RFG Private Equity Limited Partnership No 1B v Value Creation Inc, 2016 ABQB 391

Court of Queen’s Bench of Alberta Citation: RFG Private Equity Limited Partnership No 1B v Value Creation Inc, 2016 ABQB 391 Date: 20160715 Docket: 1001 04077 Registry: Calgary Between: RFG Private Equity Limited Partnership No. 1B, RFG Private Equity Limited Partnership No. 1C, Richardson Capital Private Equity Limited Partnership No. 2B, Richardson Capital Private Equity Limited Partnership No. 2C and RFG GP No. 1 Limited, Opus Capital Corp., Ronald Poelzer and Carpenter Capital Inc. Plaintiffs - and - Value Creation Inc.

Defendant _______________________________________________________ Reasons for Judgment of the Honourable Madam Justice B.E. Romaine _______________________________________________________ I. Introduction [ 1 ] This decision involves the fair value assessment of the shares of certain dissenting shareholders of Value Creation Inc. A group of shareholders holding approximately 4.4% of the shares of Value Creation exercised their rights to dissent from a proposed transaction that involved the sale of a significant asset of the company. The valuation date for the purpose of the assessment is March 11, 2010.

Value Creation submits that the shares have a fair value of $1.06 per share, while the dissenting shareholders submit that their shares should be valued at between $2.82 to $3.13 per share. [ 2 ] The primary issues are the appropriate valuation methodology, the value of certain proprietary technologies and the question of whether synergies and benefits that may have arisen from the transaction should be excluded from the fair value of the Value Creation shares or should enure to the benefit of the dissenting shareholders.

II. Factual Overview [ 3 ] Value Creation Inc. is a private oil sands development company founded by Dr. Columba Yeung, who remains its majority shareholder. The company acquired oil sands leases in the Athabasca region of Alberta, which allows for production by steam assisted gravity drainage (“SAGD”) technology. Value Creation’s plan was to become a fully integrated oil sands production and upgrading company. At the time in issue, its assets included oil sands leases, certain proprietary technologies invented by Dr.

Yeung (the “Technologies”) and an interest in BA Energy Inc., a company that Value Creation had incorporated with a view to building and commercializing a merchant upgrading operation in Fort Saskatchewan, Alberta. [ 4 ] In 2007, Richardson Capital Limited, the manager of RFG Private Equity Limited Partnership No. 1B, RFG Private Equity Limited Partnership No. 1C, Richardson Capital Private Equity Limited Partnership No. 2B, Richardson Capital Private Equity Limited Partnership No 2C, RFG GP No. 1 Limited, Opus Capital Corp. and Carpenter Capital Inc. (together with Ronald Poelzer, collectively “RFG”) invested in BA Energy, largely because of the value seen in Value Creation’s Technologies.

BA Energy held a licence from Value Creation to use the Technologies at the upgrader that it planned to construct. [ 5 ] On the Valuation Date of March 11, 2010, Mr. Yeung, directly and indirectly, held approximately 56% of the Value Creation common shares. RFG held 23,836,458 or approximately 4.4% of the common shares. [ 6 ] As part of its investment, RFG was entitled to appoint a director on the BA Energy board of directors.

RFG also had a representative director on the Value Creation board. [ 7 ] Richardson Capital knew at the time of the RFG investment that BA Energy and Value Creation intended to go public by December 2009. However, the 2008 financial crises interfered with that plan. [ 8 ] On December 30, 2008, BA Energy became subject to proceedings under the Companies Creditors’ Arrangement Act (R.S.C., 1985, c. C-36 ) (“CCAA”). BA Energy had invested approximately $500 million in developing an upgrader facility that would incorporate the Technologies, but work on the upgrader was suspended.

By this point, Value Creation owned all of BA Energy’s shares. [ 9 ] The purpose of the CCAA proceedings from Value Creation’s point of view was to protect its value in BA Energy to the extent possible. The CCAA Monitor, Neil Narfasen, reported that BA Energy was expected to emerge from the proceedings under the control of Value Creation. Value Creation recognized value in preserving the ability to restart the upgrader project after the completion of the CCAA proceedings. [ 10 ] Value Creation had entered into a credit agreement (“Credit Agreement”) with a syndicate of lenders in 2007.

In 2009, the Credit Agreement was amended to extend the due date of the loan to February 15, 2010. By January, 2009, Value Creation was facing a default under the agreement. It was required to consent to a receivership order if the loan was not paid by February 15, 2010. Approximately $477 million was required to pay out the loan. [ 11 ] Value Creation decided on a three-prong strategy:

a) to find a strategic joint venture partner to help with the development of the oilsands leases;

b) to find a financial partner to invest in Value Creation; and

c) to divest Value Creation assets. [ 12 ] In February, 2009, Value Creation retained BMO Capital Markets (“BMO”) and Genuity Capital Markets (“Genuity”) to find a transaction that would provide sufficient funds to pay Value Creation’s Credit Agreement debt while allowing it to retain BA Energy, its Technologies and its TriStar lease, and which would allow Mr. Yeung to remain in control of the company. [ 13 ] Neither TriStar nor the Technologies were marketed, and the financial advisors were to seek a joint venture partner with respect to its Terre de Grace lease rather than a sale of the company.

Initially, the board of Value Creation was of the view that divestiture would scare away potential joint venture partners and should not be pursued at the same time as the search for a strategic joint venture partner. However, by November, 2009, Value Creation was forced to pursue a divestiture process, and appointed a Special Committee of directors. The financial advisors were instructed to pursue a divestment of the Terre de Grace, Firebag, High Hill River and South Clarke Creek (part of TriStar) leases. . [ 14 ] Problems arose among the board members with respect to strategy.

The RFG director favoured a sale of the company, which was opposed by Dr. Yeung. RFG also had concerns with respect to the governance of the company and whether it could raise sufficient funding to develop the Technologies while Dr.

Yeung remained in control. [ 15 ] In November, 2009, Value Creation received an offer of a $1 billion debt-refinancing from Alberta Investment Management Corp. (“AIMCo”) [ 16 ] This proposed transaction involved AIMCo purchasing $500 million of 10% convertible debentures with a five-year term, with AIMCo undertaking to subscribe for up to an additional $500 million of such debentures to be issued in tranches upon Value Creation achieving certain defined milestones. [ 17 ] The AIMCo offer was subject to the certain conditions, including that, if an event of default occurred with respect to the debentures, Dr.

Yeung would have to surrender his voting rights to AIMCo. In addition, AIMCo’s nominee on the board of directors would be the “lead director”, which meant that Dr. Yeung would be required to resign as Chairman of the board. [ 18 ] Dr. Yeung also would have had to resign as President and Chief Executive of Value Creation by February 28, 2010. He would

be allowed to stay on the board of directors as a non-executive director. This was unacceptable to him, and, after further discussions, the offer was terminated. [ 19 ] The BMO/Genuity process gave rise to a number of offers for a joint venture involving Terre de Grace. Ultimately, the Value Creation board determined that an offer from BP best addressed the objectives of the joint venture process. [ 20 ] In the meantime, BA Energy had developed a plan to put to its creditors.

The plan depended on funds to be received on the closing of the BP transaction. [ 21 ] Discussions between Value Creation and BP about a possible Terre de Grace joint venture began in 2009 and BP began to conduct due diligence in December 2009. [ 22 ] BP proposed a joint venture in which BP would acquire 75% of Terre de Grace and Value Creation would retain 25% in exchange for, among other things, an immediate payment of US$500 million and a covenant by BP to fund certain capital costs. [ 23 ] On about January 27, 2010 Mr.

Yeung was of the view and had reported to management and the board that Value Creation had entered into a “binding obligation” with BP. “Heads of Agreement” with BP were executed. [ 24 ] On January 28, 2010, the Value Creation board of directors met to consider the BP offer and an offer by Reliance Industries Limited. Mr. Yeung told the board that the BP proposal would allow for the commercial production of Value Creation’s assets and clear its debt. [ 25 ] The board of directors approved the BP transaction (the “BP Transaction”) and the Heads of Agreement.

