Judicial scrutiny of fairness opinions

Introduction

Fairness opinions, a common feature of board-endorsed transactions such as plans of arrangement, have been receiving increasing judicial scrutiny in Canada. While the Supreme Court of Canada in BCE¹ held that fairness opinions may be an indicium of the fairness of a transaction to the corporation’s security holders, subsequent decisions have questioned the value of particular fairness opinions.

Fairness opinions are generally prepared by financial advisors (commonly investment banks) engaged by a corporation’s board of directors or a special committee of the board. While not legally required, boards and special committees frequently obtain the opinions as part of exercising their fiduciary duties. The opinions are typically cited in the corporation’s disclosure, such as a circular seeking shareholder approval of a proposed arrangement.

The fairness opinions disclosed to the market are generally short form, providing a summary of the information considered by the financial advisor and a conclusory opinion that the proposed transaction is fair, from a financial perspective, to the corporation’s shareholders or security holders. Details of the financial advisor’s analysis, some of which may have been presented to the board or special committee, are not typically disclosed.² 

Until recently, it was very common for the financial advisors to be paid a success fee based on the approval and completion of the subject transaction.³ 

Recent judicial scrutiny of fairness opinions has focused on three issues. The first is the conclusory nature of fairness opinions, which commonly reveal little of the analysis underlying the advisor’s conclusion. Recent judicial decisions have questioned whether such an opinion can meaningfully inform the security holders who vote on the arrangement—or, for that matter, the judge who is later asked to affirm its substantive fairness. Second, courts have criticized fairness opinions that are improperly narrow in scope, particularly where they exclude issues essential to assessing the arrangement’s fairness. Third, some courts have rejected the opinions of advisors whose compensation depends on the success of the plans of arrangements they are evaluating.

This increasing judicial scrutiny has created uncertainty for boards and their advisors. While the general trend toward increased scrutiny is clear, courts themselves appear to disagree about the appropriate standards. Nonetheless, recent case law contains some important lessons.

Among those lessons is the importance of distinguishing between (a) boards of directors relying on a fairness opinion as one part of executing their fiduciary duties, and (b) a court relying on a fairness opinion in contested litigation. In the case of the former—such as in disclosure of short-form fairness opinions in a circular, or as part of an applicant’s case for approval of a proposed arrangement—the issue is the process followed by the board and exercise of its judgment. In our view, while the independence of the financial advisor will almost always be relevant, in such cases courts should not treat the fairness opinions as proposed expert evidence, but should rather accept fairness opinions as part of the evidence regarding the board’s business judgment. By contrast, in a contested arrangement, applicants should be aware that a fairness opinion (particularly in short form) attached to a circular or an affidavit will not likely be relied on heavily by the court without the financial advisor giving direct evidence and being qualified by the court as an expert.

Issue 1: How much analysis must a fairness opinion disclose?

The first issue, and the subject of the most extensive judicial commentary, is how much analysis a fairness opinion must disclose.

Regulatory guidance

Regulators offer some guidance on how much analysis a fairness opinion should contain.

The Policy on Arrangements of the Director appointed under the Canada Business Corporations Act (CBCA) encourages boards of directors to obtain fairness opinions, even though they are not a statutory requirement.⁴ While the Policy states that security holders should receive “sufficient information to allow them to form a reasoned judgment as to whether to support or to vote against the proposal,” no more detailed guidance is given.⁵ Similar guidance is not provided under provincial corporations statutes.

For arrangements falling under Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions (MI 61-101), increased disclosure may be required. Broadly speaking, MI 61-101 applies to transactions that pose increased risk to minority security holders because they are “initiated by persons likely to have inside knowledge or special influence or control over publicly traded corporations.”⁶ Such transactions include insider bids, issuer bids, business combinations and related-party transactions.⁷ Under MI 61-101, these transactions generally require a formal valuation unless an exemption applies, in which case a fairness opinion is commonly provided instead.

