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Corporations, Partnerships & Associations Law - Corporations - Arrangement - Application to court - Powers of court - Approval - Fair and reasonable

Thursday, December 08, 2016 @ 7:00 PM  


Appeal by Mulacek from the approval of an arrangement, whereby all the shares of InterOil would be exchanged for shares of Exxon Mobile valued at $45 per share, plus a capped contingent resource payment. The arrangement would effectively result in InterOil, a Yukon corporation, becoming a wholly-owned subsidiary of Exxon. InterOil’s primary asset was a 37 per cent joint venture interest in an oil and gas field in Papua New Guinea that was still in development. The judge ruled that that arrangement was fair and reasonable. Mulacek, a founder and former chairman and director of InterOil who held a six per cent interest in the company, challenged the fairness of the arrangement. He provided expert evidence that the process undertaken by the InterOil Board in considering and recommending the transaction to shareholders was deficient and that the consideration contemplated by the agreement was financially inadequate. The judge agreed that the process undertaken by InterOil’s Board in connection with the arrangement demonstrated deficient corporate governance and inadequate disclosure. His concerns were heightened by the fact that the InterOil CEO and other board members would receive a significant financial benefit from the transaction. Nonetheless, the judge found the deficiencies identified less important, because a substantial majority of the shareholders of InterOil voted in favour of the arrangement.

HELD: Appeal allowed. The court was not convinced that the arrangement was fair and reasonable, and the order approving it was set aside. The judge erred in setting aside the identified deficiencies when he came to consider the fairness and reasonableness of the arrangement. Although the shareholders were entitled to vote as they chose, the court’s approval of the arrangement was also required. Given the lack of a fairness opinion from an independent expert, the lack of any assessment of the value of the contingent resource payment as compared with the value of the oilfield asset, the conflict position that the CEO appeared to be in, and the lack of necessity of the deal, the court was required to do more than accept the vote of the majority of shareholders as a proxy for fairness.