Is your company thinking of acquiring another firm? Have you concluded an amazing deal and expect to sail through the process? Not so fast, according to the Quebec Court of Appeal.
In a recent case before the Court of Appeal, the purchaser, Resolute, was ordered to pay 82% more than the original offer because it was found to be unfair. Including interest and the additional indemnity, the minority shareholders of Fibrek Inc. received $2.50 per share—184% more than what Resolute had offered the dissenting shareholders in 2012.
Fibrek: a decision of principle involving a hostile takeover
Fibrek found itself at the centre of a legal battle that raised important issues concerning the valuation of its shares in the context of a forced transaction. This case, which involved the determination of the fair value of Fibrek’s shares in a hostile takeover bid, highlights certain intricacies of corporate law and the challenges inherent in this type of transaction.
The story began when Fibrek, a Canadian pulp and paper company, was the subject of a hostile takeover bid by one of its competitors, Resolute. During the acquisition process, Fibrek’s shareholders were offered cash for their shares based on a valuation by the acquiring company.
However, a group of minority shareholders, which collectively held 12% of Fibrek, disputed the valuation, arguing that the price offered did not reflect the true value of their investment. They maintained that the fair value of Fibrek’s shares was higher than the price offered by Resolute, and exercised their right to dissent and dispute the valuation. They were still required to sell their shares, but the Court had to determine whether the offered price was fair.
The Quebec Court of Appeal determined the fair value of Fibrek’s shares based on the evidence submitted by both parties. It took various factors into account, including the company’s financial performance, market conditions, industry trends, undisclosed confidential information and expert evidence.
Following an in-depth deliberation, the Court of Appeal ruled in favour of the minority shareholders, concluding that the fair value of Fibrek’s shares was in fact higher than the price offered by Resolute.
The Court found that the valuation method used by Resolute did not reflect the true value of the shares and ordered that a higher price be paid to the minority shareholders. Resolute’s offering price did not take into account the value of a major contract that Fibrek had entered into with Hydro-Québec, which generated significant EBITDA. The Court determined that this contract increased Fibrek’s value by $0.80 per share. It subtracted $0.08 per share for environmental liabilities not disputed on appeal, increasing the fair value of Fibrek’s shares to $1.5973 per share compared to the initial price of $0.87 offered by Resolute in 2012.
What is the impact on mergers and acquisitions?
The Court of Appeal’s decision in the Fibrek case underscores the importance of fair valuation in commercial transactions. It confirms the rights of minority shareholders to contest valuations they believe to be unfair and underlines the importance of offering a fair price to avoid lengthy legal proceedings.
The Fibrek case provides valuable insight into the complexity of shareholders’ rights. The Court’s decision and the factors taken into account in determining the fair value of Fibrek’s shares help us better understand how far the courts are willing to go to protect the rights of minority shareholders.
This is an important lesson for companies considering an acquisition. Though offering fair value ahead of the deal isn’t a prerequisite, companies are exposing themselves to legal challenges and in-depth scrutiny if their offering price is found to be unfair. Meticulous analysis and transparency in the valuation process are essential to avoiding prolonged legal battles and ensuring that everything runs smoothly after the transaction is concluded.
Buyers beware: the courts are watching! You can plan ahead for these types of situations by consulting our multi-disciplinary strategic advisors in mergers and acquisitions. Their expertise covers all types of transactions in all jurisdictions, from inception to post-closing integration, including privately negotiated purchases of shares or assets, as well as public company mergers and acquisitions completed by way of take-over bids, amalgamations and plans of arrangement.
If legal proceedings should arise, you can count on our team of 125 litigation lawyers from 10 offices across Canada to represent your interests and provide you with peace of mind.