While MI 61-101 does not directly address fairness opinions or their content, it does require companies to provide “a discussion of the review and approval process adopted by the board of directors and the special committee, if any.”⁸ According to Companion Policy 61-101CP, in the view of securities regulators this disclosure requirement implies an obligation to “disclose in reasonable detail the material factors on which [the directors’] beliefs regarding the transaction are based,” including “any analysis of expert opinions obtained.”⁹ The Staff Notice related to MI 61-101 provides more specific guidance, stating that fairness opinions should “provide a clear summary of the methodology, information and analysis (including, as applicable, financial metrics and not merely a narrative description) underlying the opinion sufficient to enable a reader to understand the basis for the opinion, without overwhelming security holders with too much information.”¹⁰

Further requirements can be found in the Dealer Member Rules of the Investment Industry Regulatory Organization of Canada (IIROC).¹¹ Rules 29.14–25 govern disclosure in fairness opinions and formal valuations for transactions governed by MI 61-101.¹² Rule 29.18 states the general requirement that a fairness opinion “contain sufficient disclosure to enable the directors and security holders of the particular issuer to understand the principal judgments and principal underlying reasoning of the Valuer … so as to form a reasoned view on … the opinion as to fairness expressed therein.” Rule 29.21 lists more specific information to be discussed, including the “scope of review”, “a summary of the type of information reviewed and relied upon,” a “description of the valuation or appraisal work performed,” “key assumptions made by the Dealer Member,” and “the factors the Dealer Member considered important.”

Rule 29.24 acknowledges that a fairness opinion, in contrast to a formal valuation, need not reach or disclose specific conclusions as to a valuation range or ranges. Nonetheless, a fairness opinion must provide specific reasons for its conclusion as to fairness, with enough supporting detail for each “to allow the reader … to understand the principal judgments and principal underlying reasoning of the opinion provider in reaching its opinion as to the fairness of the transaction.”

Judicial guidance

The leading case on the test for court approval of a plan of arrangement is BCE. In order to approve an arrangement, a court must be satisfied that, among other things, the application is put forward in good faith, and the arrangement is “fair and reasonable.”¹³ In assessing the fairness of the arrangement, the Supreme Court recognized “the presence of a fairness opinion from a reputable expert” as one indicium of fairness, alongside others such as shareholder approval (preferably by a large majority), the proportionality of compromises between various security holders, security holders’ positions before and after the plan, approval by a special committee of directors, and the availability of dissent rights.¹⁴ Fairness opinions are not necessary, and the lack of a fairness opinion cannot in itself found an adverse inference that an arrangement is unfair.¹⁵ Nonetheless, fairness opinions have become a standard feature of proposed arrangements, and applicants frequently point to them as an indication of a transaction’s fairness.

The Court in BCE, however, did not elaborate on the necessary content of fairness opinions, which has left the door open to competing views on how much analysis, if any, a fairness opinion must disclose in order to be considered an indicium of fairness.

Champion Iron Mines: Must fairness opinions be expert evidence?

The most expansive, indeed controversial, view in this regard holds that for a court to give any weight to a fairness opinion, it must meet all the requirements of an expert report under the applicable court rules. In Re Champion Iron Mines Ltd,¹⁶ the Ontario Superior Court approved a plan of arrangement by which an Australian company acquired Champion Iron Mines Limited through a share exchange. The Court found the arrangement to be fair for a number of reasons, but declined to give any weight to the fairness opinion in coming to that conclusion.

In a concluding comment, the Court offered some pointed criticism of “the evidentiary utility of the common form of fairness opinion.” ¹⁷ The fairness opinion before it did not “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.”¹⁸ 

The Court held that a fairness opinion, like any other opinion evidence, can only be considered if it is adduced through a qualified expert witness and complies with court rules governing the content of expert reports. That includes fully disclosing the reasons for the opinion, including describing all factual assumptions, research conducted, and a list of every document relied upon.¹⁹ An opinion that does not meet these requirements is simply inadmissible in Court.

