July 2014

Richter Advisory
Group Inc.

Fairness Opinion
or Valuation:
How do they
Differ? What is
Fair? What do
you Need?
The perception of fairness opinions has slowly been shifting over time. The trilogy of recent
decisions in April and June 2014 of Champion Iron Mines Limited, Bear Lake Gold Ltd., and
Royal Host Inc. reiterated their use to a companys directors, shareholders and to the Courts.
While not mandated by regulators, fairness opinions are typically provided by financial advisors
often in the context of a corporate transaction to the board of directors or in some cases to
a special committee. The reasoning for a fairness opinion is two-fold. First, they assist the
companys directors in fulfilling their fiduciary duty in assessing the reasonability and fairness
of the transaction. Second, they provide a tool to permit shareholders to evaluate the financial
benefit of the proposed transaction.

Given their two-fold nature and the evolving landscape, the applicability of fairness opinions in
todays increasing litigious corporate environment should be reconsidered.

The Shifting of the Sands

The paradigm under which fairness opinions operate began changing long before the decision
in Champion. In 1996, the Ontario Securities Commission (OSC) voiced the opinion that
fairness opinions are less notable for their intended purpose, but rather for what they lack in
terms of content and transparency. This ultimately led the OSC in deciding that fairness opinions
would play no role in its regulation of related party transactions.

In April 2009 in the context of HudBay Minerals acquisition of Lundin, the OSC commented that
a fairness opinion that is rendered by a financial advisor who is being paid a success fee does
not assist directors comprising a special committee of independent directors in demonstrating
the due care they have taken in complying with their fiduciary duties in approving a transaction.

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The May 2010 collapse of Magnas dual class share structure was criticized not for its fairness
opinion, but its lack thereof. In this instance, the financial advisor was unable to prepare a
fairness opinion or even a formal valuation given the need to opine on future trading prices
subsequent to the collapse of the dual share structure. While the OSC did not object to the
transaction, they insisted on increased disclosure as to how the financial advisor assessed the
transaction and why a fairness opinion could not be provided.

In 2012, Yellow Media retained two separate financial advisors, each of whom provided a
fairness opinion and related consulting services in relation to the restructuring of the company.
While the fees received for the fairness opinion were not contingent on the successful
restructuring of the firm, the consulting services fees were. Since the dispute with the debt
holders eventually settled, the public was not afforded the Courts view of the dual role of the
financial advisors.

In April 2014s Champion decision, Justice Brown commented that a fairness opinion
constituted an opinion and that under the laws of evidence, opinion evidence may only be
received by a court if adduced through a qualified expert witness. The trial judge further noted
that while the fairness opinion may have met the independence requirements it failed to comply
with the Rules of Civil Procedure as expert evidence.

In June 2014, Bear Lake and Royal Host revisited the decision of Champion. In Bear
Lake, Justice Wilton-Siegel did not share the views expressed in Champion regarding the
requirements of a fairness opinion in meeting the Rules of Civil Procedure. Specifically, the
judge reiterated the two-fold purpose of a fairness opinion and concluded that there is no
compelling reason to depart from the existing practice regarding the use of fairness opinions
for the purposes of court approval of statutory arrangements involving M&A transactions where
there is no valuation opinion.

However, Justice Wilton-Siegel, did comment that in contested corporate transactions, to

properly qualify a fairness opinion as expert evidence under the Rules of Civil Procedure the
detailed analysis that grounds the fairness opinion must be available if required by any objecting
security holders.

In Royal Host, Justice Newbould echoed the decision in Bear Lake and concluded that the
purpose of a fairness opinion is a commercial one. It is an opinion to be considered by the board
of directors and the shareholders in a commercial context. It is not an expert report in a litigation
context.

Fairness Opinion vs. Formal Valuation

While the financial analysis undertaken in both a fairness opinion and a formal valuation are
similar, they arrive at different conclusions. In a formal valuation, the conclusion is with respect
to the value of the companys shares, whereas, a fairness opinion concludes on whether the
consideration being offered to a specific group of interested parties compared to the value
of their shares is fair from a financial perspective. The existing practice of providing a fairness
opinion rarely includes the detailed analysis, methodology and analysis that are included in a
formal valuation.

Despite the necessity of the underlying analysis in determining whether a transaction is fair,
a fairness opinion offers little transparency to its audience into the analysis undertaken in
reaching the conclusion. It simply offers a conclusion and leaves the reader with an inability to
thoughtfully critique the opinion rendered.

2
Co-written by:
Yoram Beck
MA(Econ), CBV, CFA
Vice President
Richter Advisory Group Inc.
Valuation, Litigation
and Transaction
Advisory Practrice
T. 416.642.4834
ybeck@richter.ca
Vimal Kotecha
MBA, CPA, CA, CBV
Partner
Richter Advisory Group Inc.
Valuation, Litigation
and Transaction
Advisory Practice
T. 416.642.4837
vkotecha@richter.ca
Both Yoram and Vimal
have been engaged by
board of directors on
a number of formal
valuations and
fairness opinions.
EVOLUTION OF EXCELLENCE
In Champion, Justice Brown echoes these thoughts when he states that nowhere in the fairness
opinion did the author disclose the specifics of the actual analysis which it had performed
the number crunching, so to speak which could inform a reader on the issue of whether the
offered consideration was within a minimum range that otherwise could have been obtained in a
market-based transaction process.
Justice Brown further states that the fairness opinion was devoid of analysis which a reader
could follow in order to understand how the opinion was reached and what, if any, weight should
be given to the opinion.
In contrast, a formal valuation considered under MI 61-101 or similar provincial regulations
help to provide additional clarity by including the number crunching that supports the opinion
rendered. In such cases, a valuation range is often provided which allows the reader to assess
where on the value spectrum the proposed transaction is being contemplated.
So What is Needed?
In spite of the comments by the OSC and the Court as to the efficacy of fairness opinions, their
use in the context of commercial transactions will continue. In circumstances where the actual
analysis or number crunching is required, for example in the context of contested situations,
a fairness opinion along with a formal valuation would allow the audience to thoughtfully
understand, critique and assess the value conclusion and ultimately the fairness of the
transaction.
A formal valuation prepared in compliance with the standards set out by the Canadian Institute
of Chartered Business Valuators (CICBV) has been accepted by the Courts to meet the
requirements for admission of evidence under the Rules of Civil Procedure. The CICBVs
standards allow for increased transparency while at the same time assisting the companys
directors in fulfilling their fiduciary duties. Additionally, an expert opinion may deter litigation
to the extent that a court-ready opinion has been provided and further adds credibility to any
proposed transaction.
An abridged version of this article originally appeared in the September 5, 2014,
issue of The Lawyers Weekly published by LexisNexis Canada Inc.