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Yukon Court Awards Premium in Fair Value Determination - A Comment on Carlock v. ExxonMobil Canada Holdings ULC

In a surprising recent decision with potential implications for public M&A transactions in Canada, the Supreme Court of Yukon determined that the “fair value” of the shares of InterOil Corporation (“Interoil”) acquired by Exxon Canada Holdings ULC (“Exxon”) in 2017 was significantly higher than the negotiated deal price.

The Acquisition of Interoil

The acquisition of InterOil by Exxon had already followed a somewhat tortuous path by the time the transaction closed in 2017. InterOil had conducted a strategic review, contacted numerous potential bidders, received three proposals, entered into an agreement with a bidder and finally accepted a topping bid from Exxon, for which it received a fairness opinion from its financial advisor. None of this was extraordinary in the context of a public M&A transaction. However, the acquisition by Exxon, which was proposed to be completed by a plan of arrangement (a court-approved acquisition process available under the Business Corporations Act (Yukon), as well as the other main corporate statutes in Canada), was challenged in court, with InterOil’s former CEO alleging numerous corporate governance failures.

Though initially approved by the Supreme Court of Yukon (the “Court”), largely on the basis that in spite of the governance deficiencies found by the Court, the arrangement had been approved by a significant majority of the shareholders, the arrangement was struck down by the Yukon Court of Appeal, which found that the transaction was not “fair and reasonable” - the required test for approval of a plan of arrangement. The Court of Appeal emphasized the inadequacy of the fairness opinion, due to the financial advisor being entitled to a success fee, and the lack of disclosure of the analysis underlying the advisor’s conclusion. In addition, the Court of Appeal pointedly disagreed with the chambers judge on the weight given to shareholder approval in the test of “fairness and reasonableness,” noting that while adequately informed shareholders are entitled to sell their shares at any given price, “it was not open to the Court to set to one side the deficiencies it had identified, and simply accept the verdict of the market or the majority shareholders.”[1]

Ultimately, the transaction closed, with InterOil obtaining a new fairness opinion (on a fixed fee basis), a new shareholder vote based on revised disclosure, in which over 90% of the shareholders approved the transaction, including the shareholder who had challenged the initial deal, and approval by the Court. Nonetheless, a number of shareholders dissented under the terms of the arrangement, which largely imported Section 193 of the Business Corporations Act (Yukon) (the “Act”). Much like the corresponding provisions in other Canadian corporate statutes, Section 193 of the Act entitled dissenting shareholders to receive the “fair value” of the shares acquired by Exxon, as determined by the Court. The result was the Court’s surprising decision in Carlock v. ExxonMobil Canada Holdings ULC[2] (“Carlock”), where the Court agreed with the dissenters’ expert and set the “fair value” of the shares at US$71.46, a significantly higher value than the US$49.98 per share paid by Exxon in the transaction.

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[1] InterOil Corp. v. Mulacek, 2016 YKCA 14 at para. 43.

[2] 2019 YKSC 10 (“Carlock”).

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