Bear Lake Gold and Royal Host: Fairness opinions are meant to serve a commercial purpose

Other judges did not take long to distance themselves from the position taken in Champion Iron Mines. In Re Bear Lake Gold,²⁰ the same Court disagreed with the notion that fairness opinions must meet all the requirements of expert evidence, particularly for transactions involving the acquisition of securities by a third party, holding 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.”²¹ 

According to Bear Lake Gold, fairness opinions not entered as expert evidence are still relevant to the court in two ways: (1) as evidence that the special committee or board of directors considered the fairness and reasonableness of the transaction on the basis of objective criteria, and (2) by informing shareholders so that an absence of shareholder objections to the arrangement can itself become an indication of fairness. Context matters, however. In contested arrangements involving “a reorganization of the interests of existing shareholders”, if a party proposes to qualify a fairness opinion as expert evidence, then “the detailed analysis that grounds the fairness opinion must be available if required by any objecting securityholders.”²² 

In Re Royal Host Inc,²³ the Court again signalled disagreement with the stance taken in Champion Iron Mines, stating:

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. If the board or the shareholders are not satisfied with the report, they can vote with their feet and not proceed with or approve the arrangement.²⁴ 

The Court, explicitly siding with the opinion in Bear Lake Gold, reaffirmed that a fairness opinion—including, implicitly, an opinion that does not disclose the analysis underlying its conclusion—is properly considered as an indicium of the fairness of a proposed transaction.²⁵

The recent British Columbia case of Re iAnthus Capital Holdings Inc,²⁶ appears to take a similar position, at least implicitly. Because the fairness opinion presented did not qualify as expert evidence, the Court did not “give it great weight” but still found that it “provides some evidence in support of the arrangement.” ²⁷ Likewise, the Court of Appeal also relied on the fairness opinion as an indication of fairness.²⁸ This statement is consistent with the idea that a fairness opinion can be an indicium of fairness even if it is not expert evidence, although the implications of this case are less clear since neither decision discussed how much disclosure the fairness opinion included.

InterOil: An inadequate fairness opinion undermines shareholder decision-making

These two schools of thought were addressed two years later in the InterOil case.²⁹ InterOil concerned a proposed arrangement in which InterOil Corporation would be acquired by Exxon Mobil through a share exchange. InterOil’s primary asset was a joint venture interest in a gas field in Papua New Guinea that was still in the development stage, and thus difficult to value. In the proposed arrangement, InterOil’s shares would be valued at $45 per share, plus a capped “contingent resource payment” (CRP) linked to the certified resources that the gas field would later be assessed to contain, up to a maximum of 10 trillion cubic feet equivalent (tfce).

InterOil accepted the Exxon offer after previously accepting a competing offer from another potential acquirer, Oil Search. Exxon offered a higher share price than Oil Search, as well as a higher CRP per volume of gas—but with the notable distinction that Exxon’s CRP, unlike Oil Search’s, was capped. Thus, the likelihood that the gas field’s certified resources would later exceed the 10 tfce cap imposed by Exxon was essential to the relative merits of the competing offers. A second important feature of Exxon’s offer was that due to an incentive plan, if the Exxon transaction was approved the CEO of InterOil would earn approximately $35 million.

On application to approve the arrangement, the Yukon Supreme Court was highly critical of the fairness opinion put forward in support of the arrangement. First, while the opinion described in general terms the types of documents reviewed, it did not list any specific documents and “contained no analysis … so that a shareholder could fairly consider the merits of the Exxon Arrangement”. ³⁰ Second, the fact that the investment bank giving the opinion was to be compensated based on the success of the arrangement fundamentally undermined the value of the opinion (an issue we discuss below). In spite of these deficiencies, however, the Supreme Court approved the transaction on the basis of other considerations, including that 80% of the company’s shareholders voted to approve it.