At that time, it was apparent to the board that shareholder approval of the transaction would be sought and dissent rights offered to shareholders. Ronnie Mo, Value Creation’s Chief Financial Officer, testified that Value Creation’s management then used its best efforts to make the transaction a certainty. [ 26 ] The Heads of Agreement provided that BP and Value Creation would form a partnership in which Value Creation would receive a 25% partnership interest and certain payments in consideration for its contribution of the Terre de Grace property.

As part of the consideration payable to Value Creation, BP covenanted to spend U.S. $1.6 billion in development capital, annually escalated by 3%.

As project operator, BP would decide when the U.S. $1.6 billion would be spent; however, the BP agreement provided that if it had not been fully spent by March 15, 2017, Value Creation would receive U.S. $400 million plus interest. [ 27 ] Counsel to Value Creation wrote to its lenders, taking the position that the BP Heads of Agreement was sufficient to satisfy the lenders’ requirement of a binding agreement to sell property, and thus would justify an extension to the due date of the loan. [ 28 ] Following execution of the BP Heads of Agreement, Mr.

Yeung periodically reported to the board of directors regarding the progress being made in satisfying BP’s due diligence condition and the finalization of definitive joint venture documents. [ 29 ] On February 1, 2010, Mr. Yeung and Mr. Mo sent a letter to all Value Creation shareholders, representing that the company had “entered into a binding heads of agreement with an international super-major for a resource development joint venture”. [ 30 ] Mr.

Yeung also reported to management that completion of BP’s due diligence was the only uncertainty left in the deal. [ 31 ] On February 5, 2010, Value Creation received an unsolicited proposal from another party to acquire Mr. Yeung’s equity stake. He refused the offer. On the same day, BP confirmed to Value Creation that all closing conditions under the BP Heads of Agreement had been satisfied, and that BP expected due diligence to be waived by February 15, 2010.

On February 10, 2010, the President of BP wrote to Value Creation to confirm that BP’s due diligence condition had been satisfied. [ 32 ] She confirmed that among the closing documents was an “irrevocable commitment to pay off [Value Creation’s] debt”. [ 33 ] On February 11, 2010, the lenders agreed to extend the maturity date of the debt to March 31, 2010. [ 34 ] On February 12, 2010, Value Creation sent another letter to its shareholders, advising that the BP agreements were at an advanced stage of drafting and fully reflected the terms of the BP Heads of Agreement.

The company advised and noted that the lenders had extended the maturity date of the debt to March 31, 2010, stating that “[the BP Transaction] will resolve our debt and provide VCI with secured financing... ”. [ 35 ] On February 18, 2010 Value Creation distributed a Circular to its shareholders relating to a vote on the BP joint venture proposal. By the time the Circular was sent out, over two-thirds of Value Creation’s shareholders had agreed to vote in favour of the BP Transaction, making the necessary shareholder approval a certainty. [ 36 ] On March 3, 2010, Mr.

Yeung reported to the board that all issues regarding the final form of the BP joint venture documents had been resolved.

Proxy votes in favour of the transaction by almost 80% of shareholders had been received by March 4, 2010; and shortly thereafter, BP advised Value Creation that it had made arrangements to wire the debt payment directly to the lenders, with the balance to the company. [ 37 ] By March 7, 2010, the form of definitive joint venture agreements had been finalized, and on March 10, 2010 (one day before the Valuation Date), Value Creation gave notice to its lenders that it intended to pay off the debt early. [ 38 ] The BP Transaction was formally approved by the company’s shareholders on March 12, 2010.

Thus the Valuation Date is March 11, 2010. The BP transaction closed on March 15, 2010. Mr. Mo conceded that BP had been pressing to close earlier, as the only thing in the way was the shareholder vote, which was a foregone conclusion.

III. Expert Opinions Re Value A. Clark Opinion [39] Clark Valuation Group (“Clark” or “Mr. Clark”) was retained by counsel to RFG to provide an opinion with respect to the enbloc fair market value of the Value Creation common shares as the Valuation Date.

Clark’s opinion is that the value is in the range of$2.82 to $3.13 per share, with a mid-point of $2.98 per share. [40] “Fair market value” for the purposes of the Clark opinion is defined as the highest price obtainable in an open and unrestrictedmarket between informed, prudent parties acting at arm’s length and under no compulsion to act, expressed in terms of money ormoney’s worth. [41] The assets of Value Creation considered in the valuation included:

a) the oilsands and related contingent resources;

b) the Technologies; and,

c) other assets, such as working capital and tax pools. [42] Clark made the following key assumptions in formulating its opinion:

a) that Value Creation was a going concern at the Valuation Date;

b) that by the Valuation Date, Value Creation was in a position to pay its upcoming debt obligation as BP and Value Creation hadagreed to terms regarding the Terre de Grace property;

c) that in addition to BP, several other interested prospective investors of sufficient financial means would have invested in ValueCreation;

d) that therefore, on the Valuation Date, Value Creation was no longer in financial distress or under a compulsion to act;

e) that, at the Valuation Date, BA Energy was still under the CCAA, and that no value would be ascribed to BA Energy in thevaluation, other than a debt payment of $42.4 million that was expected to flow from the sale of the BA Energy Stonefell Terminal in theCCAA proceedings; and

f) that, except for the receipt of these funds, there was no material change in the affairs of Value Creation between the Valuation Dateand March 31, 2010, the date of the next complete set of financial statements. [43] In explaining the approach he took to valuation, Mr. Clark noted that since Value Creation was a private company at theValuation Date, it was not possible to use the market value approach to directly value the shares, although market value was used toestimate the value of Value Creation resource assets.

An investment value approach was used to estimate the value of the Technologies,and the net asset value was used to determine the fair market value of the common shares by restating the recorded book values of thecompany’s assets and liabilities to their respective market values, assuming the continuation of the business as a going concern. [44] Clark thus used a combination of three methods of valuation recognized in the case law: Canadian Gas and Energy Fund Limited et at v Sceptre Resources Limited, [1985] A.L.R. (2nd), Vol. 38 223 at 233; Neonex International Ltd. v Kolasa et al, (BC SC), [1978] 3 B.L.R. 1, 2 W.W.R. 593,84 D.L.R. (3rd) 446 (B.C.S.C.). [45] As Mr.

Clark assumed that Value Creation would be able to meet its debt service requirements as they fell due, he applied agoing concern approach rather than a liquidation approach. [46] The following is a

summary of the Clark assessment of fair market value at trial: Millions Low Millions HighContingent resources and properties $809 $924Technologies 156 201Uplift barrels made possible by Technologies 80 92Carried interest in BP/VCI partnership 405 405Working capital 11 11Stonefell Terminal proceeds 42 42Tax pools 39 39Fair Market Value – March 11, 2010 $1,542 $1,714Outstanding common shares and warrants 546,980,495Equivalent per share FMV $2.82 to $3.13Midpoint $2.98 [47] In an earlier report, Clark had given a higher value opinion, but on November 23, 2014, Mr.

Clark delivered a revised reportacknowledging that he had not made an allowance for sales, general and administrative expense related to the sale operations that arepart of the fair market valuation of the Technologies, and that he wished to make a correction to an income tax calculation.

1. Valuation of properties and contingent resources [ 48 ] As at the Valuation Date, Value Creation held the following oilsands leases;

a) Terre de Grace;

b) TriStar;

c) Firebag, and

d) High Hill River. [ 49 ] Clark valued Terre de Grace and TriStar using the market value approach, considering: (

a) the quality of the resources; (

b) comparable companies and transactions including a PetroChina/AOSC transaction; and (

c) an improvement in the oil sands market following the PetroChina/AOSC transaction and prior to the Valuation Date. Clark’s analysis of comparables was supported by a report prepared by Douglas Ho dated January 22, 2014 (the “Sproule Report”), which explained similarities and differences of properties located in the subject formation from those located elsewhere in Alberta. [ 50 ] Clark concluded that, at the Valuation Date, the market value of Value Creation’s contingent resources was in the range of $0.70 to $0.80 per barrel.

