CSA staff said they found that fairness opinions shared by financial advisers were often limited and didn’t provide enough detail for shareholders to make an informed decision when voting on a deal.Getty Images/iStockphoto
Securities regulators in Ontario, Quebec, New Brunswick, Manitoba and Alberta have released a set of guidelines to make fairness opinions commissioned by boards more transparent for investors in deals that involve conflicts of interest.
In a notice, Canadian Securities Administrators staff said they found that fairness opinions shared by financial advisers were often limited and didn't provide enough detail for shareholders to make an informed decision when voting on a deal. This comes after regulators started doing reviews of these kinds of transactions two years ago.
"We decided the best way to do it was to get our message out about what we were concerned about and seeing," said Naizam Kanji, director of mergers and acquisitions at the Ontario Securities Commission. "We wanted to put everyone on notice that we aren't afraid to, and do intend, to intervene. We are watching these kinds of transactions."
Fairness opinions ahead of a deal aren't necessarily required by regulators, but if one is requested and a financial adviser doesn't provide one, the CSA's stance is that they should explain why.
CSA staff also recommend disclosing the payment arrangement for the financial adviser and whether that involves a success fee; the methodology behind their opinion; and how that opinion affected the board's decision-making in trying to win shareholder support. However, based on the guidelines, they don't have to disclose the actual fee being given to the financial adviser for providing their opinion.
The guidelines have been in place in Ontario and Quebec since 2008. The other three provinces involved with the announcement adopted them last week.
"Really, what's happened in the Canadian context is that fairness opinions have been short-form opinions. They're very short and don't release much in the way of math or financial analysis at all," said Jeremy Fraiberg, a lawyer who handles M&As at Osler, Hoskin & Harcourt.
This issue is particularly topical after the $2.5-billion (U.S.) takeover bid by Exxon Mobil Corp. for InterOil Corp. was struck down by the Yukon Court of Appeal in 2016. In that case, the report outlining the fairness opinion that was given to InterOil's shareholders failed to give them enough information ahead of the deal. The courts found that the shareholders should have been given the financial analysis that led to the opinion, the fee paid to the adviser and whether or not the adviser was receiving a success fee that could influence the way they present their opinion. (The Yukon Supreme Court later approved the deal after a revised plan of arrangement was provided.)
"There's been a big debate in Canada on whether to follow that and this is the first time the regulators are opining on that, although only on conflict transactions," Mr. Fraiberg said.
Gordon Chambers, the lawyer who represented dissident shareholder Phil Mulacek in the InterOil case, says investors are beginning to expect more from companies before voting in favour of a big move.
"Now buyers are getting more concerned if the seller doesn't have a thorough governance process. Buyers are in tune to that and saying we need it better," Mr. Chambers said.
Where the regulators and the Court of Appeal differ is that CSA staff didn't explicitly recommend hiring financial advisers with fixed fees or eliminating success fees altogether.
"The court is in a different situation when it comes to fairness analysis than we are. We recognize that the courts can get into the issue of whether there was a success-fee-based adviser. We decided that should be left to the courts," Mr. Kanji said.