Décision

[1]                This is an appeal from the judgment rendered on September 26, 2019, by the Superior Court, District of Montreal (Mr. Justice Michel A. Pinsonnault, J.S.C.) fixing the fair value of common shares of Fibrek Inc. at $1.99 per share as at July 22, 2012, with interest at the legal rate and the additional indemnity from August 30, 2012, and ordering partial execution of the judgement notwithstanding appeal.                    

[2]                For the reasons of Hamilton, J.A., with which Levesque and Beaupré, J.A. agree, THE COURT:

[3]                GRANTS in part the appeal;

[4]                SETS ASIDE in part the trial judgment;

[5]                FIXES the fair value of the Fibrek shares at $1.5973 per share rather than $1.99 per share in Paragraph 607 of the trial judgment;

[6]                As a result of the provisional execution ordered by the trial judge for $0.8773 per share, ORDERS the Appellant Resolute Growth Canada Inc. to pay to the Respondents $0.72 per share, plus interest at the legal rate and the additional indemnity:

[7]                THE WHOLE with each party paying their own costs for the appeal, given the mitigated outcome of the appeal.

[8]                Resolute Forest Products Inc.[1] acquired the majority of the common shares of Fibrek Inc.[2] pursuant to an unsolicited take-over bid at a price in cash and/or Resolute shares equivalent at the outset to $1.00 per Fibrek share. Resolute then proposed a second-step plan of arrangement in which it proposed to acquire the balance of the outstanding Fibrek shares for the same consideration. The plan of arrangement was accepted by the statutory majority of shareholders and approved by the Superior Court, with the result that Fibrek is now a wholly-owned subsidiary of Resolute.[3] The Respondents, who held 15,846,640 common shares of Fibrek (approximately 12% of the outstanding shares), dissented and were entitled to be paid the fair value of their shares under Subsection 190(3) of the Canada Business Corporations Act[4] (“CBCA”). Resolute offered the Respondents $0.8773 per share. When the Respondents refused that offer, Resolute filed a motion to fix the fair value of the shares.

[9]                In a 121-page judgment rendered on September 26, 2019, Justice Michel A. Pinsonnault of the Superior Court, Commercial Division, for the District of Montreal fixed the fair value of the common shares of Fibrek as of July 22, 2012, at $1.99 per share, and he ordered Resolute to pay $1.99 per share to the Respondents, with interest and the additional indemnity from August 30, 2012.[5]

[10]           The total value of the judgment (including interest and the additional indemnity to the date of the judgment) was approximately $44 million. The judge ordered partial execution to the extent of $0.8773 per share with interest and the additional indemnity from August 30, 2012, with the result that a total of $19,375,552 was paid on October 2, 2019.

[11]           Resolute asks the Court to set aside this judgment and fix the fair value at $0.8773 per share. The Respondents ask the Court to uphold the judgment and the fair value of $1.99 per share.

CONTEXT

[12]           The context in which the Motion for the Fixing of a Fair Value was made is set out at length in the judgment. It is nevertheless useful to briefly describe the parties and the transaction.

The Parties

[13]           Resolute and Fibrek were both pulp and paper companies.

[14]           Resolute is a pulp and paper manufacturer with its headquarters in Montreal. It operates pulp mills and sawmills in the United States and Canada and its range of products includes newsprint, commercial printing papers, market pulp and wood products. Of particular interest for the purposes of this judgment, Resolute owns and operates several sawmills and pulp mills in the Lac St-Jean region.

[15]           Fibrek was a specialty pulp maker, producing and marketing virgin and recycled kraft pulp. It operated three mills, located in Saint-Félicien, Québec (in the lac St-Jean region), Fairmont, West Virginia, and Menominee, Michigan. The Saint-Félicien mill produced northern bleached softwood kraft pulp (product known as NBSK pulp), and the Fairmont and Menominee mills manufactured air-dried recycled bleached kraft pulp (product known as RBK pulp) made from recycled paper.

[16]           The Saint-Félicien mill was built in 1977 by a predecessor of Resolute. Resolute sold it in 2002 to an unincorporated open-ended limited purpose trust called SFK Pulp Fund (“SFK”), established in 2002 for the purpose of acquiring the Saint-Félicien mill. SFK entered into a long-term supply contract with Resolute for the Saint-Félicien mill. The Fairmont and Menominee mills in the United States were acquired by SFK from third parties in 2006. In 2010, SFK’s income trust structure was reorganized into Fibrek, a CBCA corporation. The unitholders of SFK became shareholders of Fibrek.

[17]           The relationship between Resolute and Fibrek soured in 2009. In the course of its insolvency proceedings under the Companies' Creditors Arrangement Act,[6] Resolute repudiated the supply contract and there was litigation between the parties.

[18]           This history explains why Resolute had a particular interest in the Saint-Félicien mill and why Resolute anticipated significant synergies from the acquisition of Fibrek. I will come back to the question of the synergies in a separate section below. It also explains a certain hostility between Resolute and Fibrek.

[19]           Finally, Mercer International Inc. (“Mercer”) was also a pulp and paper company, with three NBSK mills in Western Canada and Eastern Germany. It was a white knight making a competing bid for Fibrek. It did not enjoy the same synergies as Resolute because of the location of its operations.

The Transaction

[20]           It is useful at this stage to set out very briefly the key events in the transaction:

• In May 2011, Resolute began discussions with five important shareholders of Fibrek, including Fairfax Financial Holdings Limited (“Fairfax”), Oakmont Capital Inc. (“Oakmont”) and the Pabrai investment funds[7] (“Pabrai”), about acquiring their Fibrek shares. Those discussions did not result in any agreement at that time.
• On November 28, 2011, Resolute announced its intention to commence an unsolicited take-over bid to acquire Fibrek at a price of $1.00 per share, payable in cash ($1.00), in Resolute shares (0.0632 Resolute common share) or in a combination of cash and shares ($0.55 in cash plus 0.0284 Resolute share) with an aggregate cap on the amount of cash ($71,541,556) and the number of shares (3,694,146 Resolute shares) available (the “Resolute Offer”). At that time, there were 130,075,556 Fibrek shares issued and outstanding. They were publicly traded on the TSX and the market price was $0.72 on the announcement date, such that the price included a 39% premium over the closing price on November 28, 2011 or a 31% premium over their volume-weighted average price over the previous 20 days. The bid was conditional on 66⅔% of the shares being tendered, a condition which Resolute could waive unilaterally. The bid was formally commenced on December 15, 2011. Fibrek had no advance notice of the Resolute Offer.
• At the same time as it announced its intention to acquire Fibrek, Resolute announced that it had entered into irrevocable (“hard”) lock-up agreements with three significant shareholders of Fibrek, including Fairfax and Pabrai,[8] who held a combined 59,502,822 shares, representing 46.3% of Fibrek’s outstanding shares. The third shareholder, not identified in the press release, was Oakmont. Fairfax was also a significant shareholder of Resolute.[9] Under the agreements, Fairfax, Oakmont and Pabrai irrevocably promised to tender their Fibrek shares to the Resolute Offer.
• On December 19, 2011, Fibrek announced that its board unanimously recommended rejecting the Resolute bid. It also announced that it was seeking a formal valuation of the shares and that it had adopted a Shareholders Rights Plan[10] to give it time to obtain the formal valuation and consider strategic options.
• Resolute contested the Shareholders Rights Plan and the Bureau de décision et de révision (“BDR”) issued a cease trading order on February 9, 2012.[11]
•  Meanwhile, Fibrek was negotiating the acquisition of Cellynne Holdings, Inc., a tissue manufacturer located in Florida,[12] and had applied to participate in a Hydro-Québec program for the purchase of electric power produced by co-generation from residual forest biomass.
• On February 6, 2012, Fibrek announced the results of the formal valuation by Canaccord Genuity Corp. (“Canaccord”). Canaccord concluded that the fair market value of the Fibrek shares was in the range of $1.25 to $1.45 per share.
• On February 10, 2012, Fibrek and Mercer announced that they had entered into a Support Agreement for Mercer to make a board-supported take-over bid to acquire all of Fibrek’s shares at a price of $1.30 per share, payable in cash ($1.30), in Mercer shares (0.1540 Mercer share) or in a combination of cash and shares ($0.54 in cash plus 0.0903 Mercer share) with a cap on the amount of cash and the number of shares (the “First Mercer Offer”). The Mercer bid was formally commenced on February 29, 2012.
• As part of that Support Agreement, Fibrek and Mercer entered into a Special Warrant Agreement whereby Mercer would purchase 32,300,000 special warrants, convertible into shares of Fibrek at a price of $1.00 each. If exercised, these warrants would give Mercer a 19.9% shareholding and would dilute the three shareholders that Resolute had locked up to 37%. The objective was to give the Mercer bid a chance of obtaining 50% of the common shares.
• Resolute contested the warrants and the BDR issued a cease trading order on February 23, 2012.[13] The Court of Quebec overturned the BDR’s decision on March 9, 2012,[14] but the Court of Appeal restored it on March 27, 2012.[15] The Supreme Court dismissed the application for leave to appeal on April 18, 2012.[16]
• Resolute reduced its minimum tender condition from 66⅔% to 50.01% of the outstanding Fibrek shares on March 20, 2012, and further reduced it to the number of locked-up shares on April 1, 2012.
• Fibrek and Mercer announced on April 11, 2012, that Mercer was increasing its offer by $0.10 to $1.40 per share, payable in cash ($1.40), in Mercer shares (0.1659 Mercer share) or in a combination of cash and shares ($0.64 in cash plus 0.0903 Mercer share) with a cap on the amount of cash and the number of shares (the “Second Mercer Offer”) and that Fibrek had adopted a second Shareholders Rights Plan, in substantially the same form as the first plan. The formal Notice of Change to the Mercer Offer was issued on April 13, 2012.
• On April 12, 2012, Resolute announced that it had acquired the Fibrek shares tendered under its offer (a total of 60,831,859 shares, which included the locked-up shares, representing 46.8% of the shares).
• Resolute filed a complaint with the BDR in relation to the second Shareholders Rights Plan and the BDR issued a cease trading order on April 16, 2012.[17]
• On April 30, 2012, Mercer announced that its offer had expired and that it would not acquire any Fibrek shares.
• The Resolute Offer expired on May 17, 2012. As of that date, Resolute had taken up and acquired a total of 96,986,011 Fibrek shares under the terms of its original offer, giving it approximately 74.56% of the shares of Fibrek.
• On June 13, 2012, Resolute and Fibrek (now controlled by Resolute) announced a second-step transaction whereby, pursuant to a plan of arrangement under the CBCA, Resolute would acquire the remaining Fibrek shares under the same terms as the original Resolute Offer and RFP Acquisition Inc. (the Resolute acquisition vehicle) and Fibrek would amalgamate and form a new corporation, wholly-owned by Resolute.[18]
• The resolution approving the plan of arrangement was duly adopted by the statutory majority of Fibrek shareholders on July 23, 2012 (88.18% of those present in person or by proxy voting in favour) and the plan of arrangement was approved and ratified by the Superior Court on July 27, 2012, on the finding that it was “fair and reasonable to the Fibrek shareholders”.
• The 38 Respondents, who held 15,390,406 Fibrek shares prior to the implementation of the plan of arrangement, dissented under Section 190 CBCA. Under Subsection 190(3) CBCA, the dissenting shareholders are entitled to be paid “the fair value” of their shares, determined as of the close of business on the day before the resolution approving the plan of arrangement was adopted or the order was made. In this case, the relevant valuation date is July 22, 2012 (the “Valuation Date”).
• In August 2012, pursuant to Subsection 190(12) CBCA, Fibrek (then a wholly-owned subsidiary of Resolute) offered to pay the Respondents $0.8773 per share, which was the cash equivalent of the “Cash and Share Option” under the original Resolute Offer ($0.55 in cash and 0.0284 Resolute share), using the value of the Resolute shares as of the close of business on the Valuation Date.
• The Respondents rejected the offers.

THE PROCEEDINGS IN FIRST INSTANCE

1. The Proceedings

[21]           On September 19, 2012, after the Respondents rejected the offers to pay $0.8773 for their shares, Resolute filed a motion to fix the fair value of the shares as of the close of business on July 22, 2012, under Subsection 190(15) CBCA. Resolute took the position that the fair value of the shares was less than its offer of $0.8773, by reason of the facts that Resolute discovered upon taking over Fibrek in May 2012.