A panel of the Yukon Court of Appeal (consisting of justices of the British Columbia Court of Appeal) took a different view. It held that the deficiencies in the fairness opinion fatally undermined the application for approval. Of particular concern was that the fairness opinion explicitly declined to give any specific value to the CRP or to assess the likelihood that the resource certification would exceed the cap. Since the effect of the cap was essential to the value of the Exxon offer, the opinion failed to provide any evidence that the arrangement was fair. Indeed, the only independent evidence of the effect of the capped CRP was provided by an opposing fairness opinion, which concluded that the Exxon arrangement offered inadequate compensation to InterOil’s shareholders.³¹  

The Court of Appeal held that because of the various “red flags” in the transaction—including the fairness opinion’s failure to value the CRP, its lack of analysis, the advisor’s success fee, and the fact that the CEO, who negotiated the Exxon agreement, was in a position of conflict—it was an error for the chambers judge to accept the majority shareholder approval as a “proxy” for fairness. While it is ultimately for the shareholders to decide on the business merits of a proposed transaction, the court must be satisfied that they made an informed choice.³² Thus, by deferring to a shareholder vote that, due in part to deficiencies in the fairness opinion, was not adequately informed, the chambers judge committed an error.

Following this reversal, InterOil secured a new “long form” fairness opinion, for a fixed fee, that outlined the analysis supporting its conclusion, and specifically addressed the financial implications of the CRP cap. A representative of the bank that supplied the new opinion also adopted its contents in an affidavit that provided further expert evidence on the deal's fairness. With this, and with some small amendments to Exxon’s offer, the shareholders voted for a second time and approved the deal with 91.24% supporting. The Court approved the arrangement, praising the detailed analysis disclosed in the new fairness opinion and the practice of appending the opinion to the affidavit of an expert from the institution that produced it.³³

Sherritt and Canopy Rivers: Further criticism of inadequate disclosure

The issue of disclosure was again placed in the spotlight by two recent Ontario decisions. In Sherritt International Corporation,³⁴ the Court approved the proposed plan of arrangement, but gave no weight to the fairness opinion put forward in support of it. Among the deficiencies the Court identified was a failure to disclose the analysis supporting the opinion:

The difficulty I have is the opinion itself and, when read carefully, stripped of its verbal ornamentation, the opinion can 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.³⁵ 

Summarizing its criticism, the Court observed that “conclusory fairness opinions with limitations of the sort set out above are of no help and are not a productive use of the court’s time.”³⁶ 

The same judge returned to the theme in Re Canopy Rivers Inc³⁷ on an interim application to set the process of approval for a plan of arrangement. In discussing the initial order, the Court took the opportunity to give directions to the bar about what information is helpful to courts considering the fairness of a proposed arrangement. For a court to assess fairness, “it requires more than simple assertions that fairness opinions say the plan is fair…. We need to be persuaded with concrete reasons, not bald assertions.”³⁸  Fairness opinions that offer “a bald conclusion that the plan is fair” or “merely perform a numerical calculation based on numbers provided by management” are inadequate.³⁹ 

Conclusions on the issue of disclosure

In spite of the somewhat divergent views expressed by the courts, some conclusions can be drawn. 

First, the strong position taken in Champion Iron Mines, namely, that a court can only consider a fairness opinion if it meets all the requirements of expert evidence, seems unlikely to carry the day. With the exception of Champion Iron Mines, decisions that have considered the issue have acknowledged that fairness opinions do not necessarily need to satisfy court rules governing expert reports.⁴⁰ 

Nevertheless, the cases discussed above also clearly demonstrate the hazard of relying upon a fairness opinion that fails to disclose meaningful information. Even those decisions that generally supported the status quo and emphasized the commercial (as opposed to evidentiary) purpose of fairness opinions assumed that such opinions must meaningfully inform shareholders so they can “reach their own conclusions” and “vote with their feet” if necessary.⁴¹ 

In this regard, InterOil offers a sobering lesson. It demonstrates that an inadequate fairness opinion can not only fail to indicate the fairness of an arrangement; it can also undermine other indicia of fairness, such as shareholder or board approval, that would otherwise speak in favour of the arrangement. Moreover, InterOil also shows that a fairness opinion that does not show its reasoning can be easily disregarded if an opposing party puts forward a more convincing expert opinion of its own.

