COURT FILE NO.: CV-14-00010499-00CL
DATE: 20140605
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: IN THE MATTER OF AN APPLICATION BY BEAR LAKE GOLD LTD. UNDER SECTION 182 OF THE BUSINESS CORPORATIONS ACT (ONTARIO), R.S.O. 1990, Ch. B.16, AS AMENDED
AND IN THE MATTER OF A PROPOSED ARRANGEMENT OF BEAR LAKE GOLD LTD. INVOLVING ITS SHAREHOLDERS AND KERR MINES INC.
BEFORE: Mr. Justice H. J. Wilton-Siegel
COUNSEL:
Brett Harrison and Jeffrey Levine, for Bear Lake Gold Inc.
Kevin Richard, for Kerr Mines Inc.
HEARD: May 14, 2014
ENDORSEMENT
[1] Bear Lake Gold Ltd. sought approval of a plan of arrangement between itself and Kerr Lake Mines Inc. and 2402196 Ontario Inc. pursuant to section 182 of the Business Corporations Act (Ontario). I approved the plan of arrangement on May 14, 2014, with written reasons to follow which are set out below.
[2] Bear Lake Gold Ltd. (“Bear Lake”) is a corporation incorporated under the Business Corporations Act, R.S.O. 1990, c. B.16 (the “Act”). Bear Lake and its subsidiaries are primarily engaged in the acquisition and exploration of mineral properties in Canada. Its shares are listed on the TSX Venture Exchange. Bear Lake has 136,381,545 issued and outstanding common shares as well as outstanding options to purchase an aggregate of 5,570,000 common shares granted pursuant to the Bear Lake option plan.
[3] Kerr Mines Inc. (“Kerr”) is a corporation incorporated under the Canada Business Corporations Act. 2402196 Ontario Inc. is a wholly-owned subsidiary of Kerr which is incorporated under the Act.
[4] Under the arrangement agreement, Kerr will acquire all of the outstanding common shares of Bear Lake in exchange for 1.4 units of Kerr for each Bear Lake common share. Each unit will consist of one common share of Kerr and one-half of one common share purchase warrant of Kerr. Each whole warrant of Kerr will entitle the holder to purchase one Kerr share at an exercise price of $0.16 per Kerr common share for a period of two years from the date of issue. The outstanding options to purchase Bear Lake common shares will be deemed to be exchanged for options to purchase Kerr shares, having terms and conditions substantially similar to the Bear Lake option plan with appropriate adjustments to reflect the 1.4:1 exchange ratio. Bear Lake and 2402196 Ontario Inc. will also be amalgamated and shall continue under the Act as a wholly-owned subsidiary of Kerr.
[5] The legal principles which govern the approval of a plan of arrangement under s. 182 of the Act were set out by the Supreme Court of Canada in BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, [2008] 3 S.C.R. 560. In seeking approval of a plan of arrangement, an applicant must 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. I will address each issue in turn.
[6] The applicant has met the statutory requirements in that the proposed transaction qualifies as an "arrangement" under s. 182(1) of the Act as it provides for an exchange of securities of a corporation for securities of another corporation. The evidence also discloses that Bear Lake has complied with the requirements of the interim order of the Court in this matter dated April 4, 2014 respecting the meeting of shareholders held on May 6, 2014.
[7] Bear Lake and Kerr have neighbouring mining properties in north-eastern Ontario along the Cadillac-Larder Lake Break in the Kirkland/Larder Lake gold mining district. The record indicates that Bear Lake requires additional financing to ensure its continued activities. Bear Lake and Kerr negotiated the transaction to be implemented by the arrangement at arm’s length. The Bear Lake board of directors recommends the transaction as being in the best interests of Bear Lake given its financial condition, its strategic alternatives and the risks related to its ongoing financing requirements, among other considerations. These are valid indicia of good faith. Accordingly, I am satisfied that Bear Lake has put forward the application in good faith.
[8] The 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.