[22]           By counterclaim, the Respondents asked the Superior Court to fix the fair value of the shares “for a value not less than $1.40 per share”. They also asked for partial provisional execution of the judgment to be rendered to the extent of $0.8773 per share.

The Evidence

[23]           The trial was heard by Justice Pinsonnault over 30 days between March 11, 2019, and May 28, 2019. He heard from 11 witnesses, including three experts, and the parties produced over 13,000 pages of exhibits.

[24]           The principal fact witnesses on the sale process were Richard Garneau (President and Chief Operating Officer of Resolute), Patsie Ducharme (Chief Financial Officer of Fibrek), Louis Véronneau (Managing Director of TD Securities Inc. (“TD”), the financial advisor to the Fibrek board), Prem Watsa (Chief Executive Officer of Fairfax) and Brent Binge (General Counsel and Chief Compliance Officer of Steelhead Partners, LLC (“Steelhead”)). It is important to note that there were no witnesses from Mercer, Pabrai or Oakmont.

[25]           Various valuations had been prepared as part of the sale process. These were produced as exhibits, but not as expert opinions:

• UBS Securities Canada Inc. (“UBS”), acting as financial advisor to the Special Independent Committee of the Resolute board, issued its opinion on November 28, 2011, that the $1.00 consideration to be paid by Resolute was fair, from a financial point of view, to Resolute. In its Fairness Opinion Analysis, UBS used eight different approaches, including the results of a discounted cash flow analysis of Fibrek (to which it added potential synergies), peer trading multiples, precedent transactions of a similar nature and recent trading levels of Fibrek shares. The low values ranged from $0.48 to $0.96 per share and the high values from $0.79 to $2.05 per share, when including all synergies expected by Resolute. Without all of the synergies, the high end of the range is $1.82.[19]
• TD, as financial advisor to the Fibrek board, issued its opinion on December 18, 2011, that the Resolute Offer was inadequate, from a financial point of view to the Fibrek shareholders.
• Canaccord was retained by the independent committee of the Fibrek board to prepare a formal valuation of the Fibrek shares. It issued its valuation on February 3, 2012 (the “Canaccord Valuation”). It considered three principal methodologies (discounted cash flow, precedent transactions and comparable companies trading)[20] and concluded that the fair market value of the Fibrek shares was in the range of $1.25 to $1.45 per share.[21]
• TD also issued an opinion to the Fibrek board on February 9, 2012, that the First Mercer Offer was fair, from a financial point of view to the Fibrek shareholders. In its analysis (the “TD Fairness Analysis”), TD relied primarily on three methodologies: precedent transactions, discounted cash flow and leveraged buyout analysis, and considered the Canaccord valuation and reviewed current trading multiples of comparable companies and equity research analyst target prices for Fibrek.[22] The low values ranged from $1.17 to $2.04 per share and the high values from $1.56 to $2.44 per share.[23]
• Sanabe & Associates, LLC (“Sanabe”) issued its opinion to Resolute[24] on June 13, 2012, that the consideration offered to the Fibrek shareholders under the plan of arrangement was fair, from a financial point of view to the Fibrek shareholders.

[26]           Finally, the parties retained two experts as to the value of the Fibrek shares. Jonathan I. Mishkin of Sanabe prepared a Valuation Report dated August 8, 2013, at the request of Resolute (the “Sanabe Valuation Report”), and Richard M. Wise and Catherine Tremblay of MNP LLP prepared a Report on the Fair Value of the Shares of Fibrek dated October 3, 2013, at the request of the Respondents (the “MNP Valuation Report”). Sanabe then prepared a Rebuttal Report dated May 16, 2014 (the “Sanabe Rebuttal Report”), and MNP prepared a Limited Critique of the Sanabe Reports dated December 20, 2018 (the “MNP Limited Critique”). Mishkin and Tremblay both testified at the trial.

[27]           Sanabe used three principal methodologies – Transaction Multiples per Tonne of Production Capacity, Transaction Multiples of EBITDA and Discounted Cash Flow.[25] Using the average of the three methodologies, Sanabe estimated a reference share value range for Fibrek as at the Valuation Date of $0.53 to $0.87.[26]

[28]           MNP adopted the Market Approach as its primary valuation approach, using the stock market trading price of Fibrek shares and stock market analysts’ reports prior to the Resolute Offer and adding the value of the Hydro-Québec contract. MNP also analyzed the value implied by the Mercer Offer.[27]

[29]           MNP also used other approaches for corroborative purposes, including the Discounted Cash Flow method, the Asset-Based Approach, market transactions and data relating to similar publicly-traded companies and previous valuation reports and fairness opinions.[28] MNP concluded that the fair value of the Fibrek shares as at the Valuation Date was in the range of $1.59 to $2.06 per share (midpoint $1.82).[29]

The Judgment

[30]           The judgment was rendered on September 26, 2019. It is very lengthy, totalling 613 paragraphs over 121 pages.

[31]           The first portion of the judgment is a very detailed review of the relevant facts. This review totals 167 paragraphs over 32 pages.

[32]           The judge then described his principal task as being the determination of the “fair value” of the Fibrek shares as of the Valuation Date of July 22, 2012. He set out the statutory framework in which he must render his decision. He cited the relevant Canadian authorities on the notion of fair value and adopted the following definition: “The highest price available in an open unrestricted market between informed and prudent parties, acting at arm’s length and under no compulsion to act.”[30]

[33]           He added that although he must value the shares as at the Valuation Date, he would consider “the benefits and advantages that will result from the Resolute/Fibrek merger that could be identified at the moment of the Resolute Offer”.[31]

[34]           Throughout the judgment, the judge was very critical of the “actions and tactics of Resolute with the active complicity of Fairfax”.[32] He recognized that those actions and tactics may have been considered to be legitimate and legal by the BDR at the time, but he found that they had an adverse effect on the fair and unrestricted bid process which the shareholders were entitled to expect.[33] In his view, the “tactical manoeuvres” devised and executed by Resolute, with “complacent if not complicit” insiders Fairfax and Steelhead, combined with the favourable decisions of the BDR, resulted in a “competition-free” hostile take-over bid and had an adverse impact on the stock market price of Fibrek’s shares, such that the stock market price on July 22, 2012, was not reflective of fair value.[34]

[35]           He also dismissed the testimony of Garneau (Resolute) that Resolute would not have agreed to pay more than $1.00 per share,[35] and the argument that Resolute would have offered less than $1.00 per share if it had known the true state of affairs at Fibrek.[36]

[36]           The judge found the testimonies of Watsa (Fairfax) and Binge (Steelhead) particularly revealing in showing how the lock-up agreements came about, and how Steelhead acquired sufficient Fibrek shares to give Resolute the majority it needed.[37]

[37]           Fairfax had acquired 27 million of its 33 million Fibrek shares a year earlier at $1.01.[38] It was also the most important shareholder of Resolute. It decided to sell its Fibrek shares in early 2011 but could not dispose of that many shares on the stock market. The judge found odd that Fairfax never told Fibrek of its intention to sell[39] and it refused possible transactions with Resolute and Mercer at higher prices[40] before suddenly locking itself into the Resolute Offer at $1.00 without any serious negotiations.[41]

[38]           The judge concluded that Fairfax, as an insider of both Resolute and Fibrek, was in a blatant conflict of interest.[42] He concluded that Fairfax’s true objective was to assist Resolute in acquiring Fibrek at the lowest cost possible “and ideally without any horse race or bidding war”, because it was in its long-term interest that Resolute acquire Fibrek. In that context, the price was of no significant importance to Fairfax because it would opt to be paid in undervalued Resolute shares, and a lower cash price to other shareholders would be better.[43]

[39]           The judge found the involvement of Pabrai and Oakmont “somewhat nebulous”, but concluded that “they were delivered to Resolute in all likelihood by Fairfax in the implementation of its strategy”.[44] He concludes that the result of locking up the three shareholders was that “it was game over” for the other Fibrek shareholders - there would be no bidding war for the Fibrek shares and the minority shareholders could not possibly hope for a better offer.[45]

[40]           The judge made several comments on Watsa’s testimony and found that many of his explanations were hard to accept[46] – calling them at one point “mindboggling”.[47] He concluded that Watsa’s testimony was “so vague and filled with so many uncertainties, unlikelihood, unsubstantiated denials and contradictions that it is very difficult for the Court to give credence to the affirmations and explanations of the witness whose memory appeared to be failing on the most crucial aspects of his testimony.”[48] He rejected Watsa’s assertion that the $1.00 cash price was the best price that the Fibrek shareholders could ever expect to obtain and that it represented a fair price for the Fibrek shares.[49]

[41]           The judge then examined the involvement of Steelhead. Steelhead was an insider of Resolute with 13.1% of the Resolute shares.[50] It had acquired 3.3% of Fibrek’s shares between July 26 and December 13, 2011, and continued to purchase shares up to 4.95%. Most of those shares were acquired after Resolute announced its take-over bid, at prices varying between $0.97 and $1.02.[51] Resolute announced in its formal offer on December 15, 2011, that Steelhead had informed it that it intended to deposit all of its shares pursuant to the Resolute Offer. Together with the locked-up shares, the shares held by Steelhead would give Resolute the majority of Fibrek’s shares[52].

[42]           The judge found that the multiple purchases of Fibrek shares by Steelhead made no financial sense if it intended to accept the Resolute Offer.[53] He rejected Binge’s explanation that there was a good chance that Resolute would have to increase its offer if a white knight came into the picture, because he found that Steelhead did everything it could  to oppose the counter-measures adopted by Fibrek and the Mercer Offers, despite the better price.[54] Binge also explained that Steelhead supported the Resolute Offer and opted to receive Resolute shares because there was more value in a Resolute/Fibrek combination than in a Mercer/Fibrek merger[55] because of the synergies.[56] The judge concluded that, in all probabilities, Steelhead, as an insider to Resolute, agreed to assist Resolute in securing a majority position in Fibrek.  The judge mentioned that Steelhead tendered and withdrew its shares on three separate occasions, but dismissed this as a form of “window dressing” or a “smoke screen” to dispel any appearance that it was a “close accomplice and enabler” of Resolute and to ensure that it did not officially secure majority control for Resolute.[57]

[43]           The judge underlined the fact that he found nothing illegal in the tactics developed by Resolute or in the conduct of Fairfax, Pabrai, Oakmont and Steelhead[58], but that they distorted completely the legitimacy of the take-over bid process.[59] He found that Resolute had the fundamental obligation to pay fair value for the Fibrek shares that it sought to acquire, and that this fundamental obligation became a legal obligation under the CBCA when some of the shareholders dissented.[60] He concluded that both offers made by Resolute – $1.00 in December 2011 and $0.8773 in August 2012 – were not representative of “fair value” of the Fibrek shares.[61] He concluded that Resolute ultimately transformed its initial $1.00 offer into a cash equivalent of $0.8773 in August 2012 “undoubtedly as a measure of retribution”.[62]

[44]           The judge then proceeded to make a lengthy analysis on what he considered to be the “fair value” of Fibrek’s shares. He affirmed that the determination of fair value rests exclusively upon him, with the assistance of each party and the experts, but that he is not bound by the opinions of experts nor the values suggested by the parties.[63]

[45]           The judge analyzed the highly conflicting approaches of the two experts.

