Can a CBCA plan of arrangement be approved in the face of a fairness opinion that is “of no help” to the court?
Sherritt, a publicly traded Canadian resource company, applied for final approval of a plan of arrangement under ss. 192(3) and (4) of the Canada Business Corporations Act (“CBCA”). Final approval was opposed by Export-Import Bank of Korea and Korea Resources Corporation. The interests of the Bank and Korea Resources in the plan arise out of a term loan that the parties have referred to as the Carry Finance Agreement (the “CFA Loan”). Under the plan, Sherritt’s guarantee of the CFA debt will be extinguished.
The Bank and Korea Resources opposed the plan of arrangement on the ground that it is not fair and reasonable to them. The fairness objection was based on two complaints: that the Bank and Korea Resources were placed into the same voting category as other unsecured creditors, and that the plan was substantively unfair.
The other creditors approved the plan of arrangement by a vote of 89.02%. The Bank and Korea Resources argued that if the CFA lenders had been put into a separate voting class, approval of the plan of arrangement within that group would have been only 54.24%—well below the two thirds majority required in the interim order. Sherritt argued that it was appropriate to classify the CFA lenders together with unsecured noteholders because both had unsecured claims as against it.
The Court held that securityholders with similar legal rights as against the applicant should vote in a single class. Creditors should vote as a common class so long as their rights “are not so dissimilar as to make it impossible for them to consult together with the view to their common interest”. The Court found that the CFA lenders advanced no reason to demonstrate that it would be impossible for the CFA lenders to consult with the unsecured noteholders with a view to their common interest.
In assessing the fairness and reasonableness of an arrangement, a court must be satisfied: (a) that the arrangement has a valid business purpose; and (b) that the objections of those whose legal rights are being arranged are being resolved in a fair and balanced way. The court need not determine that the proposed arrangement is the “most fair” or “best” proposal possible. Rather, the court need only determine that it is fair and reasonable in the circumstances. It is also relevant for courts to take into account fairness opinions from reputable experts.
Sherritt obtained a fairness opinion in respect of the proposed plan. Fairness opinions are a common feature of judicial proceedings to approve steps a corporation proposes to take, including plans of arrangement under the CBCA. Justice Koehnen explained that fairness opinions “are often invoked with veneration and treated like an all-powerful talisman that should resolve any questions about fairness”. However, the simple presence of something called a fairness opinion is meaningless. Like any other evidence, its force lies entirely in its content and substance, which must be carefully reviewed.
The opinion was prepared by Paradigm, a Canadian investment banking firm with ties to the Board of Directors of Sherritt. The Court doubted the degree to which Paradigm could constitute an independent witness since one of the directors of Sherritt was also a former investment banker at Paradigm and remained a special advisor to and shareholder of Paradigm. It is difficult to maintain independence when there are personal and financial connections between the expert and the client. An employee of Paradigm who proposed to provide an opinion other than one that was favourable to Sherritt would face overwhelming direct or indirect pressure.
Secondly, the assumptions and limitations section of the opinion stated that Paradigm was not providing an opinion “as to the fairness of the Arrangement, from a financial point of view, to the Noteholders and/or the CFA lenders.” This was of little value to the Court. In the Court’s view, the opinion could be summarized as saying, “I am an expert, I have done analysis (that I am not going to explain or tell you about), I conclude the plan is fair, just trust me.”
Notwithstanding its comments about the fairness opinion, the Court approved the plan of arrangement. There was no suggestion that what the Bank and Korea Resources received was inadequate to satisfy the debt owing to them or alternatively that they were making a larger proportionate compromise than the noteholders. The only complaint was that the Bank and Korea Resources were surrendering their guarantee without consideration when shareholders were not being compromised. The absence of consideration is a common feature of compromises in creditor arrangements. The noteholders were subject to the same disadvantage yet approved the plan by an overwhelming majority. In these circumstances, to permit the objections of the Bank and Korea Resources to prevail would give way to the tyranny of the minority.
Counsel: Robert Chadwick, Caroline Descours and Andrew Harmes of Goodmans LLP for the Applicants; C Lara Jackson, Jane Dietrich and Jeffrey Roy of Cassels for The Export-Import Bank of Korea and Korea Resources Corporation.
Judge: Koehnen, J.