Bankers' opinions on deals are not always fair: judge

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A Toronto judge has called into question the way investment banks declare whether contentious corporate deals are fair to shareholders, ruling that one so-called "fairness opinion" was inadmissible in court.

Some Bay Street lawyers say the decision could lead to other demands from courts for better disclosure to shareholders about how fairness opinions are prepared and how the financial advisers who draft them are paid.

Fairness opinions, often just three or four pages, assert that a merger or other transaction is fair to all of a company's shareholders. They are drafted for a company's board of directors by its external financial advisers, and are standard in most major corporate transactions that require shareholder votes.

They are not required by law in most cases. More extensive valuations are mandatory under securities rules in large "related party transactions," such as those involving a major shareholder.

In written reasons released in early April, Ontario Superior Court Justice David Brown explains why he approved a corporate "plan of arrangement" to see Toronto-based Champion Iron Mines Ltd. combine with Australia-based Mamba Minerals Ltd.

While still okaying the deal, which was supported by more than 99 per cent of Champion shareholders, Justice Brown says he nonetheless chose to ignore the fairness opinion the company had commissioned from Canaccord Genuity Group Inc.

He said the document, which is typical of most such documents in Canada, failed to include the "number crunching" behind the opinion. Justice Brown said this meant the document failed to meet the court's basic standards for expert evidence. He also said the fairness opinion did not disclose how much money Canaccord was paid.

In his decision, Justice Brown says courts can only base their decisions on admissible evidence: "A court is not a boardroom. A court is just that – a court of law and evidence."

Toronto lawyer Jeremy Fraiberg, a partner at Osler Hoskin & Harcourt LLP, said it was too early to tell the effect of Justice Brown's ruling or to predict whether other courts will raise similar concerns about fairness opinions.

"A thinner edge of the wedge, potentially, is whether the courts are going to look for more robust disclosure from financial advisers," he said, adding that U.S. courts and the U.S. Securities and Exchange Commission typically demand more disclosure about how fairness opinions are arrived at and how the advisers who draft them are paid.

Controversy over fairness opinions has erupted before, both in the U.S. and in Canada. In 2010, when Magna International Inc. founder Frank Stronach wanted to sell back his powerful voting shares, financial adviser CIBC was not asked to provide a fairness opinion. The lack of such a document was seized on by the Ontario Securities Commission and the large pension funds that opposed the nearly billion-dollar deal. The OSC demanded more disclosure for shareholders and the deal went through.

In 2009, an Ontario Securities Commission (OSC) panel said the payment of a "success fee" to the provider of a fairness opinion in HudBay Minerals Inc.'s proposed acquisition of Lundin Mining Corp. called the opinion into question. OSC vice-chair James Turner later clarified that the ruling was limited to that case.

Ralph Shay, a partner at Dentons Canada LLP who is both a former vice-chairman of the Toronto Stock Exchange and an ex-director of mergers for the OSC, said Justice Brown's decision hasn't caused Bay Street lawyers and investment bankers to panic. But he said it could spur some changes to fairness opinions, particularly in deals going before Ontario judges.

"I just suspect that lawyers will point out to the clients ... that this thing exists, and that the opinion should probably not be a carbon copy of the one that went to the judge," Mr. Shay said. "Now, how much more they will be beefed up is a question."