[46]           He was very critical of the Sanabe Report.[64] He was concerned that Mishkin was an investment banker and not a professional business valuator and that Sanabe had charged significant fees for its earlier opinion that the plan of arrangement (including the $1.00 cash option) was fair to the Fibrek shareholders.[65] He was also concerned that Sanabe’s approach was “in perfect alignment” with Resolute’s strategy of minimising, if not disregarding, the fairness of the process and the absence of any auction, Fibrek management’s position and the two Mercer Offers.[66] He concluded that Sanabe was in a conflict and he did not retain its report.[67]

[47]           The judge found that Tremblay was credible and that she testified objectively and conservatively.[68] He found she had attempted to determine the value of the Fibrek shares in a situation where the share price “would not have been impacted by Resolute with the complicity of conflicted hard Locked-up Shareholders” and where there had been competitive bidding between Resolute and Mercer.[69] The judge also cites Véronneau (TD), a financial advisor tasked with finding a “white knight”, who found that the lock-up agreements had an adverse effect on his efforts.[70] 

[48]           The judge essentially retained the MNP/Tremblay Market Approach to the valuation of the Fibrek shares as the most logical, reasonable and equitable approach.[71]

[49]           He used as his starting point the Second Mercer Offer of $1.40 per share as a “just, reasonable and equitable basis”. He considered the Mercer Offers to be genuine and serious and a much better indicator of fair value than the Resolute Offer.[72]  

[50]           He then added the synergies. In the context of a hypothetical auction between Resolute and Mercer, the judge concluded that the synergies anticipated by each bidder should be considered.[73] He dismissed the argument that the Respondents were not entitled to share in the synergies because they dissented from the transaction.[74]

[51]           To calculate the synergies, the judge started with the UBS analysis, which valued the synergies identified by Resolute at $0.87 per share as of November 28, 2011.[75] He deplored the fact that the UBS analysis had not been provided to Sanabe and that Resolute had resisted producing it to the Respondents.[76] He noted that MNP did not have access to the UBS analysis and had not factored in any synergies.[77]

[52]           He considered Sanabe’s opinion that 50% of the Resolute/Fibrek synergies would add $0.27 per share to MNP’s evaluation. He noted that Mercer has possibly factored in a portion of the synergies in its offers. He nevertheless found that it was fair and just to add $0.27 per share to the base value of $1.40 to account for synergies.[78]

[53]           The other factor adding value to Fibrek was the 33 MW Power Purchase Agreement concluded with Hydro-Québec on May 4, 2012, which added as much as $16 million per year to Fibrek’s EBITDA.[79] Garneau and Watsa both testified that Resolute did not include or consider the additional value of the 33 MW PPA in its $1.00 offer.[80]  MNP valued the Hydro-Québec contract at $0.81 to $0.88 per share and added $0.40 to $0.66 per share to the price in the Second Mercer Offer, because it assumed that Mercer included only 25% to 50% of the value of the Hydro-Québec contract in its offers, in the same way that Canaccord had added 25% to 50% of the value of the contract in its formal valuation dated February 3, 2012. The judge, exercising his judicial discretion, added $0.40 to the price in the Second Mercer Offer as the portion of the value of the Hydro-Québec contract that Mercer did not take into account.

[54]           Finally, the judge applied a $0.08 per share reduction to account for the impact of contingent environmental liabilities identified by Resolute upon taking over the Saint-Félicien mill in May 2012.[81]

[55]           The judge therefore concluded that the fair value of the Fibrek shares is the base value of $1.40 plus $0.27 for the synergies and $0.40 for the Hydro-Québec contract minus $0.08 for the contingent environmental liabilities, for a total of $1.99 per share.

[56]           The judge also considered the issue of whether the Respondents Whitebox Multi-Strategy Partners, LP and Pandora Select Partners, LP had validly exercised their dissent rights with respect to their Fibrek shares. The judge decided that they had. As there is no appeal on this issue, I will not go into any further detail.  

[57]           On the issue of interest, the judge held that he had discretion under subsection 190(23) CBCA to allow reasonable interest. He found that the statutory or legal interest rate under Article 1617 CCQ together with the additional indemnity under Article 1619 CCQ were “totally justifiable and reasonable”.[82]

[58]           Finally, the judge granted partial provisional execution and ordered immediate payment of $0.8773 per share plus interest, based on Resolute’s offer in August 2012 and without prejudice to its right to claim that the fair value is less than $0.8773 per share.[83]

QUESTIONS ON APPEAL

[59]           The Appellants raise the following questions in their factum:

1. Did the Trial Judge err in law by basing his determination on the incorrect premise that Resolute had an obligation at the Take-over bid phase and at “all relevant times” thereafter to offer fair value?
2. Did the Trial Judge err in law in his findings as to the unfairness of the takeover bid process?
3. Did the Trial Judge err in law and commit mixed errors of fact and law in his findings as to the legitimate expectations of Fibrek shareholders?
4. Did the Trial Judge err in law in defining and determining fair value?
5. Did the Trial Judge err in law in ordering Resolute to pay the additional indemnity under Article 1619 of the Civil Code of Québec (CCQ)?
6. Did the Trial Judge commit palpable and overriding errors of fact in the determination of components of his fair value calculation, namely:
   1. The value of the Amended Mercer Offer as at the Valuation Date?
   2. The additional synergies included in his fair value?
   3. The 33 MW PPA?

[60]           In my view, there are essentially two questions: (1) did the judge make any reviewable error in his determination of the fair value of the Fibrek shares, and if so what is the fair value of the Fibrek shares, and (2) should Resolute be ordered to pay the additional indemnity under Article 1619 CCQ.

ANALYSIS

Question One: The Fair Value of the Fibrek Shares

General principles

[61]           It is useful to start by setting out some general principles.

[62]           The right to dissent is provided for in Section 190 CBCA. Amongst the rights of the dissenting shareholder is the right to be paid the “fair value” of his shares:

[63]           When the parties do not agree on the fair value, the corporation may apply to the court under Subsection 190(15) and the court fixes the fair value:

[64]           In Ford, the Ontario Court of Appeal described as follows the principles that underlie Section 190 CBCA:

[129] I start with the principles. The appraisal remedy in s. 190 of the CBCA is part of the model adopted by Parliament to balance the rights and interests of minority shareholders with those of the majority. The Act abrogates the common law that in the absence of specific statutory authority, a corporate charter could only be amended by unanimous consent of the shareholders. But, in return, dissenting shareholders are given the right to opt out of the corporation and demand fair compensation for their shares. As the Dickerson Committee described: "The result is a resolution of the problem that protects minority shareholders from discrimination and at the same time preserves flexibility within the enterprise": Robert W.V. Dickerson, John L. Howard and Leon Getz, Proposals for a New Business Corporation Law for Canada (Ottawa: Information Canada, 1971) at 115.

[130] As it was put by the Wisconsin Supreme Court in HMO-W Inc. v. SSM Health Care System, 611 N.W.2d 250, 234 Wis. 2d 707 (Wis. S.C. 2000) at para. 17, which I discuss at length below: "The appraisal remedy has its roots in equity and serves as a quid pro quo: minority shareholders may dissent and receive a fair value for their shares in exchange for relinquishing their veto power." To include a component for historical wrongs would represent a departure from this principle since the dissenting shareholders would receive compensation for historical wrongs unrelated to relinquishing their veto.[84]

[65]           The notion of “fair value” is not defined in the CBCA. Courts have given various definitions. In Re Brant Investments, Anderson J. made the link between market value and fair value:

In such circumstances I see no reason why market value is not "fair value". Market value (in some comment called "fair value'', in some "intrinsic value") is defined as the highest price available in an open and unrestricted market between informed, prudent parties acting at arm's length and under no compulsion to act, expressed in terms of money or money's-worth.[85]

[Emphasis added]

[66]           Professor Stéphane Rousseau adopted that definition in a recent article:

Tout d’abord, il y a lieu de souligner que l’expression « juste valeur » des actions n’est pas nécessairement synonyme de « juste valeur marchande » au sens fiscal ni de « valeur du marché ». Elle désigne plutôt « le plus haut prix, exprimé en termes monétaires, disponible dans un marché ouvert et sans restriction, entre des parties informés et prudentes transigeant à distance et sans obligation d’agir ».[86]

[References omitted]

[67]           However, the courts have cautioned that the notion of “highest price” must be applied prudently:

[…] The “highest price” is not the price which could be derived on the basis of the most optimistic and risky assumptions without any regard as to their likelihood of being realized. It also seems to me that prudence would involve a consideration that there be certain fall back positions.[87]

[68]           In Ford, the Ontario Court of Appeal gave “fair value” a “broad and flexible” meaning, but said that it was not synonymous with fair market value:

[131] Since the provisions are an attempt to balance the different interests of minority and majority shareholders, the courts have tended to give the term "fair value" a broad and flexible meaning. Thus, most courts accept that fair value is not synonymous with fair market value and that the concept embraces some notion of equitable treatment. The need for this flexibility is especially evident where, as here, the act triggering the dissent is a squeeze out or expropriation of the shares of the minority shareholders. In Dennis H. Peterson, Shareholder Remedies in Canada (Markham: Butterworths, 2004) at 4.17, the author describes the notion of fair value as "what is just and equitable in the circumstances" which "confers a broad and flexible jurisdiction on the courts to determine share values".

[132] Although the jurisdiction may be broad and flexible, the section does not confer on the court an unfettered discretion to do whatever the judge feels would be fair. The determination of fair value must be anchored in the principle that gives rise to the jurisdiction. Here, where the triggering event is a squeeze out of minority shareholders, the notion of fair value involves an exercise in appraisal of the present market value of the shares but taking into account that this is a forced sale that deprives the shareholders of the opportunity to share in the fortunes of the corporation. Thus, as was conceded in this case, the fair value should not be reduced for a minority discount. And see Sutherland v. Birks (2003), 2003 CanLII 39961 (ON CA), 65 O.R. (3d) 812, [2003] O.J. No. 2885 (C.A.), Brant Investments Ltd. v. KeepRite Inc., supra, at p. 329 O.R., p. 199 D.L.R., and Diligenti v. RWMD Operations Kelowna Ltd. (No. 2) (1977), 1977 CanLII 393 (BC SC), 4 B.C.L.R. 134 (S.C.).

[Emphasis added]

[69]           Finally, Martel gives the following definition:

La juste valeur des actions correspond au prix qui est juste et équitable dans les circonstances, déterminé sur la base de considérations économiques objectives relatives aux actions, et non à leurs détenteurs. Elle n’est pas un boni attribué à l’actionnaire, qui lui donne automatiquement un meilleur prix parce qu’il est dissident : ce prix peut en effet être plus ou moins élevé que celui offert par la société.[88]

[70]            There are several valuation methods available. In ExxonMobil, Justice Harris of the Yukon Court of Appeal summarized the different approaches as follows:

[15] It is common ground that, broadly speaking, value is approached drawing on five valuation methods: (a) the quoted market price on the stock exchange (“market value approach”); (b) the valuation of the net assets of the company at fair value (“assets approach”); (c) the capitalization of maintainable earnings (“earnings of investment value approach”); (d) the “discounted cash flow” (“DCF”) method taking into account a capitalization of future profits; and (e) a combination of approaches.

[…]

[18] Each of the approaches described above offer potentially probative evidence of value, depending on the particular circumstances of a case. Ultimately, a court has to apply its best judgment to all of the evidence: […][89]

[Reference omitted]

[71]           He emphasized that “the result of the market is likely the best and most objective evidence of value” because “[i]t is rooted in reality and not based on assumptions, theory and predictions”.[90]

[72]           I agree with this conclusion: the court should review the evidence using the various approaches and decide which gives the most fair and equitable result in all of the circumstances, with emphasis on the market value.

[73]           The assessment is therefore very much fact based:

[485] The determination of fair value pursuant to the statutory right set out in the ABCA and similar legislation is highly fact specific. In making its determination, a court is advised to be prudent - to proceed not on the basis of the most optimistic approach, but to recognize that a prudent purchaser will have certain fall-back positions in mind: New Quebec Raglan Mines Ltd. v. Blok-Andersen (1993), 9 B.L.R. (2d) 93 at 132 (Ont. Gen. Div.). While each party who asserts a proposition must prove it by a preponderance of evidence on the balance of probabilities, there is no burden on either side to establish value, as this is a judgment for the court to make: Silber v. BGR Precious Metals Inc. (1998), 1998 CanLII 14690 (ON SC), 41 O.R. (3d) 147 (Gen. Div.).[91]

[74]           Finally, Justice Harris suggests that there is only “one true rule” in these valuation cases: “to consider all the evidence that might be helpful, and to consider the particular factors in the particular case, and to exercise the best judgment that can be brought to bear on all the evidence and all the factors.”[92]

Standard of review

[75]           The Court has already decided that, in matters of share valuations, it can only intervene if there is palpable and overriding error:

[136] En somme, l’évaluation de la valeur d’actions n’est limitée par aucune formule mathématique ou d’affaires et est laissée à la discrétion du juge des faits, sauf erreur manifeste et déterminante.[93]

[76]           I agree with this standard. However, I do have a reservation with respect to the statement that the valuation “est laissée à la discrétion du juge des faits”. As pointed out in Ford, there is a difference between the judge applying his best judgment and the judge having an unfettered discretion to do whatever he feels would be fair. Although the Court must give deference to the judge’s assessment of the evidence, the valuation must be based on all of the evidence.

