Law Times

www.lawtimesnews.com Page 12 march 17/24, 2008 / Law Times Grandison not a sea change in jurisprudence T he British Columbia Supreme Court's recent decision in Grandison v. NovaGold Resources Inc. emphasizes transaction value at the expense of theoretical experts' opinions when determining the "fair value" of shares in dissent proceedings. "Grandison advances the propo- sition that the negotiated price should form the basis for valu- ing the dissenting shares unless there's a good reason to reject that price," says Joe McArthur of Blake Cassels & Graydon LLP's Vancouver office, who with col- league Paul Heisler represented the respondents, NovaGold and Coast Mountain Power Corp. "And while there are Ontario cases that have suggested such an approach, Grandison goes a little further." The B.C. Business Corporations Act says a dissenting shareholder is entitled to be paid the "fair value that the notice shares had imme- diately before the passing of the resolution adopting the arrange- ment." The Ontario Business Corporations Act says a dissent- ing shareholder is entitled to "the fair value of the shares held by the shareholder in respect of which the shareholder dissents, deter- mined as of the close of business on the day before the resolution was adopted." Grandison arose after NovaGold acquired Coast Mountain, a pub- licly traded company on the TSX Venture Exchange, for $2.20 per share. Clifford Grandison, Coast's CEO and one of its founding shareholders, dissented in respect of his 1.8 million shares. Grandison took the position that his shares were worth $6.14 to $8.51 per share. Traditionally, there have been four ways of valuing a company: • market value, taken from stock exchange quotes; • net asset value, based on the cur- rent value of company assets; • investment value, a measure of the company's earning capacity; and • a combination of all of them. Justice Ian Pitfield took care to point out that the fair value of dissent shares was not the same as their market value because the market would normally discount a minority interest. "The focus is the determination of the en bloc value of all shares in the company, and the allocation of a proportionate share thereof to the dissenter," Pitfield wrote. "As a result, the minority discount that would ordinarily be applied when determining the fair market value of a minority interest is ignored." Here, because the Coast Mountain shares were thinly trad- ed, there was a danger in placing too much weight on the trading price. An asset value approach was also not appropriate, as Coast Mountain did not have significant assets at the relevant time. Instead, its value lay in its income-earning potential. But there were also problems with having fair value determined on the basis of expert opinions of investment value, which were traditionally based on discounted cash flow (DCF) valuations. "The investment, going con- cern, or intrinsic value basis for valuation is relevant, but very diffi- cult to apply with any confidence," Pitfield concluded. Coast Mountain, after all, was in the early stages of development, and the assumption underlying the DCF valuations of both parties' experts were "rife with speculation and uncertainty." "A DCF valuation provides some evidence, but is not determi- native, of value," Pitfield noted. Rather, the appropriate starting point was the transaction itself, par- ticularly when it was arm's-length in nature. And other consider- ations also militated in favour of negotiated price as starting point. When it announced its inten- tions, NovaGold owned no share of Coast Mountain. NovaGold was under no pressure to buy, and no Coast Mountain shareholder was under any pressure to sell. As well, NovaGold was not in a position to compel a majority of shareholders to sell. "No one imposed its corporate will on any shareholder, including Mr. Grandison," Pitfield wrote. "An independent committee act- ing on behalf of Coast Mountain recommended approval of the plan of arrangement. "In short, there is not evidence of a plan or ability to harm or diminish the interest of any Coast Mountain shareholder." As well, the lockup and support agreements in place did not assure NovaGold of acquiring control, nor did they oblige anyone to sell at a specified price. Nor was the break fee of eight cents per share substantial enough to prevent any- one else from bidding. It was therefore appropriate to ask where the transaction price was in relation to other value indices. "The response of the public market to the transaction as previ- ously described, the absence of a controlling shareholder or group of shareholders, and my findings [that NovaGold's expert's DCF valuation, which approximated the transaction price, was the pref- erable evidence], all support my judgment that the price accorded the share of Coast Mountain in the transaction with NovaGold reflected the fair value of the Coast Mountain shares," said Pitfield. According to McArthur, Pitfield's reasoning may have the effect of putting an onus on dis- senting shareholders to show some iniquity in the negotiated price. "There are lots of cases saying that there is no such onus on the petitioner, but Pitfield's view was that absent demonstrable unfair- ness or the lack of an open mar- ket for the shares, one need not assume that a transaction price was incapable of reflecting fair value," he says. Katherine Kay of Stikeman Elliott LLP's Toronto office wel- comes the decision. She says the case did not represent a sea change in the jurisprudence. "Rather, the case reflects a temperate and posi- tive change in the circumstances that the court had before it," she says. "If you stop and think, the transaction price should have a great deal of influence on fair value because boards exercise fiduciary duties in approving a sale. "It's rare that a dissent value would yield a higher share price than the transaction value. And if you think of that in terms of rough justice or symmetry, it makes sense." FOCUS The Law of Contracts, Fifth Edition Stephen M. 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It also meets the challenge of assessing fair compensation in the full range of damages- related issues. Looseleaf & binder • $212 Supplements invoiced separately (1-2/yr) P/C 04200320000 • ISBN 0-88804-124-1 Canada Law Book is A Division of The Cartwright Group Ltd. • Free Shipping on pre-paid orders. Prices subject to change without notice, and to applicable taxes. For a 30-day, no-risk evaluation call: 1 800 263 2037 or 1 800 263 3269 www.canadalawbook.ca LT0317 CA005 CA005 3/12/08 9:08 AM Page 1 'Grandison advances the propo- sition that the negotiated price should form the basis for valu- ing the dissenting shares unless there's a good reason to reject that price,' says Joe McArthur. BY JULIUS MELNITZER For Law Times LT

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