YUKON COURT RULING THROWS M& A LAW A CURVE.
• Canadian companies with t he urge to merge would be wise to include as much information as possible in their disclosure to shareholders — or risk a court quashing their deals like the Court of Appeal of Yukon did last month for Exxon Mobil Corp.’ s US $2.3- billion planned takeover of InterOil Corp.
Though InterOil does not have an office or any assets in Canada, the Singapore-headquartered, Papua New Guinea-focused oil producer is incorporated in Yukon, where a court ruled in October that the company’s sale to Exxon would not be allowed despite 80 per cent shareholder approval.
Philippe Mulacek, Inter Oil’ s former chairman and second-largest shareholder, objected to the planned merger between Irving, Texas- based Exxon and InterOil because the seller did not provide enough information on the value of the contingent portion of the deal preventing shareholders from making “a fully informed decision.”
Exxon beat out Oil Search Ltd. in a bidding war for InterOil over the summer by offering InterOil shareholders US$ 45 per share plus a potential additional cash payment for the value currently being developed in an early- stage natural gas play called Elk-Antelope in Papua New Guinea.
The additional payment, called the “contingent resource payment,” was capped but InterOil’s investment bank Morgan Stanley did not provide a value for that payment when it provided its opinion that the deal was fair. InterOil, for its part, argued the deal represented fair value since Exxon’s bid represented a 42 per cent premium on i ts pre- deal share price, while also offering further upside.
“It is of course for the shareholders, not the court, to decide between the conflicting views of the prospects of InterOil and i ts joint venture interest in the Elk-Antelope gas fields,” Justice Mary Newbury wrote in her 24- page decision that blocked the merger.
“It is the court’s task to decide whether the proposed arrangement has been shown to be fair and reasonable,” she added. That need for an informed choice, she wrote, is where “difficulties arise in this case.”
Cassels Brock & Blackwell LLP partner Wendy Berman was a member of the legal team that acted for Mulacek on the case, which she said is “a bit of a wake- up call, in that you can’t approach court approval as if it’s a rubber stamp.”
Investment banks advising Canadian companies during mergers and acquisitions, Berman said, frequently provide “one-line” fairness opinions, without describing how they arrive at their opinions.
Multiple legal experts agree the Exxon-InterOil case could change that practice, requiring merging companies to explain the reasons behind a deal’s valuation.
“Although the fairness opinion received by t he InterOil board was typical of those found in Canadian M&A transactions, the court found that this opinion was deficient in failing to include any substantive analysis and failing to disclose the amount of Morgan Stanley’s fee,” Davies Ward Phillips & Vineberg LLP lawyers write in a summary of the court case. Morgan Stanley’s fee for its fairness opinion was largely contingent on the deal closing, which was another issue Mulacek’s lawyers raised.
“We would say that they were financially incented to see this transaction close,” Berman said.
The fact that the fairness opinion didn’t place a value on the contingency payment and was itself contingent on the deal closing, Newbury wrote, “clearly undermines the utility of the opinion to the directors, the shareholders and the court.”
Cassels Brock partner Lara Jackson, another member of Mulacek’s legal team, said the case highlights the need for companies that “have a fairness opinion where the consideration is largely paid through a success fee based on the closing of the transaction, the notion that you should consider having a second fairness opinion that is free.”
Jackson said it was “unusual” for a judge to prevent a merger that most shareholders favoured, especially because Exxon had to top a competing bid from Oil Search for control of InterOil.
InterOil has said it is considering its options on how to close the deal.