[77]           Because the determination of fair value is “highly fact specific” and the “one true rule” is to consider all the evidence, there is not much scope for an error in law. However, if the judge excludes from consideration evidence on an important issue that should have been relevant to his assessment of value, then the Court can intervene and perform the valuation that the judge should have performed.

Judge’s general approach to valuation

[78]           As discussed above, the judge adopted the Market Approach methodology as the “the most logical, reasonable and equitable approach” to establish the fair value of the Fibrek shares.[94] I agree.

[79]           He valued the Fibrek shares in the following way:

• He started with the Second Mercer Offer of $1.40 per share as indicative of the fair value of the shares on April 11, 2012, the date of that offer.
• He added synergies. He accepted that Resolute was expecting $0.87 per share in synergies, but that the Mercer synergies would be lower and that the Second Mercer Offer already included some portion of those synergies. He added a further $0.27 of synergies to the Mercer bid.
• He also added the value of the 33 MW Hydro-Québec contract. He estimated the value of the contract at $0.80 per share, and added $0.40 to the Mercer bid as the portion of the value of the Hydro-Québec contract that Mercer had not taken into account.
• Finally, he reduced the price by $0.08 per share because of contingent environmental liabilities.
• He therefore concluded that the fair value of the shares is $1.40 + $0.27 + $0.40 - $0.08 = $1.99 per share.

[80]           I generally agree with this approach. It was appropriate to start with a value established by the market at a given time and then to adjust for elements which the market had not considered.

[81]           I will review each step in the judge’s valuation.

1. Market value of the Fibrek shares

[82]           There are four indicators of the market value of the Fibrek shares: the trading price of the shares on the Toronto Stock Exchange (TSX), the Resolute Offer and the two Mercer Offers.

[83]           The judge retains only the price of $1.40 per share in the Second Mercer Offer and uses it as the starting point in his analysis:

[495] For the purpose of determining the “fair value” of the Fibrek Share as at July 22, 2012, the Court finds that the price of $1.40 offered by Mercer in the Second Mercer Offer of April 13, 2012 should serve as a just, reasonable and equitable basis.

[Reference omitted]

[84]           In my view, this constitutes a palpable and overriding error that taints the rest of his analysis of fair value in that (1) he should not have excluded the trading price and the Resolute Offer from his analysis, and (2) the Mercer price should have been adjusted to reflect the value of the Mercer shares on the Valuation Date.

1. Trading price of the Fibrek shares on the TSX

[85]           In ExxonMobil, Justice Harris suggests that the market value approach is based on the quoted market price on the stock exchange.

[86]           In my view, and I agree with the judge and the expert Tremblay on this issue, the trading price of Fibrek shares on the TSX was of limited value in determining the fair value of the shares on the Valuation Date. However, that price does perform one very useful function that the judge did not refer to.

[87]           Let me explain.

[88]           Fibrek shares were traded on the TSX right up until the Valuation Date, and many shareholders of Fibrek at the time of the Resolute Offer sold their shares on the market between the announcement of the Resolute Offer in November 2011 and the Valuation Date. However, the trading price of the Fibrek shares during that period was clearly affected by the Resolute Offer and the Mercer Offers. The price jumped from $0.72 to $0.95 the day after the Resolute Offer was announced, varied between $0.95 and $1.03 before the Mercer Offers, went as high as $1.35 after the Mercer Offers, and then gradually declined to $0.78 after the Mercer Offers lapsed. The evidence shows many arbitrageurs purchasing shares based, not on the fair value of Fibrek, but on the offers by Resolute and Mercer and their assessment of whether those bids would go through or whether another bid might be made. Most of the Respondents were arbitrageurs and acquired their Fibrek shares during this period.

[89]           The judge excluded these prices from his analysis, and I think that he was right to do so:

[491] On this particular point, the Court shares the opinion of the expert Tremblay that the stock market price of the Fibrek Share as at the Valuation Date (July 22, 2012) was not representative of its “fair value” for the following reason:

We considered whether or not the quoted market price of the Shares on or about the Valuation Date was representative of their Fair Value. During the period between the Announcement Date and the Valuation Date, because the trading price of the Shares was affected by the Resolute Bid and the Mercer Offer (as will be further discussed herein below), we did not consider it to be representative of Fair Value. We therefore examined the quoted market price of the Shares on and prior to the Announcement Date (i.e., November 28, 2011).

[Emphasis added by judge]

[90]           Trading price of the Fibrek shares before the Resolute Offer was announced remains a good indication of the value of the individual shares on November 28, 2011. In its valuation report, MNP accepts the market price on November 28, 2011, as a conservative indication of the fair value of the shares:

However, based upon the information and documents reviewed and the results of the corroborative valuation approaches applied and the various analyses performed, we believe that Fibrek Share prices prior to the Announcement Date of the Resolute Bid can be used as a conservative indication of the Fair Value of the Shares. Given that the Shares were trading at relatively low prices compared to the highs achieved within the preceding two-year period due in part to external factors impacting Fibrek and stock markets in general, we determined that such prices would yield a conservative value. We also considered the per-Share price according to the Resolute Offer and the Mercer Offer.

[Emphasis added]

[91]           The judge emphasizes that the price of the shares in November 2011 was at a “historic low”,[95] but that is the nature of markets. Prices rise and fall, and buyers want to buy when the price is low. The price on the stock market remains an accurate indication of the value of the shares at particular times. Moreover, the price in November 2011 was not out of line with the market’s expectation for Fibrek. As part of its Fairness Opinion Analysis on November 28, 2011, UBS reviewed the brokerage analyst reports on Fibrek and concluded that the average 12-month target price for Fibrek was $1.06 per share.[96] TD performed the same analysis and arrived at the same conclusion.[97]

[92]           Since the fair value is based on an “en bloc” value for all of the shares, it is appropriate to add a premium to the market trading price to compensate for the minority discount inherent in the price on the stock market. In its valuation, Canaccord suggests a 30% premium.[98]

[93]           Here, the Resolute Offer of $1.00 on November 28, 2011, included a premium of approximately 39% over the closing price of Fibrek’s shares on the TSX on the date that Resolute announced its bid, and a premium of approximately 31% over the volume weighted average trading price of the shares on the TSX for the 20 trading days ending on that date. This suggests that the Resolute Offer of $1.00 on November 28, 2011, was consistent with the price at which the shares were trading on the TSX prior to the offer. This is relevant in assessing the fairness of the Resolute Offer.

2. The Resolute Offer

[94]           The judge emphasized that Resolute had the “fundamental” obligation to offer fair value for the shares in its take-over bid and ultimately concluded that it did not do so.[99]

[95]           He started his analysis of whether the price offered by Resolute represented fair value by considering the fairness of the sale process:

[201] Therefore, in order to determine if the cash price offered by Resolute and subsequently by Fibrek represented “fair value”, the Court must also consider whether the price offered resulted from a “fair” sale process from the standpoint of the Dissenting Shareholders.

[96]           The judge took the position that the original offer made by Resolute and accepted by Fairfax, Pabrai and Oakmont before it was publicly announced, did not represent the fair value of the shares at the time that it was made:

[214] The actions and tactics adopted by Resolute with the active complicity of Fairfax, inter alia, may have been considered legitimate and legal at the time by the BDR without any scrutiny of the obvious conflict of interest of Fairfax who happened to be both the most important shareholder and insider of Fibrek and of Resolute. But this does not necessarily mean that this Court must conclude that the $1.00 cash price of the Fibrek Share offered initially by Garneau and readily accepted by Fairfax, Pabrai and Oakmont, being the same price subsequently offered to all the other Fibrek shareholders in the Resolute Offer and in the Plan of Arrangement, reflected its “fair value” at all relevant times for the purposes hereof.

[215] On the contrary, the preponderant evidence convinces the Court that even on December 15, 2011, the date of the formal Resolute Offer, the Fibrek Shareholders, other than the Locked-up Shareholders who were called upon to make a decision whether to tender or not their Fibrek Shares under the Resolute Offer, were right to consider that the $1.00 cash price offered by Resolute (and previously accepted by Fairfax, Pabrai and Oakmont) did not represent the “fair value” of their Fibrek Shares at the time.

[97]           In his analysis, he added the following comments about Fairfax and its acceptance of the initial $1.00 offer:

[316] Clearly, the $1.00 cash price was of little concern for Watsa. Based on the preponderant evidence, the Court is convinced that Fairfax, as an insider of both Resolute and Fibrek, was in a blatant conflict of interest situation and was essentially driven by its desire to dispose of its 33 million Fibrek Shares in favour of Resolute, something that it could not do realistically on the open stock market. Fairfax being an insider and principal shareholder of Resolute, holding a seat on the Resolute Board and being undoubtedly well aware of the latter’s decision to take-over Fibrek at a cash price no greater than $1.00, Fairfax’s solution to its dilemma was to actively assist Resolute to take-over Fibrek at a moment when its stock happened to be trading at an historical low.

[317] Then, “you make it up.” From Fairfax’s standpoint, the cash price was of no significance. Fairfax would convert its Fibrek Shares into Resolute Shares instead of opting for the Cash Only Option. As Watsa stated publicly at the time, he was aiming to maximize the Fibrek Shareholder value over the long term with Resolute Shares. But, what about those Fibrek Shareholders who would prefer to choose the Arrangement Cash Only Options? To all intents and purposes, they would be bound to a “conveniently” low cash price offered to and accepted by Fairfax, Pabrai and Oakmont upon executing their respective Lock-up Agreements.

[318] Based on Watsa’s comments at the time, the Court cannot conclude that the witness was really satisfied that the $1.00 cash price offered represented “fair value” for the Fibrek Share whose value, like Resolute’s, had “come down by more than 50 per cent itself” by his own admission at the trial.

[319] The Court finds that Watsa’s acknowledgement that accepting the $1.00 cash price offer together with Pabrai and Oakmont and sealing their deal with three hard Lock-up Agreements made it impossible for this 46% block to seek or to consider a more generous or realistic offer. It was also quite revealing as to his true intentions and understanding at the time. “It was game over” for the other Fibrek Shareholders. But “[i]t was the right way to do it for Resolute.”

[320] Watsa was also echoing Garneau’s position and strategic goal that with the hard Lock-up Agreements executed by the Locked-up Shareholders controlling some 46.8% of the Fibrek Shares, he essentially wanted to avoid any bidding war that could impede on Resolute’s attempt to take-over Fibrek for $1.00 cash per Fibrek Share. Clearly, any bidding war entailed the probability that Resolute would be forced to increase its $1.00 cash offer.

[321] Although such a strategy may have been considered legitimate by the BDR (and the Court is not here to rewrite history), it does not automatically confer upon the $1.00 cash price agreed upon between Resolute and Fairfax, the most important Fibrek shareholder at the time and an insider of Resolute, the characteristic of reflecting the “fair value” of the Fibrek Share at the time.  

[98]           The judge is also critical of the conduct of Pabrai and Oakmont in accepting to sign hard lock-up agreements, and the conduct of Steelhead in buying the Fibrek shares that put Resolute over the 50% mark.

[99]           In my view, this criticism of Resolute and of Fairfax, Pabrai, Oakmont and Steelhead and this dismissal of the initial Resolute Offer as evidence of fair value are wrong and constitute palpable and overriding errors by the judge.

[100]      Looking first at the conduct of Resolute, it had no obligation to the shareholders of Fibrek. It was not under any obligation to offer them fair value for their shares. The obligation to pay fair value only arises in the context of dissent rights. To the contrary, it is in Resolute’s interest to pay as low a price as possible for the Fibrek shares. However, in the context of a hostile take-over, if Resolute wanted its offer to succeed, it needed to offer a price that the market would accept, and a price acceptable to the market is a good indication of the fair value of the shares. I will come back to this point later.

