InterOil deal - Canadian Court approves acquisition on second attempt

ExxonMobil’s acquisition of InterOil has now been successfully completed, following an adverse court decision blocking ExxonMobil’s initial acquisition attempt. In this article, we summarise the transaction developments, consider the issues regarding disclosure to shareholders and consider what would have happened in an Australian context.

In brief

• The Court of Appeal of Yukon has approved ExxonMobil's acquisition of InterOil, after blocking the original arrangement.
• The transaction shows the importance of fair and full disclosure to shareholders.

Overview

On 21 February 2017, the Supreme Court of Yukon approved ExxonMobil Corporation's acquisition of InterOil Corporation, which is to be effected by plan of arrangement (a process virtually identical to an Australian scheme of arrangement).

The Court of Appeal of Yukon had blocked the original arrangement on the basis that disclosure in the deal circular was deficient, which invalidated the shareholder vote. The transaction was then revised to make it more favourable to InterOil shareholders.

Philippe Mulacek, the founder and the former CEO of InterOil, campaigned against the transaction since it was announced, contested the first transaction at the Supreme Court of Yukon and successfully appealed the decision to the Court of Appeal. However, despite him remaining in opposition to the restructured transaction, it was passed by shareholders and completed on 22 February 2017.

Exxon’s offer for InterOil

InterOil is a Canadian-incorporated oil and gas company with operations based predominately in Papua New Guinea. InterOil's key assets include its ~36.5% stake in PRL15 (also known as the Elk-Antelope field) and a future receivable from Total SA.  When InterOil sold a 40% stake in PRL15  to Total in 2014, the sale agreement provided for an interim payment based on a 2C certification of the resource after the drilling of the Antelope 7 well.

Under the terms of the first Exxon proposal, for each InterOil share held shareholders would receive:

• Exxon shares to a value of US$45 (the exact number of Exxon shares to be issued was calculated based on a 10-day VWAP leading up to the closing date); and
• a cash contingent resource payment of approximately $7.07 per InterOil share for each tcfe gross resource certification of the Elk-Antelope field above 6.2 tcfe, up to a maximum of 10 tcfe.

The contingent resource payment maximum cap was increased to 11 tcfe after the first court setback.

The first transaction

At a special shareholders meeting held on 21 September 2016, InterOil shareholders voted to approve the Exxon proposal, with more than 80% of the votes cast at the meeting in favour of the transaction.

At first instance, the chambers judge raised a number of concerns about the disclosure in the deal circular sent to shareholders. These issues included:

• Disclosure – the information provided in the shareholder circular did not sufficiently explain the financial impact of the terms of the proposed acquisition, and the value of InterOil's assets. In particular, the fairness opinion and circular had no meaningful disclosure about the potential value of the assets, so shareholders were not able to assess what they were giving up by accepting the 10 tcfe cap on the contingent resource payment .
• Fairness opinion – the court determined that best corporate governance practice requires a fairness opinion to be independent and on a flat fee basis, not based on a success fee as was the case here. 
• Detail – the fairness opinion did not disclose the amount of the success fee (so investors could not assess whether the adviser had been influenced), what documents had been reviewed or what information the opinion was based on.

While raising these issues, the chambers judge ultimately decided that "at the end of the day it is the shareholders that have spoken in favour of the Exxon Arrangement." The judge decided  that the shareholder vote effectively overrode any of the disclosure deficiencies.

The deal is blocked: Court of Appeal decision

The Court of Appeal took a different view. It overturned the finding of the chambers judge on the basis that the information included in the deal circular was deficient, which effectively invalidated the shareholder vote.

Under the relevant Canadian law, there is a requirement for the court to determine if the arrangement has been shown to be ‘fair and reasonable’. The Court of Appeal said that this required the court to be satisfied that the shareholders were able to make an informed choice "both as to the value that they would be giving up, and the value they would be receiving". In this case, the Yukon Court of Appeal was not satisfied that shareholders had made an informed choice.

The second attempt: successful

Following the Court of Appeal knockback, InterOil and Exxon re-negotiated the Arrangement Agreement, increasing the cap on the contingent consideration, increasing the break fee to US$100 million from US$67 million and extending the sunset date on the agreement.

In response to comments from the Court of Appeal, InterOil ensured that its revised deal circular contained a fixed fee fairness opinion with financial analysis about the company's value and the consideration payable under the arrangement, as well as a report from the independent board committee.

The revised proposal was approved by more than 91% of shares voted at the shareholder meeting for the revised transaction held on 14 February 2017, and approved by the Supreme Court of Yukon on 21 February 2017. The revised transaction completed the next day, 22 February 2017.

What would have happened in Australia?

The standard approach in Australia is to have an independent expert’s report accompany each scheme booklet, with the expert being paid a flat fee (which is always disclosed in the report). Further, the primary duty of the expert is to value the target company. That means that the exact fact situation would not have arisen here. However, we have essentially the same legal test, so the decision is a salient reminder of the importance of ensuring that shareholders receive clear and comprehensive disclosure and of the risk that the court process may provide a second chance for a disgruntled shareholder to seek to upset the transaction, even if the majority of shareholders are supportive.