June 3, 2009
Canadian Regulator Weighs In: Contingent Fee Fairness Opinions
Recently, the Ontario Securities Commission announced its reasons for its January ruling that led to the withdrawal of HudBay Minerals’ proposed acquisition of Lundlin Mining. In doing so, the OSC expressed concerns about potential conflicts of financial advisers who are compensated on the basis of the success of a transaction:
“[Contingent] fees create a financial incentive for an advisor to facilitate the successful completion of a transaction when the principal focus should be on the financial evaluation of the transaction from the perspective of shareholders. While the Commission does not regulate the preparation or use of fairness opinions, in our view, a fairness opinion prepared by a financial advisor who is being paid a signing fee or a success fee does not assist directors comprising a special committee of independent directors in demonstrating the due care they have taken in complying with their fiduciary duties in approving a transaction.”
The statement may signal an increased sensitivity by OSC to this issue – and call into question the ability of a board to rely on a fairness opinion where the financial advisor has a contingent fee arrangement. For more on this, see the related memos posted in our “Canadian M&A” Practice Area.