[101]      The judge focused on the conduct of Fairfax and was strongly critical of it. As pointed out by Resolute in its factum, Fairfax was not a party to the proceedings, yet the judge devoted 132 paragraphs of his judgment to Watsa’s testimony, which lasted less than a day. He refers throughout the judgment to Fairfax’s “blatant” conflict of interest[100] and its “complicity”[101] in helping Resolute acquire control of Fibrek at $1.00 per share.

[102]      As a shareholder of Fibrek, Fairfax did not owe any fiduciary duty to the other shareholders of Fibrek. The Respondents recognize in their factum that “a shareholder may not have a fiduciary duty to anyone”, but they continue by stating “it remains bound by the duty to act in good faith and in the best interest of all the shareholders”.[102] This is simply wrong as a matter of law. Though bound to act in good faith, Fairfax was entitled to act in its own self-interest without considering the interests of the other shareholders of Fibrek.

[103]      The only people who owed fiduciary duties to the Fibrek shareholders were the directors of Fibrek. They purported to exercise that fiduciary duty by recommending the rejection of the Resolute Offer, obtaining an independent valuation, seeking out a white knight, and recommending the acceptance of the Mercer Offers. I will come back to this point as well.

[104]      Further, there is nothing illegal or even improper about lock-up agreements, even hard lock-up agreements. They are a common and accepted tool in the context of take-over bids.[103] There is no limit on the percentage of shares that can be locked-up. In Ashton Mining, for example, the bidder entered into a lock-up agreement with a shareholder holding 51.7% of the shares of the target before announcing its take-over bid. The judge agreed that this would have the effect of deterring other bidders, but he did not conclude that there was anything wrong with that.

[105]      This sale process took place under the close supervision of the BDR and the courts. They concluded that the Fibrek board acted improperly in adopting the two Shareholder Rights Plans and the Special Warrants, but did not criticize the conduct of Resolute or Fairfax and the other shareholders.

[106]      In any event, that was not the question before the judge. He acknowledged that “such a strategy may have been considered legitimate by the BDR (and the Court is not here to rewrite history)”.[104] The issue for the judge is whether the Resolute Offer provides relevant evidence of the fair value of the Fibrek shares. The judge concluded that it did not, because “the delivery of more than 46% of Fibrek’s Shares under hard Lock-up Agreements, with the complicity of Fairfax who was clearly in conflict of interest, resulted in an unfair and abusive bid process that cannot be condoned by the Court.”[105]

[107]      In my view, the judge was wrong.

[108]      As Justice Harris emphasized in ExxonMobil, “the result of the market is likely the best and most objective evidence of value” because “[i]t is rooted in reality and not based on assumptions, theory and predictions”.

[109]      As set out above, the price offered by Resolute on November 28, 2011, included a premium over the price at which the shares were trading on the TSX prior to the Resolute Offer. This suggests that the Resolute price was fair on November 28, 2011.

[110]      Further, a large majority of the shareholders, holding 115 million shares, accepted the Resolute Offer. The shareholders who accepted the offer are presumed to be acting in their own self-interest. That makes the price under the Resolute Offer a pretty good indication of the market value of the shares.

[111]      The price offered by Resolute and accepted by a majority of the shareholders is not, of course, conclusive. If it was, there would be no valuation recourse as the dissenting shareholders would ultimately receive the same amount. There may be a reason why shareholders chose to accept less than the fair value of their shares. There may also be subsequent events between the date of the initial offer and the Valuation Date that have an impact on value.

[112]      I accept that it was appropriate for the judge to focus on Fairfax, Pabrai and Oakmont and their hard lock-up agreements. Once they signed the hard lock-up agreements for 46.3% of the Fibrek shares, it was practically impossible for Mercer or any other third party to obtain 50% of the shares. Steelhead then acquired the shares that put Resolute over the 50% mark. It is important to consider the motivations of these four shareholders. 

[113]      As mentioned above, there is nothing illegal or even improper about lock-up agreements, even hard lock-up agreements. Further, the price at which shareholders were locked-up remains important in assessing the fair value of the shares. In Ashton Mining, for example, the trial judge concluded that the price at which the shareholder holding 51.7% of the shares of the target was locked-up before the take-over bid was announced was the fair value of the shares:

[29] The petitioner points to the fact that almost 100% of the shareholders have accepted the $1.25 offer as significant evidence in support of that value.  Mr. Vesuna argues, with good reason, that once the Look-Up Agreement was entered into, it was likely that the share price would remain at that level for the take-over and amalgamation and that Old Ashton would not receive competing offers.  The fact that Rio Tinto had committed to sell all of its shares for that price to Stornoway and that it held a controlling position, meant that other potential bidders would be deterred from making any offer.  Nevertheless, the agreement by Rio Tinto to accept that consideration for its large block of shares is evidence that an extremely sophisticated investor felt that the price was fair consideration for its holding.  This, in and of itself, is significant.[106]

[Emphasis added]

[114]      Fairfax and Steelhead were also significant shareholders of Resolute. The judge concluded that Fairfax (and to a lesser extent Steelhead) accepted the Resolute Offer because it was in a “blatant” conflict of interest. He also mentions that Pabrai was a shareholder of Resolute, but the Respondents admitted at the hearing that the judge was wrong. Oakmont was not a shareholder of Resolute. Therefore, to the extent that Fairfax and Steelhead were in a conflict of interest, Pabrai and Oakmont were not.

[115]      Let me deal briefly with Steelhead.

[116]      Steelhead was a significant shareholder of Resolute, holding 13.1% of its shares. It started acquiring shares in Fibrek on July 26, 2011, but the bulk of its Fibrek shares were acquired after Resolute announced its Offer, at prices varying between $0.97 and $1.02. It did not sign a lock-up agreement or tender its shares until late in the process, but it informed Resolute in December 2011 that it intended to deposit all of its shares pursuant to the Resolute Offer. Further, the judge found that Steelhead actively opposed the counter-measures adopted by Fibrek and the Mercer Offers.

[117]      I do not believe that buying shares with the intention of tendering them pursuant to the Resolute Offer places Steelhead in a conflict of interest. However, I agree that the tendering of shares by Steelhead is not evidence of the market value of the shares. Steelhead purchased Fibrek shares with the intention of tendering them under the Resolute Offer. The price at which Steelhead purchased shares on the stock market was essentially the same as the price Resolute was offering. As a result, Steelhead had little or no profit or loss and no risk on the purchase and sale of the Fibrek shares. The judge concluded that Steelhead’s sole purpose was to help Resolute acquire Fibrek, because it was a shareholder of Resolute. As such, the price paid by Resolute to Steelhead is not indicative of the market value of the shares.

[118]      As for Fairfax, its conflict was that it was a shareholder of both Fibrek and Resolute when it entered into the lock-up agreement under the Resolute Offer. Its conflict was limited in scope. As mentioned above, it did not owe any fiduciary or other duty to the other Fibrek shareholders. It was entitled to act in its own self-interest. The only issue is whether it accepted the Resolute Offer, not because it was in its interest to do so as a shareholder of Fibrek, but because it was to its advantage as a shareholder of Resolute.

[119]      There was evidence that it was reasonable for Fairfax to accept the Resolute Offer without regard to its position as a shareholder of Resolute. It had acquired most of its Fibrek shares in July 2010 at a price of $1.01 per share. By November 2011, the trading price for Fibrek shares on the TSX was $0.72 and Fairfax had such a big block that it could not even dump its shares at that price. An offer to buy all of its shares for $1.00 could be seen as a very good thing. The fact that it would be selling shares that it acquired one year earlier at a loss ($0.01 per share) does not mean that it acted unreasonably – the shares were now worth $0.29 less than they paid for them and Fairfax was recovering $0.28 of that loss.

[120]      On the other hand, it is clear that Fairfax wanted Resolute to be the successful bidder for Fibrek because that would be to Fairfax’s advantage as a shareholder of Resolute. Fairfax refused offers from Mercer at a higher price in the months leading up to the Resolute Offer. However, wanting Resolute to be the successful bidder does not mean that it was in its interest to sell to Resolute below the fair value of the shares. 

[121]      It is important to consider the numbers. Fairfax held 33,628,301 shares of Fibrek, representing 25.9% of the total number of shares outstanding. The judge’s premise is that Fairfax accepted $1.00 per share when it knew that the shares were worth more. Assuming that the shares were worth $2.00 to keep the calculations simple, it would mean that Fairfax accepted $33.6 million for its shares in Fibrek when they were worth $67.2 million. In other words, it left $33.6 million on the table, or gave $33.6 million to Resolute. Does that make any sense?

[122]      The argument is that it left that money on the table because it knew that, by agreeing to a lock-up and getting Oakmont and Pabrai to go along, it could force the other shareholders to accept $1.00 per share and that it would benefit as a shareholder of Resolute. But that argument does not withstand scrutiny. Whether Resolute acquires Fibrek at $1.00 per share or at $2.00 per share, it will still receive the same benefits from the transaction. However, if the 130,075,556 shares of Fibrek are purchased for $1.00 when they are in fact worth $2.00, then Resolute has purchased for $130 million something worth $260 million and has realized a windfall gain of $130 million. Fairfax’s share of that gain is only 10 to 12%, or $13 to $15.6 million. In other words, Fairfax left $33.6 million on the table to gain $13 to 15.6 million. It lost $18 to 20 million. If the shares are worth less than $2.00, the calculation is different but there is always a substantial loss. Even if Fairfax, as a shareholder of Resolute, wanted Resolute to be the successful bidder, it was in Fairfax’s interest to obtain the best price from Resolute. It makes absolutely no sense to assume that Fairfax deliberately agreed to sell the shares for less than they were worth. Even if Fairfax had decided to accept Resolute shares rather than cash, it would be receiving half as many shares if the offer was $1.00 instead of $2.00.

[123]      Pabrai and Oakmont were not shareholders of Resolute. The judge found their involvement “somewhat nebulous”.[107] It was not. They were sophisticated shareholders of Fibrek who agreed to sell their shares for $1.00. There is no evidence that they received any other benefit from the transaction. If they sold their Fibrek shares for less than their value, they were giving money to Resolute and getting nothing in exchange. There is nothing to suggest that they had any reason to accept the offer, other than they considered it to be a fair price for their shares. This is strong evidence of market value.

[124]      Third party entities must be assumed to be acting rationally and in their self-interest. The only logical conclusion is that Fairfax, Pabrai and Oakmont believed $1.00 to be a reasonable price for their shares.

[125]      That evidence is particularly relevant in establishing the fair value of the shares. As stated by Justice Harris in ExxonMobil:

[19] Commonly, the determination of fair value in the reported cases occurs where there is no broadly based open market transaction because, for example, the transaction might not involve a disposition of shares or is not arms‑length. In those kinds of circumstances, it is often necessary to resort to a theoretical search for value that attempts to estimate the value that would be the product of a hypothetical market. Where, however, there is an open market for shares or other evidence indicative of arms‑length conduct of numerous market participants acting in their own self‑interest and settling on a price, such evidence is particularly reliable as an indicator of fair value, as I have already explained. Objective market evidence, in the absence of evidence of market failure, is more reliable than theoretical analysis that attempts to derive a value based on assumptions about what a real market would disclose, if there were one. The behaviour of a real market is better evidence of value than a theoretical market.[108]

[Emphasis added]

[126]      The judge therefore made a palpable and overriding error in excluding the Resolute Offer from his assessment of fair value. He should have started with the $1.00 Resolute Offer as indicative of the fair value of the Fibrek shares on November 28, 2011.

3. The Mercer Offers

[127]      The judge used instead the price in the Second Mercer Offer of $1.40 per share.

[128]      That offer is certainly a relevant fact that the judge should consider. It represents the price that a third party said it was willing to pay. It was within the range of value arrived at by Canaccord on February 3, 2012 ($1.25 to $1.45). Both the First Mercer Offer of $1.30 per share and the Second Mercer Offer of $1.40 per share were found to be fair to Fibrek shareholders by TD and both had been unanimously recommended by the Fibrek board to the Fibrek shareholders. However, I have reservations about the judge’s decision to use it as his starting point.