While he did not relay on a Macquarie Equities research report dated February, 2010, his conclusion was consistent with the Macquarie conclusion that the average valuation for oil sands transactions had cleared the $0.76/bbl level. [ 51 ] In valuing Terre de Grace, Clark applied the $0.70-0.80 range only to the 25% interest in Terre de Grace retained by Value Creation through its interest in the partnership with BP. The 75% interest conveyed to BP was valued at the price of the BP transaction ($0.57 per barrel). All parties agree that this was a distressed price. [ 52 ] In valuing TriStar, Clark was aware of Mr.

Ho’s opinion that it is important to compare relative geographical features of properties in assessing market comparable transactions.

He reviewed, among others, the PetroChina/AOSC transaction, a report from McDaniel and Associates Consultants Ltd. (“McDaniel”) with respect to TriStar which corroborates Value Creation’s analysis of the qualities of the TriStar resources; and the positive changes that occurred in the oil sands market subsequent to the PetroChina/AOSC transaction and prior to the Valuation Date. [ 53 ] The result was a valuation range for TriStar of $0.70 to $0.80 per barrel, a fair market range of $365 million to $418 million. [ 54 ] Clark determined the market value of a recent bid for the east portion of Firebag to reflect a value range for the entirety of Firebag of $68 to $77 million. [ 55 ] He assigned no value to High Hill River, as no engineering reports had been produced for that lease. 2.

Value of Technologies [ 56 ] As Value Creation had never marketed its Technologies, it was difficult for both experts to determine how they should be valued. [ 57 ] Mr. Clark relied on work done on the technologies by McDaniel. [ 58 ] McDaniel’s contingent resource evaluations were based upon an incorporation of the net positive impact of the Value Creation Technologies. Mr.

Clark segregated the costs and revenues that McDaniel had specifically attributed to the incorporation of the Technologies, updated the McDaniel price decks and recalculated the tax liabilities accordingly, and discounted the present value attributable to the benefits of the application of the technologies by a 25% risk rate. [ 59 ] Excluding the “uplift barrels” associated with the use of the Technologies and applying the economic benefit only to part of TriStar and Terre de Grace, Mr.

Clark concluded that the additional cash flows resulting from the application of the Technologies represented a present value in the range of $233 to $297 million. [ 60 ] He delivered a supplemental report that corrected certain calculations regarding, among other things, costs associated with the Technologies, giving rise to a corrected value range of $156 million to $201 million. 3.

Value of uplift barrels [ 61 ] Clark noted that the McDaniel evaluation of the Technologies reported that using the Technologies would result in the production of additional oil, the “uplift barrels”. [ 62 ] Clark’s analysis extracted the additional barrels and valued them based on market comparables. However, he applied a significantly higher discount rate to reflect various risks, ultimately concluding that the uplift barrels had a value in the range of $80 to $92 million. 4.

Value of carried interest in the BP Transaction [ 63 ] BP committed to fund US $1.6 billion of capital in the Terre de Grace partnership, subject to an annual 3% increase and additional amounts for “new recoverable resources”. [ 64 ] The BP Transaction included a commitment on the part of BP to pay the Value Creation debt due on March 31, 2010. BP did

in fact pay the debt on March 15, 2010, four days after the Valuation Date, and paid the balance of the $500 million directly to ValueCreation. [65] The Clark opinion present value of $405 million for the BP/VCI partnership was based on Clark’s assumption that BP wouldspend the bulk of the funds in the later years of the seven year period of the partnership. No value was assigned to the commitment topay amounts for “new recoverable resources”. 5. Value of tax pools [66] Clark combined BA Energy’s tax pools with Value Creation’s tax pools. B.

Fair Value v Fair Market Value [67] MNP LLP (“MNP”), the expert retained by Value Creation, was critical of Clark’s use of fair market value as a standard ofvalue for its opinion. MNP instead used “fair value” in its opinion, meaning “the intrinsic value of the ownership of the Shares, havingregard to the relevant facts and circumstances”.

MNP’s opinion is described in detail later in this decision, but a fundamental issue withrespect to the Clark opinion is whether the use of fair market value was an error affecting the validity of the opinion. [68] While MNP concedes that fair market value may be the starting point in determining fair value, it submits that an expertopinion should address fair value as a valuator understands that term to be interpreted by case authority. Mr.

Clark responds that it isinappropriate for a valuator to presume to opine about fair value, as that can only be determined by the Court. [69] MNP also criticized Clark’s definition of fair market value. [70] These criticisms are unjustified. As noted by RFG, a common approach to determining fair value is to determine fair marketvalue and then determine whether other considerations or factors warrant an adjustment to arrive at fair value: Brant Investments Ltd. vKeeprite Inc. (1987), (ON SC), 60 OR (2d) 737, aff in (ON CA), [1991] OJ No 683 [ONCA] atpara. 109.

Deer Creek Energy Ltd. v Paulson & Co., 2008, ABQB 326, aff in 2009 ABCA 280 at paras. 482-3, 512; Domglas Inc v.Jarislowsky, Fraser & Co., (1980), 13 BLR 135 (QCSC) para. 411. [71] RFG does not assert that fair market value is equal to fair value, and the Clark opinion should not be discounted for itsemphasis on fair market value. Fair market value is an important consideration for a court in determining fair value while not the onlyconsideration.

As noted in Cyprus Anvil Mining Corp v Dickson [1986] NO 1204, the “one true rule is to consider all the evidence thatmight be helpful and ... the particular factors in the particular case ...”. [72] The criticism of the Clark definition of fair market value is also unjustified. While MNP prefers a slightly different wording,the definition it proposes is materially the same. [73] It is unnecessary to consider RFG’s criticism that the MNP opinion contravenes the “ultimate issue” rule, as the submissionson that issue were a response to MNP’s criticism of Clark’s use of fair market value as a standard of value. C.

MNP Opinion. [74] MNP was retained by Value Creation to give an opinion of the fair value of the Value Creation common shares as at theValuation Date. MNP’s opinion in its report dated September 30, 2014 is that the value is in the range of $1.19 to $1.34 per share. [75] Originally, MNP’s range of value was materially lower, but it issued a revised opinion dated September 30, 2014, which itsaid had been revised on a result of receiving additional material, particularly a report of Robert S. White dated July 18, 2014 (the“White Report”), supplementary documents that were submitted to Mr.

White in connection with the preparation of his report and certainadditional information requested from Value Creation. [76] MNP then presented a second revised report dated September 30, 2014 that is substantially the same as the 1st revised reportof that date, except that it includes a new provision under “Scope of Review”, in which MNP states that, while it reviewed the WhiteReport and had discussions with Mr. White, its opinions “are not dependent upon nor made in reliance on the White Report or ondiscussions we have held with Mr. White”. [77] The White Report was not introduced in evidence.

It was the subject of a pre-trial application, and the implications of that pre-trial order were the subject of some discussion at trial.

Given my findings, it is not necessary that I address this issue. [78] For the purpose of its opinion, MNP took “fair value” to mean “the intrinsic value of the right of ownership of the [commonshares], having regard to the relevant facts and circumstances. “MNP took “fair value” to be “the rateable (pro-rata) portion of the enbloc fair market value of the issued and outstanding common shares of [Value Creation] on the Valuation Date, as represented by theproportion that the Dissenters’ Shares is to the total issued and outstanding common share capital of the company”. [79] MNP’s definition of fair market value is the “highest price, expressed in terms of cash equivalents, at which property wouldchange hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an openand unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevantfacts”. [80] Notably, MNP took the position that Value Creation was in a “distressed financial condition” on the Valuation Date, and thattherefore the fair market value (and fair value) of certain assets of the company were affected.

