpose?
8The arrangement has a valid business purpose, namely, to provide sufficient funding for the completion of a feasibility study on one project, as well as to enhance the exploration potential of another project.
D. Is the arrangement fair and reasonable?
9Did the arrangement strike a fair balance between the interests of the corporation and those of security-holders in the circumstances of this case? For several reasons, I was satisfied that it did:
(i) as mentioned, the consideration represented a premium of approximately 72 per cent to the shareholders of Champion Iron;
(ii) the arrangement agreement allowed for the board to entertain superior proposals at any time prior to the approval of the arrangement resolution by Champion Iron shareholders;
(iii) the board and the special committee reviewed the terms of the arrangement and determined that the arrangement was in the best interests of Champion Iron and its shareholders. The board unanimously recommended that the shareholders vote for the arrangement resolution authorizing and approving the arrangement;
(iv) a significant number of shareholders were present at the March 27, 2014 meeting either in person or by proxy (45.09 per cent), and the arrangement resolution received approval by (i) not less than two-thirds of the votes cast by shareholders in person or by proxy at the meeting (99.41 per cent) and (ii) at least a simple majority of the votes cast by minority shareholders (99.35 per cent); and [page343]
(v) the arrangement offered rights of dissent to Champion Iron shareholders. One holder of 17 shares (0.0000001 per cent) exercised a right to dissent. No shareholder filed a notice of appearance opposing the approval application.
E. Conclusion
10For those reasons, I concluded that the proposed arrangement was fair and reasonable, and I granted an order in accordance with the draft filed by Champion Iron, which I signed. I should note that in its evidence supporting the application Champion Iron specifically advised the court that it intended to rely on the exemption from the requirements to register the distribution and/or exchange of securities to Champion security-holders resident in the United States of America under s. 3(a)(10) of the United States Securities Act of 1933, 15 U.S. Code 77a.
V. Two Concluding Comments
A. The evidentiary utility of the common form of fairness opinion2
11The management proxy circular distributed by Champion Iron contained a fairness opinion from Canaccord Genuity dated December 5, 2013. The opinion was expressed on the last page of the report, under the heading "Conclusion":
Based upon and subject to the foregoing, Canaccord is of the opinion that, as of the date hereof, the Consideration to be received by Champion Shareholders pursuant to the Transaction is fair, from a financial point of view, to the shareholders of Champion other than Mamba and its subsidiaries and affiliates.
In terms of the "foregoing" referred to in that conclusion, earlier in its fairness opinion Canaccord had described (i) its engagement, (ii) its credentials, (iii) its independence, (iv) the scope of its review, (v) the assumptions and limitations to its analysis, and (vi) its approach to fairness. I think it fair to say, however, that nowhere in its fairness opinion did Canaccord disclose the specifics of the actual analysis which it had performed — the "number crunching", so to speak — which could inform a reader on the issue of whether the offered consideration was within [page344] a minimum range that otherwise could have been obtained in a market-based transaction process.
12From the evidence filed by Champion Iron, it was clear that the applicant was aiming the results of the fairness opinion towards several different audiences. First, according to the February 5, 2014 affidavit sworn by Miles Nagamatsu, the chief financial officer of Champion Iron, the special committee of the board took the fairness opinion into account in concluding that the proposed arrangement was fair to Chamption Iron shareholders and option-holders, as well as in the best interests of the company. The board as a whole also took the opinion into account for the management proxy circular stated:
The views of Canaccord expressed in the Fairness Opinion were an important consideration in the Special Committee's recommendation and the Champion Board's decision to proceed with the Arrangement.
13Second, management included the fairness opinion in the management proxy circular sent to shareholders with the caution that:
The Fairness Opinion does not constitute a recommendation to any Champion Shareholder as to how to vote or act on any matter relating to the Arrangement. The Board urges the Champion Shareholders to read the Fairness Opinion, attached hereto as Appendix F, carefully and in its entirety.
From this, I infer that the board concluded that the fairness opinion contained information relevant to the decision-making process shareholders would have to undertake in deciding whether or not to support the arrangement.
14The management proxy circular also stated:
Under its engagement letter with Canaccord, the (sic) Champion has agreed to pay a fee to Canaccord for its services as an independent financial advisor, including fees for the delivery of the Fairness Opinion.
The amount of the fees was not disclosed. Accordingly, it is difficult to ascertain what amount of work Canaccord performed in preparing the fairness opinion.