[129]      The most significant issue is that no one from Mercer testified and there are no documents detailing how Mercer arrived at its offers. It is therefore impossible to know to what extent Mercer included, for example, its synergies or the value of the Hydro-Québec contract in the prices that it offered. Because we do not know what is included in the prices of $1.30 and $1.40 per share, it is difficult to compare them to the Resolute Offer or to make adjustments to them.

[130]      Moreover, the Mercer Offers were made at a time when Resolute had already locked up 46.3% of the shares and they were conditional on being accepted by a majority of the shareholders. There was never any practical prospect of that happening. As a result, they should be given less weight than the Resolute Offer, at which 115 million shares were sold.

[131]      I will nevertheless proceed with a two-prong analysis based on two indications of market value of the Fibrek shares: Resolute offered $1.00 per share on November 28, 2011, based on the information available to it at that date, and Mercer offered $1.40 per share on April 11, 2012, based on the information available to it at that date.

4. Updating the Offers

[132]      Whether one takes the Resolute Offer or the Second Mercer Offer as a starting point, it is important to consider that they were made on November 28, 2011, and April 11, 2012, respectively eight months and three months before the Valuation Date.

[133]      The offers need to be updated in two ways. First, they need to be updated to take into account facts that affect value that were not known or considered when the offers were made. The judge did this and I will review the adjustments that he made in the next sections of my reasons.

[134]      Further, both offers were payable in cash, in shares of the offeror or in a combination of cash and shares with a cap on the amount of cash and the number of shares. The offers were worth $1.00 and $1.40 when they were made, based on the value of the Resolute shares on November 28, 2011, and the value of the Mercer shares on April 11, 2012. The judge considered only the Second Mercer Offer, and he used the value of $1.40 throughout his analysis.

[135]      In my view, this was an error. He should have updated the value of the Second Mercer Offer (and the Resolute Offer) to reflect the value of the Resolute shares and the Mercer shares on the Valuation Date. In fact, both the Resolute shares and the Mercer shares had dropped in value between the dates of the offers and the Valuation Date. The Respondents should not be shielded from this loss in value.

[136]      On the Valuation Date, the Resolute Offer was worth $0.8773 and the Second Mercer Offer was worth $1.16. Those are the values that should have been used.

[137]      Instead, the judge qualified Resolute’s transformation of the initial $1.00 offer into a cash equivalent of $0.8773 in August 2012 as “undoubtedly […] a measure of retribution”.[109] This only reinforces the impression that he had a negative attitude towards Resolute.

Synergies

[138]      The synergies are the efficiencies that a purchaser expects to realize when integrating the operations of the target with its own operations. They are the added value that the purchaser derives from the transaction. They vary by purchaser, depending on the overlaps in the operations of its business and that of the target. They are generally added to the discounted cash flow analysis of the value of the target’s business.[110]

[139]      When the purchaser offers to buy the target, it may include in the price a portion of the synergies it hopes to realize. In the context of a bidding war with another potential purchaser, each purchaser may offer a portion of its synergies. But a purchaser would not want to bid all of its synergies, because it then has lost the benefit of the transaction. Further, the purchaser with the better synergies would not have to bid any of the synergies that its competitors do not share.

[140]      The judge added synergies to the Second Mercer Offer.

[141]      He first reviewed the evidence on the potential synergies available to Resolute. He criticized Resolute for withholding the UBS analysis, which showed $0.87 per share in potential synergies available to Resolute. He concluded that it would be “fair and just” to add $0.27 per share to his “base value” of $1.40 per share based on the Second Mercer Offer. His complete analysis is as follows:

[504] The Court has already determined that the synergies identified by Resolute should be factored in its determination of the “fair value” of the Fibrek Share as proposed by the expert Tremblay, bearing in mind that among others, the Steelhead representatives mentioned on more than one occasion that the “synergies that would result from a transaction with Resolute would be greater than those resulting from a transaction with Mercer.” Clearly, synergies mattered.

[505] As previously indicated, UBS also examined that aspect in November 2011 in anticipation of the Resolute hostile take-over bid and had concluded that the synergies identified by Resolute carried a total per-share added value of $0.87.

[506] Upon preparing the MNP Report, Tremblay was unaware of the synergies identified by Resolute and UBS in the UBS Opinion and of the value attributed to them. The Court understands that the range of values that she came up with initially did not factor in any value for the synergies stemming from a Resolute/Fibrek merger.    

[507] In the Sanabe Rebuttal Report of May 16, 2014, the expert Mishkin determined that 50% of these synergies would have made MNP’s valuation higher by $0.27 per share. However, it has been Resolute Growth’s and Mishkin’s position all along that none of the synergies identified by Resolute or by UBS should be factored in the determination of the “fair value” of the Fibrek Share, since Resolute was the only special interest purchaser, in their view. The Court has already dismissed that argument.

[508] Mercer possibly factored-in a certain amount in its offers to account for the synergies. The Court nevertheless believes that the value of $0.27 identified by Mishkin represents a fair and just amount to be added to the base value of $1.40 on account of the synergies resulting from a Resolute/Fibrek Merger that were likely greater that those identified for the British Columbia based corporation. 

[509]  Therefore, the Court shall add to the $1.40 base value an additional $0.27 per Fibrek Share on account of the synergies. 

[References omitted]

[142]      With respect, this analysis is flawed.

[143]      His starting point is that UBS examined the potential synergies identified by Resolute in the UBS Fairness Opinion Analysis dated November 28, 2011 and concluded that they carried a total per-share added value of $0.87. That analysis was prepared before Resolute had any access to the books and records of Fibrek.

[144]      In that analysis, UBS estimated the synergy value per share at $0.30 for “Head Office & Administrative Savings” and $0.57 for “Fibre Optimization”. In the notes, UBS explains that the Head Office & Administrative Savings “[i]ncludes C$6.0 mm in Head Office synergies and C$1.5mm in Administrative savings at Saint-Félicien” and that the Fibre Optimization “[i]ncludes C$7.5mm for Fibre Optimization at Rubik [Fibrek], C$5.0mm at Montreal sawmills and C$3.0mm at Montreal paper mills”, for a total of $23 million for all annual synergies. The annual savings of $7.5 million in Head Office & Administrative Savings have a present value of $39 million or $0.30 per share. Similarly, annual savings of $15.5 million in Fibre Optimization have a present value of $74 million or $0.57 per share.[111]

[145]      UBS does not discuss whether any of these synergies would be available to a third party like Mercer. The fact that Resolute might have expected to realize synergies of $0.87 per share forms part of its internal valuation of Fibrek and UBS’s assessment of whether the $1.00 offer was fair from a financial point of view to Resolute, but is not evidence that these synergies should be included in the market value of the Fibrek shares.[112] As such, the UBS analysis has very limited value in assessing fair value. The judge should not have been so critical of the fact that it was not disclosed earlier by Resolute.

[146]      Sanabe undertook a more detailed analysis of the potential synergies as part of its report dated August 8, 2013.[113] Sanabe’s analysis is based on Resolute management’s analysis prepared in November 2012, after Resolute had taken control of Fibrek. It identifies total potential synergies of $31,112,000 per year, which is more than the $23 million of synergies identified by UBS. However, it concludes that while some of those synergies (purchasing power and sales commissions) would be fully available to all potential buyers, some (chip transportation and sawmill optimization) were unique to Resolute and others (SG&A, industry association and pulp transportation) would only be available as to 50% to other purchasers, as companies outside Quebec would face pressure to maintain a significant managerial presence in Quebec and the pulp transportation benefits would only be available to Eastern Canadian NBSK producers. As a result, it concludes that only $10,262,000 of annual synergies would be available to other buyers.[114] Sanabe also assumed that a bidder would only offer to pay 50% of those synergies to acquire Fibrek, as it would not undertake the transaction unless it retained a meaningful portion of the potential benefits of the combination. This reduces the synergies potentially included in the transaction to $5,131,000 per year, which have a present value of $38.7 million to $44.6 million (based on discount rates of 10.5% to 12.5%). That represents $0.30 to $0.34 per share.

[147]      In its Rebuttal Report dated May 16, 2014, Sanabe suggests that one of the differences between its report and the MNP report produced by the Respondents is that MNP did not include anything for synergies.[115] Sanabe attributed $0.27 per share to that difference.[116] In its Amended Limited Critique, MNP stated that its valuation report was conservative and did not include any synergies in its Discounted Cash Flow analysis (which was one of its corroborative approaches) and it accepted the “upward adjustment of $0.27/Share”, which would offset another adjustment and have an immaterial net effect.[117]

[148]      Although the judge is very critical of several aspects of the Sanabe report, he accepted the figure of $0.27 of synergies per share. That figure is consistent with and a little higher than the conclusions reached by Canaccord ($0.21 to $0.22)[118] and TD ($0.20 to $0.23).[119] There is no reviewable error.

[149]      However, the judge then added the $0.27 per share to the Second Mercer Offer of $1.40 per share, “on account of the synergies resulting from a Resolute/Fibrek Merger that were likely greater that those identified for the British Columbia based corporation”.

[150]      In principle, synergies have no place in the market value approach. Synergies are added to the discounted cash flow analysis as a form of additional value not otherwise included in that analysis. UBS, Canaccord and TD all estimated synergies, but included them only in their discounted cash flow analyses.[120] Sanabe included them only in its discounted cash flow analysis[121] and suggested in its Rebuttal Report that MNP add them to its discounted cash flow analysis.[122] MNP had not included them in its initial valuation, but agreed in its Limited Critique that they should be added to its discounted cash flow analysis.[123] No one, other than the judge, added them to a market value analysis. The reason for this is that the market value includes synergies.

[151]      To justify adding them to the Second Mercer Offer, the judge found that there should have been an auction between Resolute and Mercer but that Resolute had cut it short with its hard lock-up agreements. The judge therefore continued a hypothetical auction, trying to guess where it would end up. The last bid was Mercer at $1.40, and the judge concluded that there was another $0.27 in synergies and therefore someone could have bid $1.67.

[152]      This approach is wrong for many reasons.

[153]      First, the judge should not be conducting a hypothetical auction. The judge justified this hypothetical auction by referring to the “legitimate expectation” of the Fibrek shareholders that they would benefit from “a ‘fair’ and unrestricted bidding process”.[124] The notion of “legitimate expectations” is relevant in oppression cases and should not have been imported here.[125] Further, the shareholders’ legitimate expectation must give way to the reality of valid lock-up agreements.

[154]      The judge’s mandate is to fix the fair value of the shares. A hypothetical auction involves far too much speculation and, if pushed too far, results in a party bidding much more than the fair value of the shares. The judge should use the objective evidence of what parties actually bid for the shares and make necessary adjustments to those bids to take into account objective elements that were not considered. He should not be trying to guess how high the parties might have bid if there had been an unrestricted auction. That is particularly so when Garneau testified that Resolute would not have participated in an auction and would not have paid more than $1.00 per share and Mercer dropped out at $1.40.

[155]      The $0.27 represents the synergies that Mercer could reasonably include in its bid. Even if the judge was going to follow the hypothetical auction approach, and there were many reasons why he should not, there was no basis to believe that the Second Mercer Offer did not already include those synergies. The judge acknowledges that this is a possibility: “Mercer possibly factored-in a certain amount in its offers to account for the synergies”[126] but he nevertheless added the full synergies to the Second Mercer Offer.

[156]      This was an error. The First Mercer Offer of $1.30 was announced on February 9, 2012. Prior to that offer, Canaccord had issued its valuation opinion on February 3, 2012, in which it concluded that the range of values for the Fibrek shares was $1.25 to $1.45. It included synergies of $0.21 to $0.22 in its valuation. Mercer would have known about this valuation when it announced its first offer. Further, TD gave the opinion that the First Mercer Offer was fair to Fibrek shareholders on February 9, 2012, and the Fibrek board unanimously recommended that the Fibrek shareholders accept it. TD included synergies of $0.20 to $0.23 in its analysis. One cannot reasonably conclude that it did not include synergies.

[157]      Mercer then increased its offer from $1.30 to $1.40 on April 11, 2012. That $1.40 was Mercer’s best and last bid for Fibrek. The most reasonable assumption is that Mercer included its synergies in the $1.40 offer. If Mercer had further synergies, this was the time to include them in its bid. There is no reason to believe that Mercer could have added another $0.27 to its bid or that Resolute would have needed to bid $1.67 to beat Mercer.