[ 81 ] The reports were authored by Richard Wise and Drew Dorweiler, both of whom testified at trial. [ 82 ] MNP made the following assumptions in formulating its opinion:

a) that there were no identifiable special interest purchasers in the marketplace on or about the Valuation Date;

b) that there were no material contracts or agreements in effect, or being negotiated, that would otherwise have a bearing on its opinion, of which it was unaware;

c) that the respective financial statements of Value Creation reflect all of its assets and liabilities (including, but not limited to, intellectual property);

d) that there were no material contingent assets or liabilities, unusual contractual obligations or substantial commitments, other than in the ordinary course of business, or litigation pending or threatened, of which it was unaware;

e) that there are no significant factors bearing ion the fair value of the shares that it had not considered in reaching its opinion. [ 83 ] MNP referenced a general decline in stock markets in the third and fourth quarters of 2008, and drastically reduced liquidity in the marketplace. With respect to its opinion that Value Creation was in a distressed financial condition on the Valuation Date, MNP referenced:

a) Value Creation’s acknowledgement in its shareholder’s circular dated February 18, 2010 that, if the BP Transaction was not approved by shareholders or completed, Value Creation would not have sufficient funds to pay its debt under the Credit Agreement due on March 31, 2010, the lenders would have the right to appoint a receiver and Value Creation may no longer be able to carry on business as a going concern;

b) that Value Creation had incurred significant historical operating losses in the last three fiscal years; and

c) that Value Creation was facing a payment of approximately U.S. $462.3 million to its lenders due on March 31, 2010 and had begun to consider the possibility of a CCAA filing [ 84 ] Based on economic uncertainty and the company’s financially-distressed situation, MNP concluded that the pool of likely purchasers for Value Creation’s assets or the shares was limited and that its financing alternatives were very restricted at the Valuation Date.

Value Creation’s distressed financial situation, its looming repayment obligations under the Credit Agreement, combined with the illiquidity in the financial markets, led MNP to conclude that it was highly improbable that, at the Valuation Date, there was significant interest in the marketplace for an investment in the shares in the short term. [ 85 ] MNP adopted the asset-based-approach to the valuation of Value Creation, applying the Adjusted Balance Sheet Method (Adjusted Shareholders’ Equity Method) under a going-concern premise, on the assumption that Value Creation would continue on an ongoing basis rather than being liquidated in the near future. [ 86 ] MNP explained that, in applying the Adjusted Balance Sheet Method to value Value Creation’s issued and outstanding shares, each asset and liability on the balance sheet was written up or down, as the case may be, to its respective current or fair market value as of the Valuation Date, on an going-concern (as opposed to liquidation) basis.

Corporate income taxes relating to the above adjustments were notionally deducted (or added) to arrive at adjusted shareholders’ equity on a net basis. MNP:

a) aggregated the estimated values of the Terre de Grace, TriStar and Firebag oil sands leases;

b) estimated the values of property, plant and equipment appearing on the company’s balance sheet as at March 11, 2010;

c) estimated the values of the loans to and the receivable from BA Energy, as well as the issued share of BA Energy (the “BAE Shares”);

d) estimated the value of the Technologies;

e) estimated the value of Value Creation’s non-capital losses and research expenditure credits for income tax purposes;

f) aggregated the values in (

a) to (e), arriving at the estimated value of Value Creation’s total assets;

g) calculated estimated transaction costs relating to the total assets in (f) (excluding the said loans and receivable in (c), the non- capital losses and the research expenditure credits in (e));

h) deducted the amounts in (

g) from the aggregate value of Value Creation’s assets in (f), arriving at the value of Value Creation’s assets (net of transaction costs) at the Valuation Date;

i) calculated the notional provision for taxes attributable to the Terre de Grace, TriStar and Firebag blocks of oil sands leases and the Technologies;

j) calculated Value Creation’s debt and accrued interest, net of cash and cash equivalents, non-cash working capital and proceeds from the notional exercise of outstanding warrants;

k) aggregated the taxes in (

i) and the debt and accrued interest in (j), arriving at the company’s total liabilities for valuation purposes;

l) deducted the liabilities in (

k) from the total assets in (h), arriving at the company’s Net Asset Value (“NAV”);

m) applied an “Illiquidity Discount” to the NAV in (l), arriving at the estimated fair market value of Value Creation’s equity;

n) added to Value Creation’s outstanding common share capital the common shares that would be issued upon the exercise of “in-the- money” warrants, resulting in the number of Value Creation’s common shares outstanding on a fully-diluted basis; and

o) divided the fair market value of Value Creation’s equity in (

m) by the fully-diluted number of common shares outstanding in (n), arriving at the fair market value per share at the Valuation Date. [ 87 ] MNP applied an “Illiquidity Discount” to the issued shares of the company to reflect its view that shareholders would be unable to quickly convert their shareholding to cash or pay a liability.

This, it says, is distinct from a “marketability discount”, which is an amount or percentage deducted from the value of an ownership interest to reflect the relative absence of marketability. [ 88 ] MNP considered certain offers received by Value Creation for blocks of its oil sands leases during the four months immediately preceding the Valuation Date as potentially providing meaningful indicia of value for these leases. [ 89 ] The following

schedule sets out MNP’s calculation of fair value per share of Value Creation as at the Valuation Date: Low (millions) High (millions) Terre de Grace $1,000.00 $1,000.00 TriStar 164.20 197.04 Firebag 55.00 55.00 Property, plant and equipment 4.07 4.07 BAE loan and receivable 57.27 57.27 Investment in BAE Shares - - Technologies - 30.41 Technologies – SR & ED expenditures 2.34 2.34 Notionally-available non-capital losses - - Total asset value 1,282.89 1,346.13 Portfolio Discount 0.0% - 0.0% - Transaction costs 1.0% (12.23) 1.0%

(12.87) Total asset value (net of transaction costs) (a) $1,270.65 $1,333.27 Notional taxes payable $87.77 $102.29 Debt and accrued interest (net) 460.88 460.88 Contingency reserve 0.0% - 0.0% - Total liabilities (b) $548.64 $563.16 Estimated NAV (a) – (b) $722.01 $770.11 Illiquidity Discount applicable to Shares 10.0% (72.20) 5.0%

(38.51) Estimated Fair Market Value of equity $649.81 $731.60 Number of issued and outstanding Shares (fully diluted) 546.36 546.36 Fair Value per Share $1.19 $1.34 [ 90 ] In valuing Terre de Grace, MNP did not use the BP Transaction value, but instead an offer made by CNPC/PetroChina. On February 15, 2010, CNPC/PetroChina offered $800 million for an 80% interest in Terre de Grace.

MNP conceded that the BP offer was the highest bid, but did not use it on the basis that it was the transaction from which RFG had dissented. [ 91 ] In valuing TriStar, MNP used the McDaniel bitumen contingent resource estimate included in a January 5, 2010 report prepared by Genuity (the “BMO/Genuity Update”). It also reviewed the February 1, 2010 report authored by Macquarie Equity Research.

It then applied a “distress discount” of 25% to the value per barrel range. [ 92 ] For Firebag, MNP reviewed an offer from Esso Imperial for part of the lease, and relied on information from Value Creation management that the other part of the lease could not be economically developed. [ 93 ] MNP used book value for Value Creation’s property plant and equipment. It adjusted BA Energy’s balance sheet to its estimated net realizable values, writing book values up and down.

MNP took into account BA Energy’s sale of certain assets and part of the offer from Reliance. [ 94 ] No value was assigned to BA Energy shares. [ 95 ] MNP originally gave negligible value to the Technologies, largely as a result of discussions with Value Creation management. However, after reviewing the White Report, and the February 1, 2010 offer from Reliance in which Reliance attributed a value to the Technologies of between zero and $134 million, MNP applied a 50% probability factor to the $134 million.

MNP assumed that the resulting $67 million optimal scenario would be paid at the end of four years subsequent to the Valuation Date, and therefore applied a 15% present value discount, arriving at an estimated high end value of $38.4 million, from which it deducted the $8 million value of the licence agreement held by BA Energy. [ 96 ] Research technology deductibles were estimated from Value Creation’s 2009 tax return. [ 97 ] MNP then deducted transaction costs from the total asset value on the basis that a notional purchaser of the assets would do

so. It deducted notional taxes and payment of the Credit Agreement debt minus an amount received from the notional exercise of outstanding warrants. It then applied its “Illiquidity Discount”. D. Financial Distress [ 98 ] Mr. Clark is critical of MNP’s assertion that Value Creation was in financial distress at the Valuation Date. Clark’s view is that the company’s debt repayment issue had been effectively resolved by the Valuation Date. [ 99 ] I agree with Mr. Clark that, given the BP Transaction, Value Creation was out of financial distress at the Valuation Date.