To be sure, there were a number of problems that contributed to the result in InterOil. Had it not been for the various “red flags” in the transaction, it is unlikely that the conclusory nature of the opinion would itself have been enough to undermine the arrangement’s approval.⁴² Indeed, some of the most trenchant commentary about inadequate disclosure in fairness opinions has occurred in decisions in which the Court, in spite of the opinion’s inadequacies, approves the transaction.  Nonetheless, InterOil is a clear warning that in a contested arrangement, an inadequate fairness opinion can significantly undermine the success of the proposal.

Ultimately, judicial scrutiny of fairness opinions will remain contextual and dependent on the specific concerns raised in each transaction. While fairness opinions that reveal little or no analysis might continue to suffice for arrangements in which fairness is easily established, companies and their advisors should be aware of the risks of this approach. In arrangements likely to be opposed—and particularly where there may be an appearance of conflicting interests or undue influence on the part of management or other insiders—fairness opinions should disclose enough information and analysis to meaningfully inform shareholders and the court. While fairness opinions need not meet all the standards governing expert evidence in court, in some cases adopting those standards may be the wisest course.

Issue 2: What is the appropriate scope of a fairness opinion?

The second focus of recent judicial scrutiny relates to the scope of fairness opinions. In some cases, courts have disregarded an opinion because it fails to address issues that are essential to the statutory test for fairness. 

Regulatory guidance

Regulatory documents offer some guidance in this area, particularly on the question of whose interests should be included in assessing an arrangement’s fairness. 

The Policy on Arrangements of the CBCA Director holds that a fairness opinion should address the fairness to each class of security holders affected by the arrangement:

In the Director’s view, a fairness opinion that deals only with selected classes of security holders and which does not address fairness from an inter-security holder class perspective (i.e. fairness among security holders), provides only limited evidence as to the fairness of any proposed arrangement and invites inquiry as to the fairness of the arrangement to classes of security holders to whom the opinion is not addressed.⁴⁴ 

For arrangements that include a compromise of debt, fairness opinions should state why the arrangement is fair to holders of debt securities, which generally means showing that the arrangement will put the security holders in a better position than if the corporation were liquidated.⁴⁵ 

While the Policy on Arrangements does not have the force of law, it is sometimes taken as a persuasive authority by courts.⁴⁶ 

Neither MI 61-101 nor its Companion Policy requires or addresses fairness opinions, but for transactions governed by this instrument, the accompanying Staff Notice emphasizes that the directors’ disclosure should “address the interests of minority security holders and not be limited to whether the transaction is in the best interests of the issuer.”⁴⁷ 

The IIROC Dealer Member Rules governing fairness opinions⁴⁸ —which apply to transactions covered by MI 61-101—do not give any specific guidance on how the interests of various classes of security holders should be addressed in a fairness opinion.

Judicial guidance

Courts have issued sharp criticism of fairness opinions that improperly limit the scope of the inquiry.

First, following BCE, the court’s inquiry into the substantive fairness of a proposed arrangement always includes a consideration of fairness between different classes of security holders, and in particular, whether “the objections of those whose legal rights are being arranged are being resolved in a fair and balanced way.”⁴⁹ Where there are significant conflicting interests among security holders, a fairness opinion that addresses fairness only to the corporation generally, or to some security holders but not others, is unlikely to be well received.

The Sherritt case provides a recent example. As noted above, the Court disregarded the fairness opinion put forward in support of the proposed arrangement in part because it failed to disclose the analysis underlying its conclusion. The Court was equally critical, however, that the opinion assessed fairness to “the company” but ignored fairness to the holders of debt that would be compromised in the arrangement:

In that context fairness to the company would appear to mean fairness to Sherritt as a debtor. It is self-evident that any arrangement that decreases the amount of debt the debtor owes is fair to the debtor. The issue on a plan of arrangement is not whether reducing debt is fair to the debtor but whether it is fair to creditors.⁵⁰

As a result, the Court found the opinion to be “of little value.”

