Leave application sought for case about whether independent valuation considered in takeover situation
A B.C. mining company takeover dispute, now in the process of a leave to appeal application to the Supreme Court of Canada, could help settle the rights of dissenting minority shareholders who feel that the takeover purchase price of the company they invested in is far too low, says the lawyer handling the case.
The case of Bamrah v. Waterton Precious Metals Bid “goes to the heart of one of a handful of shareholder remedies that are out there for minority shareholders,” says Rahool Agarwal, partner with Lax O'Sullivan Lisus Gottlieb LLP. He says a Supreme Court of British Columbia decision that didn’t consider an independent appraisal of what his client’s shares were worth “has deviated from the purpose” of one of the few dissent remedies available to minority shareholders who feel they have been given a raw deal.
Agarwal says the case concerns the exercise of dissent and appraisal rights, which allow a shareholder who objects to a fundamental corporate change — for example, a corporate acquisition or amalgamation — to exit the company with the fair value of his or her shares as determined by a court.
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These rights provide an important protection to minority shareholders who would otherwise be powerless against majority decisions, Agarwal says. They act as a discipline on the conduct of the corporation and its controlling shareholders, and when applied fairly, bring balance to what “would otherwise be a David-versus-Goliath relationship.”
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The Bamrah v. Waterton Precious Metals Bid case dates back to 2014, when the plaintiff, Nandeep Bamrah, dissented from a takeover bid that would have seen his shares in Chaparral Gold Corp, a publicly traded mineral company, acquired for CAD$0.61 per share. The deal was a result of a hostile takeover bid for Chaparral Gold, which had two non-producing gold assets in Nevada.
Bamrah made an application to have the fair value of his shares determined by the British Columbia Supreme Court and brought in expert evidence showing that Chaparral shares were worth between US$1.60 and US$1.80 per share — over 200 per cent higher than the bid price. That was based on factors such as the favourable mining-friendly Nevada jurisdiction, comparable transactions, and the value of the gold assets.
The court rejected this evidence. Rather than undertaking a rigorous and independent analysis of fair value based on established valuation methods, the application judge simply confirmed the bid price on the basis that it was the product of “an open and unrestricted market.”
Agarwal says the trial judge should have at least looked at and considered the evidence presented, which would have “stress-tested the deal price to determine whether there was some reason why it was wrong.”
However, the British Columbia Court of Appeal later upheld the trial judge’s decision. Agarwal says this effectively confirms that a deal price, whatever it is, will govern in the context of a public market takeover unless there is overwhelming reason why it should not, such as fraud.
Agarwal says these decisions are concerning, as they take an approach that erodes the protections dissent and appraisal rights afford minority shareholders. Accepting the transaction price would make it nearly impossible for dissenters to use widely accepted valuation methods to prove that a minority shareholder’s shares are worth more than the amount offered by the acquirer.
Not allowing minority dissenting shareholders to bring in their appraisal evidence would create a “chilling” effect when it comes to the rights of minority shareholders, Agarwal says. “It is going to embolden companies to jam through a deal that may not be in the best interest of minority shareholders,” he says, “and that is important from an accountability standpoint.”
The plaintiff Bamrah has since brought forward an application to have his case heard by the Supreme Court of Canada and is asking that it be considered in conjunction with another application for leave to appeal in a case that deals with similar issues.
In that case, Charles A. Carlock, et al. v. ExxonMobil Canada Holdings ULC, a small group of minority shareholders exercised their right to dissent in a transaction in which ExxonMobil Canada would acquire InterOil Corportion for US$49.98 a share.
InterOil was a Yukon-incorporated early stage oil and gas company that owned a 36.5 per cent interest in a joint venture to develop a project in Papua New Guinea. When it sought to raise capital, it instead received takeover bids, and ultimately reached a deal where it would acquire InterOil by plan of arrangement.
The Yukon Supreme Court rejected the transaction price of US$49.98 per InterOil share as fair value largely because of the flawed corporate governance process leading to the transaction. In doing so, the court assessed fair value at US$71.46 per InterOil share based on an expert discounted cash flow analysis.
The Carlock case then went to the Court of Appeal of Yukon, which overturned the lower court decision. It held that the agreed-upon purchase price reflected fair value for shareholders, and that where there is significant market evidence, the transaction price is the best and most objective evidence of the fair value of the shares.
The plaintiffs in the Carlock case have also applied to the Supreme Court of Canada for leave to appeal. Agarwal says he is hoping his client’s application for leave to appeal in Bamrah v. Waterton Precious Metals Bid should be considered along with the Carlock case because of its importance to corporate law and to investors in public companies across the country.
He adds that a Supreme Court decision in these cases would create a landmark precedent on the issue of minority shareholders’ rights.
Agarwal says “we’re hoping that the apex court of our country will be able to provide guidance and say we have to take a more holistic view when it comes to a minority shareholders dissenting on the valuation of a takeover situation, not just the market transaction price.”
Agarwal says a decision on whether leave to appeal will be granted in both of Bamrah v. Waterton Precious Metals Bid and Charles A. Carlock, et al. v. ExxonMobil Canada Holdings ULC should be expected in several weeks.