On February 10, 2010, the President of BP had confirmed by letter that it had completed its due diligence, that due diligence was no longer a condition to closing and that there were no regulatory filings required to close the transaction. More than 2/3 of shareholders were compelled by agreement to approve the transaction, definitive agreements were at an advanced stage, and BP had confirmed an irrevocable commitment to pay up to $500 million to Value Creation’s lenders on closing.

The approval of the BP Transaction by the shareholders was a certainty, given that by February 18, 2010, approximately 79% had entered into agreements with BP to vote in favour of the transaction. By March 7, 2010, the definitive agreements were in final form. By March 10, 2010, assurances had been given to the lenders that the debt payment would be made before the due date. [ 100 ] While it may have been theoretically possible that the BP Transaction would not close after the Valuation Date, that theoretical possibility was insignificant in the circumstances.

Value Creation was no longer realistically in a situation where it would not be able to pay its debt under the Credit Agreement. [ 101 ] It is also not the case that the pool of likely purchasers for Value Creation’s assets or shares was severely limited at the Valuation Date, particularly given that the search for offers had resulted in several other offers, less desirable for Value Creation management for a variety of reasons than the BP Transaction, but nevertheless capable of resolving Value Creation’s immediate need for sufficient cash to pay down its Credit Agreement debt. [ 102 ] If it is incorrect to assume that the BP Transaction was a virtual certainty to close, there were other potential purchasers and investors that could have resolved Value Creation’s distressed circumstances.

Given the offers that had been made, Value Creation could have reached agreements that would have resolved its current debt crisis with Reliance, CNOOC, CNPC or AOCS. I agree with Value Creation and MNP that none of these options would likely have closed before March 30, 2010, but the assumption that the lenders would immediately use the option of a consent receivership if the BP Transaction did not close is not the only possible outcome.

While the conditions to closing a different transaction may have taken longer than March 30, 2010 date, it is equally plausible that the lenders may have agreed to a further forbearance, given that Value Creation’s process appears to have resulted in a number of viable offers. [ 103 ] Value Creation appears to submit that MNP’s assumption that Value Creation was in distress is supported by the fact that the BP Transaction would not provide the company with sufficient capital to build upgraders without selling some of its properties. [ 104 ] It also argues that Clark’s valuation depends on the Court accepting that Value Creation would have raised sufficient capital to build several upgraders without selling any properties. [ 105 ] I must disagree with this

interpretation of Mr. Clark’s opinion. He did not assume that Value Creation would either retain or develop its assets. Instead, he applied the definition of fair market value to each asset. In addition, challenges in raising capital do not equate to financial distress. [ 106 ] It follows that I do not accept MNP’s “distress discount” to per barrel values. [ 107 ] Mr. Clark is also critical of MNP’s view that the BP Transaction should not be considered in its valuation of the Terre de Grace lease.

Again, I agree that there would be no reason not to use the BP Transaction as evidence of the fair market value of Terre de Grace if MNP was correct in using current offers and expressions of interest to value that property. Using that offer to value Terre de Grace is not an impermissible use of transaction to which RFG’s dissented, as discussed later in this decision. E.

Value Creation Proposal [ 108 ] Value Creation in its final argument submits that, despite the MNP opinion, evidence adduced at trial supports the following fair value for the RFG shares; Asset Value (millions) Technologies $0 to $30 Uplift barrels $0 Terre de Grace $1,000 TriStar $156.48 to $194.56 Firebag $55 BA Energy, PP&E, Working Capital $40 Taxes ($95) Liabilities ($477) Transaction Costs (1%) ($6.79 to $7.48) Illiquidity Discount (5% to 10%) ($50.96 to $56.07) Distress Discount (10%) ($67.95 to $74.76) TOTAL $553.78 to $609.26

Outstanding shares 546,980,495Value per share $1.01 to $1.11 [109] Value Creation’s proposed value appears to be based on portions of the MNP opinion and certain submissions made inargument, as follows:

a) that the market “clearly” indicated its lack of interest in the Technologies unless and until Value Creation proved them;

b) that there is no evidence that can be used to quantify “uplift barrels”, and Mr. Clark is not qualified to give an opinion in that area;

c) that the market (other than the BP Transaction) established the value of Terre de Grace, even though Value Creation was underdistress;

d) that the market established that TriStar is less valuable than Terre de Grace, and TriStar has surface restrictions that affects itsvalue;

e) that the Firebag value should reflect Value Creation’s distressed position; and

f) that MNP’s approach to notional taxes is correct. IV. Analysis A. Statutory basis for determination of fair value [110] Pursuant to section 191(3) of the Alberta Business Corporations Act, RSA 2000, Ch.

B-9, as amended, dissenting shareholdersare entitled to be paid “fair value” for their shares, determined as of the last business day before the day on which the resolution fromwhich the shareholder dissents was adopted. [111] The ABCA does not define fair value but it provides that it may be fixed by the Court. [112] In Brant Investments Ltd., a leading case that combined an oppression action with the determination of fair value, the trial Courtreflected on the meaning of fair value at paras 132 and 133: ...The right as I view it is to recover the value of the investment so that the proceeds may be utilized elsewhere.

In such circumstances Isee no reason why market value is not “fair value”. Market value (in some comment called “fair value”, in some “intrinsic value”) isdefined as the highest price available in an open and unrestricted market between informed , prudent parties acting at arm’s length andunder no compulsion to act, expressed in terms of money or money’s worth. In my view, on the facts of this case, “market value” willconstitute “fair value” within the meaning of that term as used in s. 184(3) [of the CBCA].

It is on that basis that I propose to determinethe award to the dissenting shareholders... “Market value” as defined above is a notional or hypothetical concept; and opinion arrived at by evidence, assumptions, calculations andjudgment, in the absence of an actual transaction. The distinction is important for the disposition of this case. [113] On appeal the Court agreed that, on the facts of that case, “fair value” and “market value” could be equated, but such is notnecessarily always the case.

What is clear is that fair value is a value that is “just and equitable”, one that provides adequatecompensation or indemnity, consistent with the requirements of justice and equity: Manning v Harris Steel Group Inc (1986), (BC SC), 7 BCLR (2d) 69 (BCSC), at 75 citing Domglas Inc v Jarislowsky, Fraser & Co (1980), 13 BLR 135 (Que SC), at164. [114] MNP defines fair value as meaning “the intrinsic value of the right of ownership of the Shares”.

As noted in Morrison v UnitedWestburne Industries Ltd, [1988] OJ No 378 (Ont HC) at p 11, “intrinsic value” has a particular meaning that may not make itsynonymous with fair value and I prefer not to use that term. [115] 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 torecognize that a prudent purchaser will have certain fall-back positions in mind: New Quebec Raglan Mines Ltd v Block-Andersen(1993), 9 BLR (2d) 93 (Ont Gen Div [Commercial List]), at 132.

While each party who asserts a proposition must prove it by apreponderance of evidence on the balance of probabilities, there is no burden on either side to establish value, as this is a judgment forthe court to make: Silber v BGR Precious Metals Inc (1998), (ON SC), 41 OR (3d) 147 (Ont Gen Div). [116] As the valuation experts point out, there are at least four accepted methods of valuing shares:

a) market valuation, which is sometimes restricted to the use of quoted prices on a stock exchange;

b) net asset valuation;

c) investment valuation; and

d) a combination approach. [117] As noted in Grandison v NovaGold Resources Inc, 2007 BCSC 1780 (BCSC) at para 154, these options are not exhaustive and“[e]verything that has a bearing on the question of value must be considered”.

[118] The approaches that may be appropriate to this valuation are the market-based approach, the net asset valuation approach, or a combination of the two.

As noted in Cyprus Anvil Mining Corp v Dickson (1986), (BC CA), 33 DLR (4th) 641(BCCA), at 652: The one true rule is to consider all the evidence that might be helpful, and to consider the particular factors in the particular case, and toexercise the best judgment that can be brought to bear on all the evidence and all the factors. [119] The Court in Cyprus Anvil also noted at pp 652-3 that no method of determining value that might provide guidance should berejected, but that in the end it is up to the court to exercise judgment to determine fair value.