A similar problem occurs when an issue central to the question of fairness is excluded from the scope of the opinion. In many ways this, even more than the failure to disclose its analysis, was the essential flaw that undermined the fairness opinion put forward in the InterOil case. As discussed above, the key feature distinguishing the competing offers InterOil had received was the fact that while the Exxon offer included a higher price per share, it (unlike its rival) also included a cap on the CRP. By failing to address this central issue, the utility of the fairness opinion was undermined.⁵¹ Indeed, the Court of Appeal found that excluding the CRP cap from the scope of the fairness opinion was itself a “red flag” warning of a potential lack of fairness.⁵² 

Likewise, it is also important to be mindful of scoping limitations that might undermine the independence, or perceived independence, of the experts giving the fairness opinion. In Re The Catalyst Group Inc,⁵³  the Ontario Securities Commission expressed concern about a real estate appraisal that was relied upon in a combined valuation and fairness opinion. The real estate appraisal appeared to be based on scenarios given to the appraiser by the special committee of the company’s board and not unequivocally adopted by the appraiser as reasonable or appropriate.⁵⁴ The Commission emphasized that the valuator, who was also giving a fairness opinion, “must express its own opinion, constrained only by circumstances beyond its own control and that of its client, and not constrained by limitations imposed by that client.”⁵⁵  

Issue 3: Fixed fee or success fee?

The third focus of recent judicial scrutiny is paying success fees to advisors who issue fairness opinions. 

It has long been common practice for a fairness opinion to be provided by the same financial advisor who is retained to advise the board or special committee more generally in negotiating and evaluating the proposed transaction. That advisor is often compensated at least in part through a success fee.

The result is it is arguable that the advisor preparing the fairness opinion has an incentive to conclude that the arrangement is fair. In some situations, that incentive may raise questions about the reliability of the fairness opinion. To address this concern, a company can hire a second financial advisor to assess the transaction and provide a fairness opinion for a fixed fee, but doing so is expensive. Whether and in what circumstances a fixed-fee fairness opinion is necessary thus remains a difficult question.

Regulatory guidance

Regulatory documents are silent on the appropriate compensation structure for a financial advisor preparing a fairness opinion. They do, however, impose some disclosure obligations regarding the structure of an advisor’s compensation.

For transactions falling under MI 61-101, the Staff Notice opines that the compensation arrangement for a fairness opinion should be disclosed, “including whether the financial advisor is being paid a flat fee, a fee contingent on delivery of the final opinion, or a fee contingent on the successful completion of the transaction.”⁵⁶ Transactions governed by MI 61-101 also trigger disclosure requirements under the IIROC Dealer Member Rules, which stipulate that a fairness opinion should disclose “the financial terms of the Dealer Member’s retainer.”⁵⁷  

Judicial guidance

Until recently, the common practice of paying success fees received little scrutiny from the courts.⁵⁸  

That changed in 2016 with the InterOil case. In all three InterOil decisions,⁵⁹ the Yukon courts were highly critical that the compensation of the investment bank giving the fairness opinion was contingent on successfully completing the transaction. At the first hearing, the Supreme Court heard the testimony of a former Chair of the Ontario Securities Commission that the fairness opinion should have disclosed the details of the bank’s fee and the company should have secured a second, independent opinion for a fixed fee.⁶⁰ The Court agreed, finding that the contingent fee effectively meant the bank’s opinion no longer constituted independent advice, but was rather simply a “comfort letter.”⁶¹  

The Court of Appeal agreed with this view. It found that the contingent fee, together with the opinion’s failure to properly consider the value of the CRP (as discussed above) “clearly undermines the utility of the opinion to the directors, the shareholders and the Court”.⁶² The Court held that the need for an independent, fixed-fee opinion was all the greater because of the conflict of interest faced by the CEO, who stood to earn some $35 million if the arrangement proceeded, and the passive role of the special committee in negotiating the transaction. In these circumstances, the board should have sought independent advice but did not.⁶³  

