Lexpert Magazine

LEXPERT MAGAZINE | JANUARY/FEBRUARY 2018 47 | TOP CASES | to undertake a transaction on a particular tax basis, even though it correctly recorded the legal relationships that the parties in- tended," says Alexander Cobb of Osler, Hoskin & Harcourt LLP in Toronto. It fell upon the SCC, then, to decide the scope of the rectification doctrine in twin cases involving Fairmont Hotels and Jean Coutu, a retail pharmacy chain. Both cases involved transactions structured to hedge the companies' exposure to exchange rates. In each instance, the transactions were in- tended to be tax-neutral. As it turned out, the CRA determined that they were not. Fairmont and Jean Coutu both accepted the CRA's determination, but applied to the court to rectify the transactions in a manner that would make them tax-neutral. In Jean Coutu's case, the Québec Court of Appeal refused rectification. Here, the court found that the company's "general intention" to avoid tax was "not sufficient- ly determinate" to invoke the doctrine. In Fairmont's case, the Ontario Court of Appeal came to the opposite conclusion, ruling that rectification was appropriate where the parties had a "common continu- ing intention" to effect a transaction with- out attracting tax liability. ALEXANDER COBB Osler, Hoskin & Harcourt LLP "THE MAJORITY DID NOT TAKE INTO ACCOUNT THE COMPLEXITY OF THE INCOME TAX ACT IN CON- SIDERING WHEN COURTS SHOULD ALLOW TAXPAYERS TO CORRECT THEIR DOCUMENTATION." e SCC opted for the traditional view of rectification, denying the remedy in both cases. In so doing, the court over- ruled the broader approach and found that rectification was limited to cases where an agreement had not been recorded correctly in a written document. Rectification, then, was available to give effect to parties' real intention by amend- ing the written agreement, but not where the goal was to amend the agreement itself. In both the Fairmont and Jean Coutu cas- es, rectification was not available because the written agreement, although it did have unintended tax consequences, did in fact carry out the parties' intended transaction. e mistake, then, was not in the way that the agreements were expressed, but rather in the nature of the agreements themselves. While rectification is still available in appropriate circumstances, the SCC has imposed a fairly high burden of proof on parties seeking the remedy. e evidence in support, the court said, must exhibit "a high degree of clarity, persuasiveness, and cogency before substituting the terms of a written instrument with those said to form the parties' true intended course of action." Cobb maintains that the SCC's deci- sions are not fair to taxpayers: "e majori- ty did not take into account the complexity of the Income Tax Act in considering when courts should allow taxpayers to correct their documentation." 08 Mulacek v. InterOil, 2016 YKCA 14 is decision calls into question long- standing practices regarding the role of fairness opinions in plans of arrangement. Generally speaking, there is no legal re- quirement in Canada for a board of direc- tors to obtain a fairness opinion. What boards receive is a detailed financial analy- sis supporting the fairness opinion. Court- sanctioned practice, however, has always held that shareholders are not entitled to the details behind the opinion, but merely the conclusion. is type of "one-line" document was what InterOil provided to its sharehold- ers, from whom it was seeking approval for a plan of arrangement. Nonetheless, more than 80 per cent of shareholders approved the transaction. InterOil then sought approval from the courts. Over the objections of Philippe Mulacek, a founder and former chairman of the company and holder of 5.5 per cent of its shares, the Yukon Supreme Court ap- proved the plan. Mulacek appealed and the Yukon Court of Appeal reversed. e tremor in the judgment that initially shook the business community was the unanimous court's suggestion that the single-line con- clusion as to fairness found in the opinion did not put the shareholders in a position to "make an informed choice" about the transaction, particularly when the sole financial advisor retained by the board, Morgan Stanley, had a success fee included as a term of its engagement. WENDY BERMAN Cassels Brock & Blackwell LLP "WHAT THE COURT OF APPEAL WAS SAYING WAS THAT IT WOULD NOT REGARD AS INDEPENDENT AN ADVISOR WHO WAS BEING PAID IN A WAY THAT INCLUDED A SUCCESS FEE. WITHOUT THAT INDEPENDENT ADVICE, THE COURT CANNOT GIVE DEFER- ENCE TO THE BOARD'S WORK." e parties tried again. e acquirer, Exx- onMobil, agreed to a modest contingent in- crease in the purchase price. Interoil hired a second financial advisor, BMO Capital Markets, on a flat-fee basis. BMO's fairness opinion provided considerably more detail than had been common practice. Aer shareholders voted in favour of the deal at a level even greater than the 80 per cent who approved the original transaction, the plan went back to the Yukon Supreme Court for consideration. Here again, an aershock awaited the fi- nancial community. Justice Ronald Veale approved the new iteration. But that wasn't the aershock: that came when he suggested that an in- dependent, fixed-fee, long-form fairness opinion and a report from the independent transaction committee "provide a mini- mum standard for interim orders of any plan of arrangement." Many observers have limited the deci- sion to cases involving the type of "red

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