SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

COURT FILE NO.: 14-10544-00CL

DATE: 20140606

IN THE MATTER OF AN APPLICATION under section 192 of the Canada Business Corporations Act, R.S.C. 1985, c. C-44, as amended

AND AN APPLICATION under Rule 14.05(2) and Rule 14.05(3) of the Rules of Civil Procedure

AND IN THE MATTER OF a proposed arrangement involving Royal Host Inc.

BEFORE: Newbould J.

COUNSEL:
Derek J. Bell and Michael J. Paris, for the Applicant Royal Host Inc.

Kara L. Beitel, for Holloway Lodging Corporation

HEARD: May 28, 2014

ENDORSEMENT

[1] Royal Host Inc. has commenced this application in which it will seek a final order approving a proposed arrangement whereby all of its issued and outstanding common shares will be acquired by Holloway Lodging Corporation. Under the proposed arrangement, holders of Royal Host shares will receive $1.00 in cash and 0.1 of a common share of Holloway for each Royal Host share held.

[2] Royal Host has applied for an interim order under section 194(2) of the CBCA authorizing the calling and holding of a special meeting of shareholders to consider and vote on the arrangement and for other relief typically obtained in interim orders leading to the arrangement. The relief sought is not remarkable and meets the test set out in Re First Marathon Inc., [1999] O.J. NO. 2805 by Blair J. (as he then was) in which he stated that the purpose of an interim order is simply to set the wheels in motion for the application process relating to the arrangement and to establish the parameters for the holding of shareholder meetings to consider approval of the arrangement in accordance with the statute. The court should ensure that the shareholders are properly notified of a proposed arrangement and that they receive sufficient information necessary to consider the proposed arrangement. The court does not, however, approve the circular or engage in a detailed examination of the meeting material.

[3] At the conclusion of the appearance of counsel I made the order sought, with one minor change, with brief reasons to follow. These are my reasons.

[4] The quorum for the shareholders’ meeting will be two or more individuals present in person either holding personally or representing as proxies not less than 20% of the outstanding shares of Royal Host. In a recent decision in Re Tigray Resources Inc., 2014 ONSC 1979, in which the quorum requirement was one person holding directly or by proxy 5% of the shares of Tigray, concern was expressed by Brown J. regarding the small size of the quorum. He stated that where the applicant sought to set the quorum for the shareholders’ approval meeting at such a low level, the fact that a simple quorum was met and a vote held might not carry much evidentiary weight in the fair and reasonable analysis to be conducted by the court when considering a request for a final approval order.

[5] I do not share the same concern. What is important in considering whether an arrangement should be approved, so far as the vote is concerned, is the percentage of shares voted for or against the proposed arrangement. A vote by proxy, so long as the proper formalities for a proxy vote are followed, is no less a vote than a vote by a shareholder present at the meeting. Indeed, it is commonplace for far more votes being cast by proxy than by persons present at the meeting. What the quorum is for the meeting is not relevant to that issue. So long as the quorum is in accordance with the company’s by-laws, I do not think a court should have concern with the quorum for the meeting.

[6] In this case, the board of directors of Royal Host obtained a fairness opinion from Trimaven Capital Advisors. As is typical in arrangements, the opinion states that the consideration under the arrangement is fair from a financial point of view to the shareholders of Royal Host, but it does not contain the analysis done by Trimaven leading to that opinion. The opinion will be included in the notice of meeting and management information circular to be sent to the shareholders. The affidavit material in support of the interim order states that the fairness opinion will not be tendered at the final order hearing as evidence that the arrangement is, in fact, substantively fair. Rather, it will be used to show that the directors have put forward the arrangement in good faith and that the shareholder vote, when taken, will have been informed by, among other things, an independent opinion of a third party financial advisor.

[7] This statement in the affidavit material is no doubt in response to the recent case of Re Champion Iron Mines Ltd (2014), 2014 ONSC 1988, 119 O.R. (3d) 339. In that case, there was also a similar fairness opinion considered by the board of directors and a special committee to the board, and it was sent to shareholders as well. In its factum on the hearing to approve the arrangement following a 99% vote in favour of the arrangement, the applicant apparently 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. Brown J. refused to consider the fairness opinion and held it to be inadmissible because it did not comply with the rules of practice for an expert opinion in that the report did not contain the expert's reasons for the 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.

[8] The position proposed to be taken by Royal Host regarding the fairness opinion appears reasonable, although ultimately it will be a matter for the court hearing the application for approval of the arrangement to consider, assuming the votes put forward support the arrangement. The purpose of a fairness opinion is a commercial one. It is an opinion to be considered by the board of directors and the shareholders in a commercial context. It is not an expert report in a litigation context. If the board or the shareholders are not satisfied with the report, they can vote with their feet and not proceed with or approve the arrangement.

[9] Justice Wilton-Siegel had occasion to deal with this issue in Re Bear Lake Gold Ltd 2014 ONSC 3428 and concluded that a fairness opinion is properly included in the material as an indicia of the fairness and reasonableness of the proposed transaction. I agree with his analysis and opinion on this issue.

[10] The one small change I made to the draft order was to change the time during which a notice of appearance may be served from 7 days before the hearing of the application to 2 days. I see no reason in the ordinary course without some special reason for requiring the notice of appearance to be served 7 days before the hearing of the application. Of course, if the person filing the notice of appearance unreasonable fails to act in a timely manner, depending on the circumstances, that could well negatively affect that person’s position on the hearing of the application for approval of the arrangement.

Newbould J.

Date: June 6, 2014