On the proposed arrangement's return to the Yukon Supreme Court, the chambers judge granted a new interim order requiring (1) a new “long form” fairness opinion, obtained for a fixed fee, and (2) a report on the arrangement by a Transaction Committee consisting of four independent directors. In contrast to the Court of Appeal, which emphasized the circumstantial factors that made a contingent-fee opinion inappropriate, the chambers judge made a categorical statement about the minimum standards for any plan of arrangement:

In my view, these requirements provide a minimum standard for interim orders of any plan of arrangement. It is not acceptable to proceed on the basis of a Fairness Opinion which is in any way tied to the success of the arrangement.⁶⁴ 

It is unclear what the long-term effect of InterOil will be on the practice of obtaining fixed-fee fairness opinions. While the case was widely discussed within the legal profession, it has not yet been considered by courts outside of Yukon and British Columbia. Anecdotally, outside those jurisdictions it remains common for advisors giving fairness opinions to be compensated at least in part through a success fee. 

The recent Sherritt case in Ontario does suggest, however, that contingent-fee fairness opinions might well remain a subject of wider judicial concern. As noted above, the Court in Sherritt approved the proposed arrangement but disregarded the fairness opinion. While the Court’s sharpest criticism was reserved for inadequacies in the content of the fairness opinion, it also found that the investment bank giving the opinion was not sufficiently independent. First, one of the company’s directors was a former partner and current advisor of the bank. Second, the Court found that the bank’s independence was undermined because it provided ongoing services to the company, and expected to continue to do so in the future:

The simple fact of being retained as an expert contains its own implicit pressure. The dynamic is clear from the outset that the client wants an opinion favourable to itself. It is far easier to resist that pressure when the firm being retained has no long-term economic interest to pursue with the client.⁶⁵ 

While the nature of the bank’s fee did not come up in the discussion of independence, it is striking that the Court saw the ongoing advisory relationship itself as a significant concern. One suspects that the disclosure of a success fee in this case would have prompted even sterner criticism from the Court.

Ultimately, InterOil has left considerable uncertainty about whether, and when, paying a success fee will significantly undermine the value of a fairness opinion to the court. The answer will likely continue to depend on the context of the transaction as a whole. In easy cases, where the arrangement is unopposed and there are many indicia of fairness, the increased cost of procuring an independent fixed-fee opinion may not be necessary. But in arrangements where there is a concern about conflicts or insider influence, relying upon a contingent-fee opinion may pose significant risks. As InterOil demonstrates, in situations involving material conflicts of interest, any reliance that a court might have placed on a fairness opinion can quickly unravel if there is a success fee at stake. 

Finally, more detailed disclosure of its analysis may help to shore up the validity of a success-fee opinion as an indicium of fairness. Judicial skepticism about the incentives affecting a fairness opinion is more likely to thrive where the court has little insight into how the opinion was formed.

Conclusion

The recent trend toward increasing judicial scrutiny of fairness opinions has thrown into question the common practice of relying upon fairness opinions that are conclusory and, in many cases, linked to a fee contingent on the success of the arrangement. Despite the more categorical statements occasionally made by courts, judicial reception of fairness opinions will likely remain contextual and dependent upon the specific concerns raised in each transaction. Fairness opinions should be tailored to the situation. For arrangements likely to be opposed—and particularly where there may be significant conflicting interests—boards and their advisors would be wise to ensure that the fairness opinion discloses enough analysis to meaningfully inform security holders, and thus to lend weight to the various indicia of fairness that the court will assess. Likewise, the choice to incur the expense of a fixed-fee opinion should also be informed by the various potential indicators of fairness (or its opposite) inherent in the situation. Balancing these considerations will continue to be a challenge to companies and their advisors alike.