The determination of “fair value” is not aprocess characterized by mathematical certainty and exact calculation. B Hindsight evidence and benefits from transaction [120] As noted by the expert witnesses, the issue of whether, and to what extent, RFG is able to rely on the fact and consequences ofthe BP Transaction is a major issue in this case. [121] Generally, neither the parties nor the court may rely on hindsight evidence. Events that were not known as of the valuation dateor that occurred afterwards are not relevant to determination of fair value on the valuation date.

At trial in Smeenk v Dexleigh Corp(1990), (ON SC), 74 OR (2d) 385 (Ont HC), affirmed on this point by the Court of Appeal at (1993), (ON CA), 15 OR (3d) 608 (Ont CA) at 614, Henry, J stated at p 404: The advantages of hindsight are not available either to the applicant or to the court. It is the policy of the Act to divorce the value of theshares on the valuation date from the effects of the amalgamation whether anticipated or ex post facto.

Events that were not known onthe valuation date or which occurred thereafter are therefore, in ordinary circumstances, not relevant to the issue which is to determinefair value on the valuation date; where they may nevertheless have some relevance or probative value they should on the basis of thesame principle be given little weight. [122] In Smeenk, the primary issue of hindsight was evidence of a sale of assets that took place after the valuation date. [123] It is noteworthy that this case was decided after the

Canada Business Corporations Act was amended to delete a provision thatspecifically prevented a court from taking into account any effect that the resolution dissented from would have on share value.

TheCourt in Smeenk commented that the amendment did not signify an intention to change the prior approach, but framed the proposition asa general rule applicable “in ordinary circumstances”. [124] It is also noteworthy that the dissenting shareholders in Smeenk did not present any expert valuation evidence and thus theCourt had only the uncontroverted evidence of a single valuator who followed the general rule. [125] The reason for the general rule was set out by Anderson, J in Brant Investments Ltd at p 113: The basic ground upon which the dissenting shareholders took their position of dissent was objection to the impugned transaction.Because the manner of carrying that transaction forward involves a fundamental change within the meaning of the Act, they wereaccorded by the Act a right of dissent and a right to be paid the ‘fair value’ of their shares.

In my view they should have no enhancementof the value of their investment attributable to the transaction which gave rise to their dissent [126] The Court of Appeal endorsed this decision, but referenced, at para 103 of the case, the 1977 proceedings of the StandingSenate Committee on Banking, Trade and Commerce dealing with Bill S-2, entitled “An Act to amend the

Canada Business CorporationAct.” The parliamentary secretary to the Minister of Consumer and Corporate Affairs remarked on the proposed deletion: Finally, clause 56, in effect, broadens the court’s discretion to evaluate a dissenter’s shares by considering the benefits that flow to theremaining shareholders after the fundamental change has been effected. [emphasis added] [127] Thus, the Court of Appeal noted at para 104 that: ...

In appropriate cases, particularly where the dissenters are forced out, the trial Judge may exercise his discretion so as to allow thedissenters to participate in the benefits of the transaction.

The availability and nature of the participation would necessarily depend on theparticular facts of the case... [128] The general rule was clarified in Ford Motor Co of Canada v Ontario (Municipal Employees Retirement Board) (2000), 48 CPC (4th) 272 (Ont SCJ) at para 5, where Ground, J comments that factual hindsight information (not opinions) may be used to compareactual results achieved after the valuation date to projected corporate results said to be reasonably foreseeable or to challenge thereasonableness of assumptions made by the valuators. [129] The issue of whether benefits and synergies arising from the transaction dissented from can be taken into account in a valuationarose in Deer Creek Energy Ltd v Paulson & Co, 2008 ABQB 326, aff’d 2009 ABCA 280, in the context of a two-stage squeeze-outtransaction.

The issue was whether benefits and synergies that may result when the purchaser becomes the sole owner of the shares afterthe second stage should be taken into account in valuing the shares.

The dissenting shareholders in that case dissented from the firststage of the transaction, and the second did not occur for several months. [130] I found that the impact of the anticipation of the second stage of the transaction was recognized in the price offered toshareholders in the first stage (at para 546) and that there was no justification for allowing dissenting shareholders additional benefitsthat might have accrued in the period of time between the first stage and the second stage (at para 547). [131] I noted at para 543 that under Canadian law, as a general rule, a dissenting shareholder cannot benefit from an increase in

underlying share value created by a corporate transaction from which that shareholder dissented: Smeenk at p 404; Canadian Gas & Energy Fund Ltd at paras 15-19; Brant Investments Ltd at p 772.

While a narrow exception to this general rule exists in the circumstances of a squeeze-out transaction, it appears that courts have been reluctant to exercise their discretion to take into account the benefits of the transaction dissented from in assessing fair value: Fraser Inc at 112; New Quebec Raglan Mines Ltd at p 109-110. [ 132 ] Given the lack of Canadian authority on the issue, I also reviewed American cases, but noted that care must be taken in considering the American position, as the Delaware statute that is considered in many of them includes a provision that specifically excludes from the calculation of fair value “any element of value arising from the accomplishment or expectation of the merger”, and the cases focus generally on the scope of this statutory provision.

It also appears that the dissenting shareholder provisions in the Delaware statute apply in a narrower range of cases than do those in Canadian business corporations statutes. [ 133 ] However, despite this provision, the Court in Cede & Co v Technicolor, Inc , 684 A 2d 289 (US Del SC 1996) found that a lower Court had erred in failing to include in the calculation of fair value the merged company’s new business plans and strategies. Prior to the merger, Technicolor planned to open a number of film processing stores, but had encountered difficulties in following its plans, reporting operating losses.

After a takeover bid by MacAndrews & Forbes Group Incorporated (“MAF”), MAF and Technicolor were consolidated for tax and financial reporting purposes, even though MAF had acquired only 82% of the Technicolor shares. The lower Court found as a fact that, before the later squeeze-out merger of the companies, the management of MAF “began to dismember what they saw as a badly conceived melange of business”, actively marketing several of the Technicolor divisions rather than continuing with the original plan to open further film processing outlets.

As the appellate Court put it at p 14, there was a “fundamental disagreement between the litigants...concerning the nature of the enterprise to be appraised”. One party’s experts assumed that the Technicolor businesses would continue as going concerns; the other party’s experts assumed that the businesses would be sold in accordance with the marketing plan.

Given the lower Court’s finding that the MAF plan to liquidate the Technicolor business was “an operative reality” prior to the merger date, the issue was whether any value attributable to that plan as of the merger date had to be excluded as falling within the statutory exclusion of “arising from the ...expectation of the merger.” [ 134 ] The Court harkened back to a decision in Weinberger v UOP, Inc , 457 A 2d 701 (US Del SC 1983), wherein it had been commented that “[o]nly the speculative elements of value that may arise from the accomplishment or expectation of the merger are excluded”.

The Court in Technicolor noted at p 34 that: The “accomplishment or expectation” of the merger exception in

Section 262 is very narrow, “designed to eliminate use of pro forma data and projections of a speculative variety relating to the completion of a merger.” Weinberger v UOP, Inc 457 A 2d at 713. That narrow exclusion does not encompass known elements of value, including those which exist on the date of the merger because of a majority acquiror’s interim action in a two-step cash-out transaction. [ 135 ] Lawrence A. Hamermesh & Michael Wachter in an

article entitled “The Fair Value of Cornfields in Delaware Appraisal Law” (2005) 33 J. Corp. L. 119, note that the opinions in Weinberger and Technicolor have left a “troublesome uncertainty” in defining the proper approach to valuation in the United States.

They discuss the principles of United States law in these types of cases, dividing them into categories. [ 136 ] In analysing these categories, the authors note at p 148, quoting the latter paragraph from Union Illinois 1995 Inv Ltd Partnership v Union Financial Group, Ltd , 847 A 2d 340 (US Del Ch 2004) at 364 that: Of all the claims we make, the assertion that “fair value” excludes gains arising from the merger itself is the most clearly established and visible in Delaware law...Such excluded gains include, for example, those resulting from economies of scale or increased market share, or those that derive from the acquirer’s plans to operate the post-merger enterprise more effectively...