[9] The remaining issue is whether the arrangement strikes a fair balance between the interests of the corporation and those of the security holders in the circumstances of this case. I note that, as in most M&A transactions, the issue is not actually an issue of balancing the interests of the corporation and one or more classes of shareholders but rather the fairness and reasonableness of the consideration being given to the shareholders by a third party purchaser in return for their shares in the corporation. Moreover, there is no objection or dispute between Bear Lake and one or more classes of its securityholders.
[10] In the present circumstances, I am satisfied that the requirement of a fair balancing of interests, as translated into the context of a share exchange, is satisfied for the following reasons:
The board of directors recommended that the shareholders approve the transaction;
The board of directors had the benefit of a fairness opinion of Primary Capital to the effect that the consideration to be paid to the shareholders was fair to such shareholders from a financial point of view;
No shareholder exercised the dissent rights available to shareholders;
The arrangement was passed by 97.9% of the votes cast at the shareholders meeting called to consider the arrangement; and
No shareholders opposed the arrangement at this hearing.
[11] Accordingly, I conclude that the proposed Arrangement was fair and reasonable for the purposes of section 182 of the Act.
[12] Counsel has drawn my attention to the decision in Champion Iron Mines Limited, 2014 ONSC 1988 in which D.M. Brown J. rejected a fairness opinion as failing to satisfy the requirements of expert evidence under the Rules of Civil Procedure. I do not share this concern in the context of M&A transactions involving the acquisition of securities of an issuer by a third party. In such circumstances, I consider that a fairness opinion is properly included as an indicia of a good faith transaction as well as of the fairness and reasonableness of the proposed transaction in the manner described below.
[13] A fairness opinion is not a valuation but rather an opinion of a financial advisor regarding the fairness or reasonable of a transaction from a market perspective. In a cash transaction, a fairness opinion therefore addresses primarily the transaction price, including any premium, relative to comparable transactions. In a transaction involving an issue of securities of a purchaser that is a public corporation, a fairness opinion must also address the likely impact of the transaction on the acquiror's shares, other things being equal, although it cannot be, and does not purport to be, a prediction of the market reaction to the transaction. In this regard, there can be no certainty pre-announcement regarding the market impact of the transaction and, in addition, the market price of the acquiror's shares may well be affected by other considerations during the post-announcement period.
[14] Nevertheless, fairness opinions do assist a special committee or a board of directors in assessing a proposed transaction. In this regard, in the usual case, the assumptions and the analytical basis of the fairness opinion would be the subject of a detailed presentation to the directors that is not included in the fairness opinion, as published in the information circular. In circumstances involving the acquisition of securities of an issuer by a third party, an applicant for approval of a statutory arrangement does not intend, however, that the fairness opinion will constitute expert evidence.
[15] Instead, the fairness opinion is of relevance to the court in two respects. First, it is evidence that the special committee or board of directors has considered the fairness and reasonableness of the proposed transaction on the basis of objective criteria to the extent possible. Second, the publication of the fairness opinion in the information circular allows the shareholders to reach their own conclusions regarding the integrity of the directors' recommendations and regarding the fairness of the transaction to them from a market perspective. The absence of shareholder objections therefore becomes a relevant consideration for a court. In this regard, it is important to note that shareholders will be able to assess the merits of the fairness opinion based on the post-announcement market reaction to the transaction. If the market reaction, as reflected in the market price of the shareholders’ securities, is negative, there may be a basis for challenging the integrity of the directors' decision making process, including their reliance on the fairness opinion, and perhaps of the good faith nature of the transaction. Conversely, the absence of any shareholder objections to a proposed transaction can be relied upon by a court as an implicit shareholder endorsement of the directors' view of the fairness and reasonableness of the transaction and the applicant's good faith in proposing the transaction.
[16] For these reasons, I conclude there is no compelling reason to depart from the existing practice regarding the use of fairness opinions for the purposes of court approval of statutory arrangements involving M&A transactions where there is no valuation opinion. However, as in previous contested situations, particularly involving a reorganization of the interests of the existing securityholders of a corporation rather than an acquisition of outstanding securities by a third party, if a party proposes to qualify a fairness opinion as expert evidence under the Rules of Civil Procedure the detailed analysis that grounds the fairness opinion must be available if required by any objecting securityholders.
Wilton-Siegel J.
Date: June 5, 2014