15The final audience targeted by the applicant was the court. In para. 63(f) of its factum, Champion Iron identified the fact of the securing of the fairness opinion, as well as its favourable content, as evidence in support of a finding that the application had been put forward in good faith. In BCE Inc. v. 1976 Debentureholders, the Supreme Court of Canada observed that in conducting a fairness analysis courts have considered "the presence of a fairness opinion from a reputable expert".3 [page345]
16In conducting the fairness analysis in the present case, I placed no weight on the Canaccord fairness opinion. In the conclusion to its fairness opinion, Canaccord expressly voiced an "opinion". Under our laws of evidence, opinion evidence may only be received by a court if adduced through a qualified expert witness (subject to certain exceptions which have no application to this case). Otherwise, opinion evidence is inadmissible.
17Under the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, which govern proceedings in the Superior Court of Justice, including plan of arrangement applications under corporate statutes, expert evidence must comply with (i) requirements concerning the contents of the expert report (rule 53.03(2.1)) and (ii) requirements concerning the independence of the expert (rule 4.1). While the Canaccord fairness opinion materially satisfied the independence requirements (although Canaccord did not file an acknowledgement of expert's duty), the fairness opinion did not comply with many of the rule's content requirements, specifically the requirements that an expert's report 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".4 The fairness opinion simply asserted an opinion, without disclosing the reasons for it. On its face, it was devoid of analysis which a reader could follow in order to understand how the opinion was reached and what, if any, weight should be given to the opinion.
18Accordingly, I concluded that the fairness opinion, as written, was inadmissible for purposes of the final order application and I ignored it. That said, ample other admissible evidence was filed by Champion Iron to support the granting of the final order.
19The form of fairness opinion filed by Champion Iron closely resembled the form of such opinions typically seen these days on plan of arrangement applications. It would not be stretching the language too far to characterize the form of such fairness opinions as "cookie cutter" in appearance. That is not to say that any particular fairness opinion in that form lacked substantive supporting reasoning. Perhaps such reasoning existed. My simple point is that the supporting reasoning typically is not apparent on the face of the fairness opinions. From an [page346] evidentiary point of view, that renders them inadmissible for the purpose of asking the court to rely on their content in support of granting the application.
B. On plans of arrangements courts do not act as rubber stamps
20Which leads me to make a larger point. As a judge in front of whom a fair number of final order applications pass on a regular basis, one sometimes develops the feeling that corporate lawyers regard the role of courts in the whole plan of arrangement process as nothing more than one box to check off on a closing agenda. As a result, applicants in these sorts of proceedings often tend to ignore two fundamental requirements of any court proceeding.
21First, a court can only decide the case based upon admissible evidence, and I have expressed my view about the inadmissibility of the fairness opinion adduced in this case and others of its ilk. A court is not a boardroom. A court is just that — a court of law and evidence. Although the lawmakers have injected the courts into the approval process for corporate transactions such as plans of arrangement, that does not alter the fact that the courts play a judicial role in the process, not an agenda checklist-type role.
22Second, in order to discharge his or her judicial adjudicative function, a judge requires time to read, understand and assess the evidence put before him or her. Holding a shareholders' meeting on the morning of March 27, filing a two-volume final application record that same afternoon, and then informing the court that the final order must be granted in time to meet a 1:00 p.m. March 28 corporate filing deadline was not, with all due respect, a schedule which showed proper respect for the adjudicative function of the court. On the contrary. One could take from such a schedule that the deal-makers simply viewed the court as performing a rubber-stamp function in the overall transaction — an inconvenience imposed by the language of the statute.
23While judges of the Toronto Region Commercial List work in a constant "real-time" environment, from my review of the materials in this case no reason appeared why a gap of at least one business day could not have been inserted between the holding of the shareholders' meeting and the attendance in court to seek a final order. That would have allowed ample time to deliver the final order application record to the judge early on the day before the hearing, permitting the judge some time to read the [page347] materials with care. In my view, counsel on final order applications must adopt a scheduling approach which affords judges adequate time to review and weigh the evidence and arguments put before them.
Application allowed.
Notes
End of Document
Footnotes
- 2008 SCC 69, [2008] 3 S.C.R. 560, [2008] S.C.J. No. 37.
- The discussion which follows deals with the fairness opinions typically provided on plan of arrangement transactions by financial advisors, and not with the formal valuations required by s. 4.3 of Multi-Lateral Instrument 61-101 as that section did not apply in the circumstances of this case.
- Ibid., para. 152.
- Rule 53.03(2.1), para. 6.