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Securities Regulatory Valuations and Fairness Opinions

15/07/2009


Meyers Norris Penny’s Chartered Business Valuators provide an update on securities regulatory related valuation topics. 

New Chartered Business Valuator Professional Practice Standards for Formal Valuations
At its recent annual general meeting, the Canadian Institute of Chartered Business Valuators (CICBV) approved amendments to its professional practice standard pertaining to Valuation Reports Prepared for Purposes of Securities Legislation, Regulation or Policies. The updated standard (Appendix A to Standard No. 110) complies with Multilateral Instrument 61-101 (MI-61-101) and its related companion policy.

Specifically, Chartered Business Valuators are now directed to disclose in their Formal Valuation Reports (such as those prepared for MI 61-101) any distinctive material benefit that might accrue to an interested party (as defined in the applicable securities regulations or policies) as a consequence of the transaction. This includes whether such benefit has been reflected in the valuation conclusion.

The term distinctive material benefit is not explicitly defined in the standard, but examples found in MI 61-101* include earlier use of available tax losses, lower income taxes, reduced costs or increased revenues. Another example we have encountered is access to or earlier use of other tax assets such as undepreciated capital cost pools and investment tax credit balances.

The standard has also been updated to reflect changes of a housekeeping nature to provide consistency with terminology, definitions and other recent changes to CICBV pronouncements. Counsel to issuers, offerors and special committees can benefit by being familiar with the standards to which appointed valuators must adhere to under MI 61-101. MNP can assist by discussing any securities regulatory valuation issues with you. The full text of the updated standard and all other professional practice standards followed by CBVs, along with CICBV code of ethics and by-laws, can be found on the institute’s website.

Fair Value / Independence of Financial Advisor Delivering Fairness Opinions
The legal community has reported a great deal of information regarding the recent Ontario Securities Commission (OSC) decision on the HudBay Minerals Inc. attempted acquisition of Lundin Mining Corporation and the need for shareholder approval. Although the issues raised by the transaction and rationale for the OSC decision go beyond our professional scope as business valuators, we noted that the OSC, in its Reasons for Decision dated April 28, 2009, raised concerns with the retention of financial advisors to prepare fairness opinions whose fee is dependent upon the success of the transaction. In the Reasons for Decision, the OSC did not address certain allegations about the process followed by the board and Special Committee of HudBay. However, in relation to the related transaction filings, the OSC expressed its concern about the financial advice received by the Special Committee from its appointed financial advisor.** The OSC drew attention to the fact that the financial advisor was “to receive a signing fee when the arrangement is entered into and a much larger success fee payable if the Transaction is consummated” and concluded that:

”Such fees create a financial incentive for an advisor to facilitate the successful completion of a transaction when the principal focus should be on the financial evaluation of the transaction from the perspective of shareholders. While the Commission does not regulate the preparation or use of fairness opinions, in our view, a fairness opinion prepared by a financial advisor who is being paid a signing fee or 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.”

Although these comments did not form part of the basis for their decision in the HudBay transaction, we believe that the remarks are indicative of the OSC’s views on the importance of independence of financial advisors giving fairness opinions and that special committees and their counsel should consider the benefits of maintaining such advisor independence and avoid situations where the attention of the OSC is clearly heightened. CBVs from Chartered Accountancy firms, which are typically not involved in managing transactions, can be a viable alternative resource for fairness opinions and formal valuations.

OSC Leaders Address Chartered Business Valuators
We were fortunate to attend the recent Eastern Region Conference of the CICBV. One session featured OSC Chief Accountant, Cameron McInnis and Accountant, Marie-France Bourret, who offered their personal perspective on the subject “Fair Value and its Impact on Financial Reporting in the Current Economic Environment.” The presentation highlighted the significant reviews undertaken by the OSC regarding valuation related disclosures and measurements, including: impairment of goodwill; intangible assets and long-lived asset; and the related challenges companies are facing in the current economic climate. Valuation is definitely on the OSC radar.

We believe that in today’s uncertain markets, corporate decision-makers including boards and special committees are well-advised to consider obtaining independently prepared fairness opinions in connection with significant transactions and independent valuations in connection with asset impairment testing.

Going Private Trend and our Recent Formal Valuations
We closely monitor securities filings, including management information circulars and going private transactions. We believe that the market’s depressed share prices will continue to encourage this activity, further motivated by various strategic opportunities and options.
Recently completed going private transactions for which we have provided formal valuations and fairness opinions include:

  • MediSolution Ltd. (a subsidiary of Brookfield Asset Management Inc.); and
  • Momentum Advanced Solutions Inc.

These TSX listed companies operated in the information technology and services sector. The going private transactions involved the acquisition of shares by entities owned by majority/significant shareholders.

 *MI 61-101, section 6.5 (2)(a)(ii), dealing with the summary of the Formal Valuation to be included in issuer or offeror filings.

**Paragraphs 263 and 264 of the OSC Reasons for Decision dated April 28, 2009.

This newsletter is provided as an information service and should not be construed as a legal opinion or other advice. Readers are cautioned not to act on information without seeking specific advice with respect to their unique circumstances. Requests to discuss specific valuation matters are welcome. 

By Steven Hacker, CA, CBV and Amanda Salvatori, CA, CBV