Alberta Court Dismisses Fair Value Appeal

On August 31, 2009, the Alberta Court of Appeal unanimously dismissed an appeal by dissenting shareholders from a $31 fair value award arising from the takeover of Deer Creek Energy Limited by the Canadian subsidiary of French multinational Total S.A.: Deer Creek Energy Ltd. v. Paulson & Co. Inc., 2009 ABCA 280.

The litigation arose in the wake of an August 2005 takeover bid of $25 per share by Total E&P Canada Ltd. for Deer Creek, an early-stage oil sands company. The bid was increased in September to $31 per share to match a competing bid. Of Deer Creek's outstanding shares at the date of the takeover bid, 82.4 per cent were tendered to the Total bid. However, an American hedge fund, Paulson & Co. Inc., began accumulating shares in the market upon the announcement of the offer and ultimately acquired nearly 8.5 million shares, roughly a 16 per cent interest.

When Total proceeded with a second-stage transaction to acquire 100 per cent of Deer Creek's shares, it offered the other shareholders the same $31 per share. Paulson and a small number of individual shareholders dissented on the second-stage transaction and asserted that the fair value of Deer Creek's shares was greater than $31.

At trial, Justice Barbara Romaine of the Alberta Court of Queen's Bench rejected the dissenting shareholders' claims, and found that the fair value of Deer Creek's shares was $31 at the relevant valuation date. Given the number of shares in respect of which dissents had been registered, the amount claimed in excess of that offered by Deer Creek ranged from roughly $675 million to nearly $1.5 billion.

In its decision, the Court of Appeal held that the trial judge's use of a market valuation approach was appropriate in the circumstances of this case. The panel affirmed her rejection of the contention that Deer Creek became more valuable between the first and second stages of the takeover in light of market developments and the presence of Total E&P Canada Ltd. as a new majority shareholder. It affirmed her analysis of the evidence on a discounted cash flow analysis, which she had used as a check against the market valuation, and her preference for the expert evidence presented by Deer Creek. The Court of Appeal disagreed only with her conclusion that the case involved “special circumstances” warranting a departure from the normal rule that dissenting shareholders should not be required to pay costs on valuation litigation. The award of trial costs against the dissenting shareholders was therefore set aside.

Deer Creek was represented on the appeal by Clarke Hunter, QC, Glen Poelman and Steven Leitl of Macleod Dixon LLP, with preparation assistance from Lori Bevan and Scott Gordon. Securities law support was provided by Robert Engbloom, QC, who had earlier led the legal team on the takeover bid itself.

Paulson & Co. was represented by Frank Foran, QC, Randall Block, QC, and Jennifer Faircloth of the Calgary office of Borden Ladner Gervais LLP. The David Gabai family and a group of individual shareholders, led by their broker Steve Boivin, were represented by Peter Linder, QC, of Peacock Linder & Halt LLP.