Logically, if this mandate is to be faithfully followed, this court must endeavor to excluded from any appraisal award the amount of any value that the selling company’s shareholders would receive because a buyer intends to operate the subject company, not as a stand-alone going concern, but as a part of a larger enterprise, from which synergistic gains can be extracted. [ 137 ] However, they also note at p 149 that, through a “wooden

interpretation” of Weinberger and Technicolor , a reader could draw a contrary inference. They suggest that such literal reading of the cases is not required, and is in fact “intolerably inconsistent with the language” of the legislation itself. [ 138 ] Two subsequent Delaware cases have distinguished Technicolor and interpreted it narrowly. In Grimes v Vitalink Communications Corp , [Doc No 12334 (US Del Ch August 28, 1997)], [1997] WL 538676, dissenting shareholders sought an appraisal remedy after the completion of a two-stage merger.

By the time of the second-stage merger, the target company, Vitalink, previously an industry leader, had fallen from its once prominent market position and urgently sought a buyer with expertise in a new router technology.

The dissenting shareholders’ assessment of “fair value” presumed the router system would be supplied by the acquiring company vis-à-vis the merger. [ 139 ] The Court of Chancery distinguished the Technicolor case, citing significant factual differences, including the fact that, in Technicolor, the new management plan “was the operative reality on the date of the merger.” In Grimes , by contrast, the Court found at paras 23-6 that there was “no evidence of any value added by [the acquiring company] between the date on which it obtained majority control and the date of which petitioners became entitled to appraisal rights”.

While there was a plan and an expectation that the acquirer would be able to fulfil the target company’s needs, that plan had not been implemented and was merely speculative. As such it was to be disregarded in assessing fair value. [ 140 ] In Allenson v Midway Airlines Corp , 789 A 2d 572 (US Del Ch 2001), a decision involving a single-stage cash-out merger, the Court of Chancery interpreted Technicolor as requiring actual implementation of a new plan or activity before the element of value could be included in a fair value assessment.

It was held that a suite of debt concessions were not to be considered in the “fair value” determination even though they had been negotiated before the merger was completed because they had not been implemented by that time.

[ 141 ] The Court noted that, in Technicolor , the acquirer in implementing its new business plan before the merger had subjected the minority shareholders to the economic risks that the new plan posed. [ 142 ] In Deer Creek , I found that the acquiror had not implemented a new plan and that the evidence failed to establish that Deer Creek had done anything but follow its existing plan and timeline, with normal variations.

As in Grimes , while there were expectations that Deer Creek would profit operationally and financially from the acquirer’s strengths in these areas, these were still speculative. [ 143 ] To the extent that American law is helpful on this issue, both in Deer Creek and in this case, it appears that synergies and benefits that arise from an acquirer’s further implementation of a business plan are not to be included in determining fair value as long as they are not “operationally implemented” before the transaction occurs. [ 144 ] In this case, there are three issues of valuation that depend on the extent to which the BP Transaction can be relied upon: 1) whether Value Creation should be considered to be in financial distress on the Valuation Date; 2) whether the BP Transaction can be taken into account in valuing Terre de Grace; and 3) whether the value of the BP covenants other than the payment of the Credit Agreement debt can be taken into account in a valuation. 1.

Financial distress [ 145 ] As noted previously, I accept Mr. Clark opinion that, as at the Valuation Date, Value Creation was no longer in financial distress.

Despite the general rule, the events that would save Value Creation from receivership in this case occurred prior to the Valuation Date, whether they were the virtual certainty of the repayment of debt through the BP Transaction, or the existence of other credible offers that could do the same, albeit perhaps not by March 30, 2010. [ 146 ] Even in Delaware, with a strict statutory rule that excludes from a fair value determination “any element of value arising from the accomplishment or expectation of the merger or consolidation,” this exclusion did not include “elements of future value ... which are known or susceptible of proof as at the date of the merger and not the product of speculation”: 8 Del C at 262(h); Weinberger at p. 713. 2.

BP Transaction [ 147 ] MNP did not consider the BP Transaction in valuing Terre de Grace. As noted previously, if negotiated transaction prices are the appropriate approach to value of the property, using that transaction would not be an impermissible use of the hindsight rule. That an offer on the property made by an informed arm’s length party was accepted by Value Creation is a fact that was known at the Valuation Date, and it is relevant evidence of the market value of the property. Mr.

Clark did not accept the BP Transaction Value for Terre de Grace, on the basis that Value Creation was in distress at the time of the offer, but the same was true for the other offers received during the time period, including the CNPC/PetroChina offer relied upon by MNP. 3. Future benefits [ 148 ] The BP Transaction included a capital commitment of US $1.6 million, the present value of which Mr.

Clark took into account in valuing the Value Creation shares. [ 149 ] RFG submits that the limited jurisprudence in this area has developed a principle (the synergy principle) in relation to valuations based on future earnings. Under the proposed synergy principle, the courts generally exclude from fair value any future enhancements to value created by operational synergies that are uniquely derived from the transaction that gives rise to the right to dissent.

Thus, RFG submits that the synergy principle does not require the court to exclude value inherent in the company at the Valuation Date, such as the fair market value of a stand-alone asset. [ 150 ] As postulated by RFG, the synergy principle was developed in relation to valuations based on projected future earnings. The question is whether the subject transaction would result in enhanced future earnings that can only be attributed to the transaction.

If so, under the synergy principle, the court may determine that the present value of that component of the earnings should be excluded from fair value. [ 151 ] RFG submits that, logically, the synergy principle does not have any application to the determination of the fair market value of a stand-alone asset, which is what RFG submits that Mr. Clark has done in his opinion. [ 152 ] Both expert valuators agreed that Value Creation should be valued as a going concern using the asset-based approach. The value of Value Creation is thus the combined value of its stand-alone assets. Mr.

Clark excluded from his valuation the 75% interest in Terre de Grace purchased by BP at a distressed price. He then valued the remaining Value Creation assets on the basis of what an arm’s- length purchaser would pay for them, in accordance with the definition of fair market value.

RFG submits that the synergy principle has no application to such a valuation. [ 153 ] RFG submits that the relevant jurisprudence demonstrates that the synergy principle seeks to segregate value inherent to the enterprise as at the Valuation Date (such as existing earnings potential or the market value of assets) from newfound synergistic value which would not exist but for the transaction. It cites an

article by Clark Hunter and Clarissa Pearce, Fair Value – A Common Issue with Sparse Authority , 2011 Ann Rev Civ Lit 25 (“Hunter”), as follows: Often, a merger or takeover will create new business circumstances or opportunities from which the existing company will benefit. Benefits that increase the value of the company are referred to as “synergistic benefits”.

Whether synergistic benefits should be considered in determining the “fair value” of shares has been the subject of some difficulty within Canadian jurisprudence. Often a company will offer synergistic benefits to more than one potential purchaser. In such circumstances, the value of the synergistic benefits are not limited to a specific transaction and can be regarded as inherent to the company itself and therefore properly included in fair value.

However, in circumstances in which only one specific transaction leads to an increase in value, courts have typically held that such synergistic benefits belong to the acquirer and should not be included in fair value. [ 154 ] Anderson, J. in Brant Investments , adopted the following definition of “synergy” at para 121: Synergy is the effect created by economies of scale; that is, the realization of increased earnings and cash flows as a result of the combination of two or more business operations over and above the aggregate earnings and cash flows of the two businesses reviewed separately.

Aside from possibly affecting earnings and cash flows, the effect may also reduce risk, thereby increasing the aggregate going concern value on a combination of businesses. [ 155 ] I accept that the circumstances of this case are different from those of Smeenk or of Deer Creek , for example, where the issue was whether dissenting shareholders should be entitled to the benefit of an enhancement of their investment attributable to events that supervened after the Valuation Date. [ 156 ] To determine whether the value Mr.

Clark placed on Value Creation’s carried interest in the BP/VCI partnership is value that falls within the general rule of exclusion or should be recognized in the assessment, I must carefully review how that value was calculated. [ 157 ] Mr. Clark described his analysis as follows: 17.4 Carried Interest: Part of the compensation VCI received from BP for the sale of its interest in TDG was a carried interest in future capital expenditures. This was referred to in the BP documentation as “Working Commitment Contributions” (WCC).