[158]      For all of these reasons, I am of the view that the judge made several errors in adding synergies of $0.27 per share to the Second Mercer Offer. He should not have added anything.

[159]      The judge did not consider the issue of whether anything should be added to the Resolute Offer for synergies. The only evidence as to whether the Resolute Offer included anything for synergies is a calculation prepared by Garneau in which he included synergies of $0.06 per share in a total share value of $0.68. The judge did not attach much weight to this calculation as it had been prepared in the weeks leading to the trial.[127] Further, it is difficult to make a link between that share value of $0.68 and the offer of $1.00. It is fair to assume that part of the $0.32 difference is the premium for buying all of the shares and the rest is synergies, but it is too speculative to estimate what portion, if any, of the $0.27 was not included. I would not add anything to the value of the Resolute Offer for synergies.

33 MW Hydro-Québec contract

[160]      The judge then added the value of the 33 MW Hydro-Québec contract. The contract is clearly very valuable: Hydro-Québec agreed to buy the energy produced by Fibrek at $106/KWH and then sell it back to Fibrek at $46/KWH for 25 years. Estimates of the value of the contract vary, but the judge fixed it at $0.80 per share. That value is not challenged on appeal.

[161]      The judge also determined that Resolute did not include or consider the additional value of the 33 MW Hydro-Québec contract when it made its offer of $1.00 per share on November 28, 2011. That conclusion is not challenged by Resolute on appeal. I will therefore add $0.80 to the value of the Resolute Offer.

[162]      Finally, he concluded that it was reasonable to add $0.40 per share to the Second Mercer Offer as the portion of the value of the Hydro-Québec contract that Mercer did not take into account.

[163]      Resolute contests the last finding. It argues that the evidence adduced at trial demonstrated that Mercer had fully factored in the value of the contract in the Mercer Offers. The addition of $0.40 per share therefore results in double-counting and a windfall benefit for the Respondents.

[164]      The evidence on this issue is not clear. The evidence accepted by the judge establishes the following timeline:

• October 26, 2011: the Québec Government adopted the Regulation respecting the maximum production capacity referred to in a program to purchase electric power produced by cogeneration from residual forest biomass (O.C. 1085-2011), which allowed Hydro-Québec to purchase power from a renewable energy source producer without having to solicit tenders.
• December 15, 2011: program approved by the Régie de l'énergie.
• December 20, 2011: program formally launched by Hydro-Québec.
• January 10, 2012: Fibrek submitted a proposal to Hydro-Québec.
• January 27, 2012: Hydro-Québec confirmed the Fibrek proposal qualified for its program.
• February 3, 2012: Canaccord included only 25% or 50% of the value of the Hydro-Québec contract in its valuation of Fibrek shares, to account for the uncertainly of signing a contract.[128]
• February 23, 2012: Hydro-Québec accepted the Fibrek proposal.
• May 4, 2012: execution of the Hydro-Québec contract.

[165]      The Mercer Offers were announced on February 9, 2012, and April 11, 2012. The judge assumed that since Mercer announced the offers before the Hydro-Québec contract was executed, it probably did not include the full value of the contract. MNP assumed that Mercer had adopted the same approach as Canaccord (i.e. included only 25% or 50% of the value of the contract) and it therefore added the other 50% or 75% to the Mercer Offers. The judge, exercising his judicial discretion, added $0.40 per share, which is 50% of the value of the contract.

[166]      Resolute contests this conclusion, arguing that the level of uncertainty about the Hydro-Québec contract was low and that the Mercer Offers factored in the projected profits from the contract. It relies on the following evidence:

• Fibrek management believed as early as December 2011 that it would get a contract with Hydro-Québec[129] - this was reflected in its public disclosures and was disclosed by TD to the potential white knights;[130]
• Mercer met with Quebec government officials in late January 2012 and obtained assurances that Fibrek would be awarded a contract;[131]
• Mercer was aware that Fibrek had received confirmation from Hydro-Québec on February 23, 2012, that it had accepted the Fibrek proposal.[132]
• Fibrek stated in its press release dated April 11, 2012, in relation to the Second Mercer Offer, “We are very pleased that the new offer now recognizes further value in Fibrek to the benefit of our shareholders, including our potential 33 megawatt power purchase agreement which could generate an incremental EBITDA of up to $16 million.”

[167]      The judge did not make a palpable and overriding error in concluding that Mercer had not included the full value of the Hydro-Québec contract in its offers. There was no direct evidence that Mercer had included the full amount. The evidence of Mercer’s knowledge is not conclusive proof that it included the full amount. Fibrek management’s confidence and its declarations to that effect are not sufficient to make the contract a certainty. Similarly, the assurances received from Quebec government officials appear from the evidence to have been limited in scope and inconclusive. Patsy Ducharme from Fibrek testified that “[t]hey [the Mercer executives] received verbal confirmation at the meeting that we qualified”[133] and Louis Vérroneau stated in an email the day after the meeting that “[t]hey [the Mercer executives] have a good feeling about the 33MW”. The confirmation from Hydro-Québec on February 23, 2012 was conditional on a number of items, notably the execution of the contract, which did not happen for another 10 weeks.

[168]      In the circumstances, I see no error in the judge’s conclusion that Mercer was being prudent and did not give full value to a contract which had not been executed. Until a contract is signed, there is some element of risk and uncertainty as to the completion of the transaction.

[169]      The judge’s estimation is that Mercer gave the Hydro-Québec contract 50% of its value. Although a 50% discount only three weeks before the signature of the agreement appears high, I am not convinced by Resolute’s argument that the judge made a palpable and overriding error. There was no direct evidence of the breakdown of the Mercer Offers, to show what it had included. The judge based himself in large part on the fact that Canaccord gave the contract 25% or 50% value in its valuation dated February 3, 2012. Because the Mercer Offers are later in time with a higher level of certainly and lower level of risk, he assumed that Mercer gave the contract the higher value. This is somewhat speculative but I would not intervene.

[170]      It is important to note at this stage that TD concluded that the Mercer offers were reasonable and that the Fibrek board recommended that the Fibrek shareholders accept them. Yet the Mercer offers did not value the Fibrek shares any higher than the Resolute Offer. Resolute offered $1.00 with no knowledge of the Hydro-Québec contract. If one removes the $0.40 that Mercer is presumed to have added for the Hydro-Québec contract, it is offering the same $1.00. I take this as further evidence that the Resolute Offer was reasonable and representative of fair value.

[171]      Having assumed that Mercer included 50% of the value of the Hydro-Québec contract in the Second Mercer Offer, the judge added $0.40 per share to the offer, representing the other 50% in his assessment of fair value. 

Contingent environmental liabilities

[172]      Resolute pleaded in first instance that Fibrek was worth less than the $1.00 offered in November 2011 because of various issues discovered when Resolute took control in May 2012. The judge subtracted $0.08 per share because of contingent environmental liabilities. This amount is not contested on appeal.

Conclusion on fair value

[173]      The judge concluded that the fair value of the Fibrek shares on July 22, 2012 was $1.99 per share: he started with the Second Mercer Offer ($1.40), added the synergies ($0.27) and the value of the Hydro-Québec contract not already included ($0.40) and subtracted the contingent environmental liabilities ($0.08).

[174]      I have explained why I disagree with the elements of this calculation.

[175]      In my view, the most reliable starting point for the market value of the Fibrek shares is the Resolute Offer, valued as at the Valuation Date ($0.8773). To that amount, I add the value of the Hydro-Québec contract ($0.80) and subtract the contingent environmental liabilities ($0.08). The result is $1.5973 per share.

[176]      If I instead use the Second Mercer Offer, it has a value of $1.16 as at the Valuation Date. To that amount, I would add 50% of the value of the Hydro-Québec contract ($0.40) and subtract the contingent environmental liabilities ($0.08). The result is $1.48 per share.

[177]      I view the result based on the Resolute Offer to be more reliable and more representative of fair value. It is the Resolute Offer, updated to the Valuation Date, and adjusted for two factors unknown at the time it was made. I would not modify it because the result based on the Second Mercer Offer is lower. In my view, the result based on the Second Mercer Offer is close enough to the result based on the Resolute Offer to serve as corroborative evidence.

[178]      Finally, I note that the MNP Report produced by the Respondents and accepted by the judge concluded that the fair value of the Fibrek shares was between $1.59 and $2.06 (midpoint $1.82), without taking into account the contingent environmental liabilities of $0.08 per share. Once those are deducted, the MNP range is $1.47 to $1.98 (midpoint $1.74). I note that my conclusion falls within this range while the judge’s does not. I view this as further corroboration.

Question Two: The Additional Indemnity

[179]      Finally, there is a question raised with respect to interest. The judge ordered Resolute to pay $1.99 per share plus interest at the legal rate and the additional indemnity pursuant to Article 1619 CCQ. Resolute contests the inclusion of the additional indemnity.

[180]      Resolute argues that the additional indemnity under Article 1619 CCQ applies only in cases of damages awarded under the Civil Code. On this point, Resolute is correct.

[181]      However, the judge did not award the additional indemnity under Article 1619 CCQ.  Rather, in the exercise of his discretion under Subsection 190(23) CBCA to allow “a reasonable rate of interest on the amount payable to each dissenting shareholder from the date the action approved by the resolution is effective until the date of payment”, he concluded that interest at the legal rate under Article 1617 CCQ plus the additional indemnity under Article 1619 CCQ together constituted a reasonable rate of interest.

[182]      Resolute argues that the judge should instead have used the prime commercial lending rates or Resolute’s cost to borrow. While the judge could have chosen one of those rates, he did not. There are many examples of courts in Quebec awarding interest at the legal rate plus the additional indemnity in cases under the CBCA or the equivalent provincial statute.[134] I would not intervene in his exercise of discretion.

***

[183]      For all of the reasons set out above, I propose to allow the appeal in part, fix the fair value of the Fibrek shares at $1.5973 per share rather than $1.99 per share, and order the Appellant Resolute Growth Canada Inc. to pay to the Respondents $0.72 per share, with legal interest and the additional indemnity since August 30, 2012.

[1]  The initial take-over bid was made by AbitibiBowater Inc., doing business as Resolute Forest Products. AbitibiBowater Inc. later changed its name to Resolute Forest Products Inc. Resolute FP Canada Inc. and RFP Acquisition Inc. were direct or indirect wholly-owned subsidiaries of Resolute Forest Products Canada Inc. For ease of reference, I will refer to all these entities as “Resolute”, unless there is a need to distinguish them.

[2]  I use Fibrek Inc. and Fibrek to refer to the original (i.e. pre-acquisition) company.

[3]  Post-acquisition, Fibrek Inc. amalgamated with its subsidiary Fibrek Holding Inc. into a corporation named Fibrek Holding Inc., which was continued as Fibrek Canada ULC and then liquidated into Resolute Growth Canada Inc. I include all of these post-acquisition entities in “Resolute”.

[4]  R.S.C., 1985, c. C-44.

[5]  Fixation des actions de Fibrek inc., 2019 QCCS 4003.

[6]  R.S.C., 1985, c. C-36.

[7]  Pabrai Investment Fund II, L.P., Pabrai Investment Fund 3, Ltd., and Pabrai Investment Fund IV, L.P., funds beneficially owned by and controlled by Mr. Monish Pabrai. I will use the expression “Pabrai” to refer to these entities collectively.

[8]  The agreement was entered into with Dalal Street, LLC, on its own behalf and as general partner for Pabrai Investment Fund II, L.P., Pabrai Investment Fund 3, Ltd., and Pabrai Investment Fund IV, L.P.

[9]  The judge also identifies Pabrai as a shareholder of Resolute, but this is wrong.

[10]  The first Shareholders Rights Plan was a form of “poison pill”. It allowed Fibrek’s other shareholders to purchase additional common shares at a substantial discount to the market price if (1) any other shareholder acquired additional shares that gave it more than 20% of Fibrek’s shares, (2) Resolute or Fairfax (already over 20%) acquired any additional shares, or (3) Resolute entered into any additional lock-up agreements.

[11]  AbitibiBowater inc. (Produits forestiers Résolu) c. Fibrek inc., 2012 QCBDR 8. The BDR’s reasons were filed on August 30, 2012, see AbitibiBowater inc. (Produits forestiers Résolu) c. Fibrek inc., 2012 QCBDR 95.

