On February 2, 2024, the Quebec Court of Appeal issued its unanimous decision reducing the fair value of the Fibrek shares by 20% and emphasizing the importance of market prices in determining fair value.

Overview of the main facts discussed on appeal

On November 28, 2011, Resolute announced an unsolicited take-over bid to acquire Fibrek at a price of $1.00 per share, supported by irrevocable (hard) lock-up agreements with 3 shareholders holding 46.3 % of Fibrek’s shares (the Locked-up Shareholders), one of which was also a shareholder of Resolute. Fibrek shares were then trading at $0.72, such that the Resolute offer included a 39% premium.

On December 19, 2011, Fibrek’s Board recommended rejecting the Resolute bid. On February 10, 2012, Fibrek and Mercer, another pulp and paper company, announced an agreement for a Mercer take-over bid to acquire all of Fibrek’s shares at a price of $1.30 per share. The agreement included a purchase of special warrants by Mercer, convertible into Fibrek shares, which would effectively dilute the Locked-up Shareholders to 37%. The special warrants were cease-traded by the Quebec administrative securities tribunal and fast-tracked, successive appeals followed. During the appeal proceedings, Mercer increased its offer to $1.40. However, once the Supreme Court of Canada denied leave to appeal sealing the fate of the special warrants, Mercer let its offer expire, without taking up and paying for any Fibrek shares.

This paved the way for Resolute to complete its acquisition of Fibrek, through a second-step transaction by plan of arrangement under the CBCA. Holders of approximately 12% of Fibrek’s outstanding shares, mostly arbitrageurs, exercised their dissent rights and sought to be paid fair value for their shares as at July 22, 2012 (the Valuation Date). Between the launch of the Resolute offer and the Valuation Date, Fibrek had signed a power purchase agreement with Hydro-Quebec, which Fibrek expected would generate material EBITDA (the Energy Contract).

The Trial Judgment

The trial judge fixed the fair value at $1.99 per share, rejecting the Resolute offer price and instead adding various components to the amount of Mercer’s second offer of $1.40. The Court of Appeal overturned the trial judgment, on account of several palpable and overriding errors. It used Resolute’s offer price as updated at the Valuation Date ($0.87) to which it added the value of the Energy Contract ($0.80) and subtracted $0.08 for environmental liabilities not disputed on appeal, for an amount of 1.59$ per share.

Takeways from the Court of Appeal Judgment

  • The transaction price, to the extent it was accepted by sophisticated market actors, acting in their own self-interest, constitutes objective evidence of value that should serve as a basis for an assessment of fair value in valuation proceedings.
  • Absent probative value of market failure or subsequent facts not accounted for by the market, the transaction price should not be excluded by the courts.
  • Courts should not substitute their judgment to that of sophisticated market actors involved in a transaction, who should be presumed to be acting rationally and in their own self-interest.
  • Shareholders do not owe any fiduciary duty to their fellow shareholders.
  • There is nothing illegal nor improper about lock-up agreements, even hard lock-up agreements, which are a common and accepted tool in the context of take-over bids.
  • Bidders do not have any obligation, when launching a bid, to offer fair value to the target’s shareholders.
  • The concept of legitimate expectations, relied upon in the context of oppression remedies, should not be imported into valuation proceedings.
  • Judges tasked with determining fair value should not be conducting hypothetical auctions, which involve far too much speculation and, if pushed too far, result in a party bidding much more than the fair value of the shares.

Shareholders cannot expect that fair value in valuation proceedings will reflect what they might have hoped would happen in an auction divorced from market reality. Market reality invariably includes commercial restrictions – such as lock-up agreements – that may impact any potential bidding