[12]  These negotiations had been ongoing since early 2011.

[13]  AbitibiBowater inc. (Produits forestiers Résolu) c. Fibrek inc., 2012 QCBDR 13. The BDR’s reasons were filed on March 6, 2012, see AbitibiBowater inc. (Produits forestiers Résolu) c. Fibrek inc., 2012 QCBDR 17.

[14]  Fibrek inc. c. AbitibiBowater inc. (Produits forestiers Résolu), 2012 QCCQ 1745. The judge’s reasons were issued March 16, 2012, and rectified March 19, 2012 see Fibrek inc. c. AbitibiBowater inc. (Produits forestiers Résolu), 2012 QCCQ 1814.

[15]  AbitibiBowater inc. (Produits forestiers Résolu) c. Fibrek inc., 2012 QCCA 569.

[16]  Fibrek inc. c. AbitibiBowater inc. (Produits forestiers Résolu), 2012 QCCA 569, application for leave to appeal dismissed, April 18, 2012, No. 34757.

[17]  AbitibiBowater inc. (Produits forestiers Résolu) c. Fibrek inc., 2012 QCBDR 37.

[18]  Court file no 500-11-043327-127.

[19]  UBS Fairness Opinion Analysis, p. 32.

[20]  Canaccord Valuation, p. 10.

[21]  Ibid., p. 21.

[22]  TD Fairness Analysis, p. 19.

[23]  Ibid., p. 21. The large range of values depended on the extent to which the value of the Hydro-Québec contract was added.

[24]  The opinion was issued to the “Independent Members of the Board of Directors of Fibrek Inc.”, but this was after Resolute had acquired a majority of the shares and had replaced the directors.

[25]  Sanabe Valuation Report, p. 14-15.

[26]  Ibid., p. 30.

[27]  MNP Valuation Report, p. 56-57.

[28]  Ibid., p. 57-63.

[29]  Ibid., p. 64.

[30]  Judgment under appeal, para. 188, 426.

[31]  Judgment under appeal, para. 199.

[32]  Judgment under appeal, para. 214 et s.

[33]  Judgment under appeal, para. 211-213.

[34]  Judgment under appeal, para. 219, 222-223.

[35]  Judgment under appeal, para. 217.

[36]  Judgment under appeal, para. 224-225.

[37]  Judgment under appeal, para. 230-233.

[38]  Judgment under appeal, para. 266.

[39]  Judgment under appeal, para. 276-277.

[40]  Judgment under appeal, para. 262-263, 286-288, 293-296.

[41]  Judgment under appeal, para. 296.

[42]  Judgment under appeal, para. 316-317.

[43]  Judgment under appeal, para. 312-313, 316-317.

[44]  Judgment under appeal, para. 341-343.

[45]  Judgment under appeal, para. 319-320, 337, 366.

[46]  Judgment under appeal, para. 258-259, 300, 310, 332.

[47]  Judgment under appeal, para. 310.

[48]  Judgment under appeal, para. 358.

[49]  Judgment under appeal, para. 362-363.

[50]  Judgment under appeal, para. 374.

[51]  Judgment under appeal, para. 377.

[52]  Judgment under appeal, para. 371.

[53]  Judgment under appeal, para. 383.

[54]  Judgment under appeal, para. 384.

[55]  Judgment under appeal, para. 386.

[56]  Judgment under appeal, para. 398-400.

[57]  Judgment under appeal, para. 392-394.

[58]  Judgment under appeal, para. 407, 414-415.

[59]  Judgment under appeal, para. 418.

[60]  Judgment under appeal, para. 417.

[61]  Judgment under appeal, para. 419-420.

[62]  Judgment under appeal, para. 365.

[63]  Judgment under appeal, para. 427.

[64]  Judgment under appeal, para. 442, 445.

[65]  Judgment under appeal, para. 451-454.

[66]  Judgment under appeal, para. 452-453.

[67]  Judgment under appeal, para. 456-458.

[68]  Judgment under appeal, para. 460.

[69]  Judgment under appeal, para. 462-463.

[70]  Judgment under appeal, para. 468-470.

[71]  Judgment under appeal, para. 494.

[72]  Judgment under appeal, para. 495-502.

[73]  Judgment under appeal, para. 471.

[74]  Judgment under appeal, para. 473-474.

[75]  Judgment under appeal, para. 505.

[76]  Judgment under appeal, para. 479-481.

[77]  Judgment under appeal, para. 506.

[78]  Judgment under appeal, para. 507-509.

[79]  Judgment under appeal, para. 510-512.

[80]  Judgment under appeal, para. 513-514.

[81]  Judgment under appeal, para. 535.

[82]  Judgment under appeal, para. 576-579.

[83]  Judgment under appeal, para. 590.

[84]  Ford Motor Company of Canada, Ltd. v. Ontario Municipal Employees Retirement Board, 79 OR (3d) 81, 2006 CanLII 15 (ON CA), para. 129-132.

[85]  Re Brant Investments Ltd. et al. and KeepRite Inc. et al., 60 OR (2d) 737, 1987 CanLII 4366 (ON SC), p. 51-52.

[86]  Stéphane Rousseau et Laurence Cromp-Lapierre, « Le droit de dissidence : à la recherche de la juste valeur », (2020) 483 Développements récents en droit des affaires 26, p. 51.

[87]  New Quebec Raglan Mines Ltd. V. Blok Andersen, [1993] O.J. No 727 (Ont.Ct.J.(Gen.Div.)), p. 4, with appeal as to bill of costs at [1997] O.J. No 2222 (Ont.C.A.). See also Re Canadian Rocky Mountain Properties Inc. (Canada Business Corporations Act), 2006 ABQB 251, par. 8; Deer Creek Energy Limited v. Paulson & Co. Inc., 2008 ABQB 326, para. 485, appeal dismissed save as to the payment of costs, 2009 ABCA 280; Clarke Hunter and Clarissa Pearce, “‘Fair Value’ – A Common Issue With Surprisingly Sparse Canadian Authority”, in Todd L. Archibald and Randall Echlin, Annual Review of Civil Litigation, (Toronto, Ont.: Carswell, 2011) at p. 29.

[88]  Paul Martel, La société par actions au Québec – Les aspects juridiques, Vol. 1 (Ottawa, Ont.: Wilson

& Lafleur, 2011) at para. 30-43.

[89]  Carlock v. ExxonMobil Canada Holdings ULC, 2020 YKCA 4, para. 15.

[90]  Id., para. 16.

[91]  Deer Creek Energy Limited v. Paulson & Co. Inc., 2008 ABQB 326, para. 485, confirmed by 2009 ABCA 280.

[92]  Carlock v. ExxonMobil Canada Holdings ULC, 2020 YKCA 4, para. 13.

[93]  Fondaction (Fonds de développement de la Confédération des syndicats nationaux pour la coopération et l'emploi) c. Poutres Lamellées Leclerc inc., 2020 QCCA 261, para. 136, citing Société immobilière 1234 de la Montagne ltée c. Ioanidis, [2002] JQ no 5674, 2002 CanLII 63651, (QCCA) ,para. 11-12, and Domglas inc. c. Jariloswsky Fraser & Co. Inc., [1982] QJ No 446, 1982 CanLII 2950, (QCCA), para. 7-8.

[94]  Judgment under appeal, para. 494.

[95]  Judgment under appeal, para. 294, 316, 418, 485, 597.

[96]  UBS Fairness Opinion Analysis, p. 14. The various analyst reports were also produced as exhibits.

[97]  TD Fairness Analysis, p. 74.

[98]  Canaccord Valuation, p. 20.

[99]  Judgment under appeal, para. 417, 420.

[100]  Judgment under appeal, para. 316, 331, 334, 340, 367-368, 418-419, 439, 442, 446, 462.

[101]  Judgment under appeal, para. 214, 219, 337, 368, 395, 598.

[102]  Respondents’ Factum, para. 112.

[103]  Sears Canada Inc. et al., 2006 ONSEC 13, para. 250, appeal dismissed, 2006 CanLII 34453 (ON SCDC); Stornoway Diamond Corporation (Re), 2006 BCSECCOM 533, para. 11, 67; Sterling Centrecorp Inc. et al., 2007 ONSEC 9, para. 104; Bingham v. Ashton Mining of Canada Inc., 2007 BCSC 281, para. 52.

[104]  Judgment under appeal, para. 321.

[105]  Judgment under appeal, para. 598.

[106]  Ashton Mining of Canada Inc. v. Kwantes, 2007 BCSC 1374, para. 29; appeal dismissed, 2008 BCCA 248; application for leave to appeal to the Supreme Court dismissed, July 2, 2012, No. 33005.

[107]  Judgment under appeal, para. 341.

[108]  Carlock v. ExxonMobil Canada Holdings ULC, 2020 YKCA 4, para. 19.

[109]  Judgment under appeal, para. 365.

[110]  See the UBS Fairness Opinion Analysis at p. 7; the Canaccord Valuation at p. 14-15; TD Fairness Analysis at p. 21 and 31; Sanabe Valuation Report at p. 36, 58.

[111]  UBS Fairness Opinion Analysis, p. 8.

[112]  Carlock v. ExxonMobil Canada Holdings ULC, 2020 YKCA 4, para. 90.

[113]  Sanabe Valuation Report at p. 36, 58.

[114]  This figure is high for Mercer, as it did not have Eastern Canadian NBSK operations.

[115]  Sanabe Rebuttal Report at p. 20.

[116]  The difference between synergies of $0.30 to $0.34 per share in the Sanabe Valuation Report and synergies of $0.27 in the Sanabe Rebuttal Report is not explained. It likely results from the exclusion of the synergies for pulp transportation, because Mercer does not have any mills in Easter Canada.

[117]  MNP Limited Critique at p. 19.

[118]  Canaccord Valuation at p. 25-26.

[119]  TD Fairness Analysis at p. 31.

[120]  UBS Fairness Opinion Analysis at p. 7-8, 24-27 and 32; Canaccord Valuation at p. 14-15; TD Fairness Analysis at p. 21.

[121]  Sanabe Valuation Report at p. 36, 58.

[122]  Sanabe Rebuttal Report at p. 19.

[123]  MNP Limited Critique at p. 19.

[124]  Judgment under appeal, para. 212, 406.

[125]  Ashton Mining of Canada Inc. v. Kwantes, 2007 BCSC 1374, para. 31; Re Brant Investments Ltd. et al. and KeepRite Inc. et al., 60 OR (2d) 737, 1987 CanLII 4366 (ON SC), para. 114. In BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, at para. 47, the Supreme Court emphasized the distinctions between the oppression remedy and the fairness analysis under Section 192 CBCA.

[126]  Judgment under appeal, para. 508.

[127]  Judgment under appeal, para. 97.

[128]  Canaccord Valuation at p. 24-25. In the TD Fairness Analysis dated February 9, 2012, TD gave different scenarios where it included 25%, 50% or 100% of the value of the Hydro-Québec contract (p. 21 and 35).

[129]  Testimony of Patsie Ducharme, March 25, 2019, p. 216-217.

[130]  Testimony of Louis Véronneau, March 20, 2019, p. 198-207, 218-222.

[131]  Testimony of Patsie Ducharme, March 25, 2019, p. 229-230.

[132]  Testimony of Patsie Ducharme, March 25, 2019, p. 232, 235; email dated January 26, 2012 from Louis Véronneau to Dany Paradis and others.

[133]  Testimony of Patsy Ducharme, March 25, 2019, p. 230.

[134]  See, for example, Vanier c. Lucien Vanier et Fils inc., 2018 QCCA 796, para. 6, 84; Nadeau c. Nadeau, 2014 QCCS 5831, para. 530; Investissements L’O-Vin ltée c. Ruel, 2006 QCCS 2657; Segal v. Blatt, 2009 QCCS 1576, appeal dismissed Finecast Ltd. c. Segal, 2011 QCCA 36; St-Onge v. A&O Gendron inc., 2013 QCCS 774; Ouellet c. Usinage JV Tech inc., 2015 QCCS 5339, application for leave to appeal dismissed: Usinage JV Tech inc. c. Ouellet, 2016 QCCA 122.