BP undertook to spend an additional US$1.6B of development capital on TDG in the BP/VCI Partnership. VCI would receive credit of 25% of that amount, as carried interest. 17.5 As the project operator, BP would decide when that money would be spent, however, according to

section 6.5 of the Partnership Agreement, if BP had not entirely invested the $1.6B before March 15, 2017, 25% of the remaining unspent WCC must be paid to VCI in cash, as a return of capital at that time. 17.6 The carried interest represents value to VCI because approximately US$400 million will be spent on its behalf in the development of productive partnership assets at TDG of VCI will receive a cash payment from BP at the end of seven years (in March 2017).

BP is not compelled to accelerate the development of the TDG project and in the extreme it might be that BP delays the injection of the WCC until the seventh year. For the purposes of this valuation, we have estimated a present value for VCI’s carried interest on the basis that BP will invest the WCC progressively on an increasing sum-of-the years basis.

This results in the bulk of the US$1.6B being spent in the later years of the seven year period, as shown in the Table below. 17.8 In our view, BP has the financial strength to honour its obligation, whether it spends the money on TDG development or ultimately pays cash to VCI under the terms of the Partnership Agreement (US$400 million plus an annual 3.0% inflation adjustment).

Since VCI’s position in the arrangement is reasonably secure, i.e., it will receive either investment credit or cash from BP, we discount the receivable/carried interest, with the inflation adjustments, for the time value of money at the Canadian risk-free rate of 3.25%. The corresponding present value is approximately $405 million, ... [ 158 ] Thus, it is clear that this value arises only from the execution of the business plan that was part of the BP Transaction, and no part of it was implemented on the Valuation Date.

While, it appears reasonably certain that BP would honor its obligation, and while it may be appropriate for business valuation purposes to include this benefit in a fair market value assessment, it must be excluded from the fair value determination as it is a benefit flowing from the transaction that was the subject of the dissent. It had not been implemented or operationally operative at the Valuation Date . As noted in Allenson v Midway Airlines Corp., a new business plan does not add value to a company “simply because it exists”, but rather “only if it is actually being implemented”: 789 A. 2d. 572 (Del.

Ch. 2001) at ftn. 2, cited in Hunte r at page 53. [ 159 ] Mr. Clark considered the BP covenant of conditional payment for new recoverable resources, but did not add value for that benefit given that it was sufficiently uncertain at the Valuation Date. C Analysis of Competing Opinions of Value 1. Terre de Grace [ 160 ] As noted previously, Clark valued Terre de Grace and TriStar using the market value approach, considering: (

a) the quality of the resources; (

b) comparable companies and transactions including a PetroChina/AOSC transaction); and (

c) an improvement in the oil sands market following the PetroChina/AOSC transaction and prior to the Valuation Date. Clark’s analysis of comparables was supported by a report prepared by Douglas Ho dated January 22, 2014 (the “Sproule Report”), which explained similarities and differences of properties located in the subject formation from those located elsewhere in Alberta. [ 161 ] Clark concluded that, at the Valuation Date, the market value of Value Creation’s contingent resources was in the range of $0.70 to $0.80 per barrel.

While he did not relay on a report prepared by Macquarie Equities Research in February, 2010 his conclusion was consistent with the Macquarie conclusion that the average valuation for oil sands transactions had cleared the $0.76/bbl level. [ 162 ] In valuing Terre de Grace, Clark applied the $0.70-0.80 range only to the 25% interest in Terre de Grace retained by Value Creation through its interest in the partnership with BP. The 75% interest conveyed to BP was valued at the price of the BP transaction

($0.57 per barrel). All parties agree that this was a distressed price. [ 163 ] MNP valued Terre de Grace on the basis of the CNPC/PetroChina offer. As noted previously, this was inappropriate. If consideration of received expressions of interest is the best way to value Value Creation’s properties, the BP Transaction should not be excluded. [ 164 ] Given that I have found that Value Creation was no longer in distress on the Valuation Date, I agree with Mr.

Clark that the offers received by Value Creation while Value Creation was in financial distress do not reflect the fair market value of the Value Creation resources. I accept that Mr. Clark’s approach to valuing these assets is the appropriate approach in the circumstances. [ 165 ] Value Creation is critical of Mr. Clark’s reference to the PetroChina/AOSC transactions as a comparable in respect of the valuation of Terre de Grace.

Value Creation and MNP submits that these transactions are not of value because: (1) there are material differences between AOSC’s properties and Value Creation’s properties (AOSC has probable reserves while Value Creation only has contingent resources); and (2) the PetroChina/AOSC transaction did not involve distress. [ 166 ] Mr. Clark considered the PetroChina/AOSC transactions to be comparable to Value Creation’s oil sands lease assets because the properties are located in the same formation as Terre de Grace and were in startup situations, pending regulatory approvals.

He also considered them to be fair market value benchmarks as of August 28, 2009. [ 167 ] Value Creation submits that Mr. Clark did not do the work necessary to assess whether the AOSC properties were comparable to Terre de Grace and TriStar, nor did he have the expertise to do so. It submits that RFG should have spent the approximately $300- 400,000 necessary to obtain an expert opinion on that issue. [ 168 ] Mr.

Clark used the AOSC transaction because of its timeline to the Valuation Date, the similarity of the contingent resources of AOSC’s Dover and McKay properties to the Value Creation properties (relying on information provided by Mr. Ho), the similarity of the structure of the transaction and because, effectively, a price was paid for resource barrels that did not have a tax base equal to the fair market value of the asset, thus precluding consideration of a tax shield adjustment when compared to the Value Creation resource assets.

I accept that these factors made the AOSC transaction an appropriate comparable for the Terre de Grace and TriStar assessments, without further engineering assessment. [ 169 ] Value Creation also submits that Clark erred in inflating the imputed per barrel price of the AOSC/CNPC transaction by 20% using the Claymore Index. It submits that if the transaction is used as a comparable, the per barrel price should be reduced to $0.58 based on the evidence. Whether it was appropriate for Mr.

Clark to use the Claymore Index in assessing Terre de Grace and TriStar is discussed later in this decision when the TriStar assessment is discussed. [ 170 ] I therefore accept the Clark opinion with respect to the value of the Terre de Grace contingent resources that Value Creation continued to own after the BP Transaction. 2. TriStar [ 171 ] TriStar is one of Value Creation’s key assets, and Clark and MNP came to significantly different valuations of this lease. [ 172 ] As previously noted, in valuing TriStar, Mr. Clark was aware of Mr.

Ho’s opinion that it is important to compare relative geographical features of properties in assessing market comparable transactions.

He reviewed, among others, the PetroChina/AOSC transaction, a report from McDaniel and Associates Consultants Ltd. (“McDaniel”) with respect to TriStar which corroborates Value Creation’s analysis of the qualities of the TriStar resources; and the positive changes that occurred in the oil sands market subsequent to the PetroChina/AOSC transaction and prior to the Valuation Date. [ 173 ] The result was a valuation range for TriStar of $0.70 to $0.80 per barrel, a fair market range of $365 million to $418 million. [ 174 ] In valuing TriStar, MNP used the McDaniel bitumen contingent resource estimate included in a January 5, 2010 report prepared by Genuity (the “BMO/Genuity Update”).

It also reviewed the February 1, 2010 report authored by Macquarie Equity Research. It then applied a “distress discount” of 25% to the value per barrel range. [ 175 ] MNP’s opinion is substantially premised on its “understanding” that the contingent resources of TriStar were impacted by:

a) bitumen thickness;

b) overburden;

c) insignificant drilling delineation;

d) uncertainty with respect to regulatory approval of a pilot project; and

e) the potential of “regulatory risk” with respect to “holding reservations”. [ 176 ] Mr. Ho questioned MNP’s qualifications to opine on such matters, and disagreed with all of them in a rebuttal report. MNP conceded that its understanding with respect to the quality of the resources was based only on advice from Value Creation management. I accept Mr.

Ho’s analysis of these issues on the basis of his greater expertise. [ 177 ] MNP also considered the McDaniel contingent resource estimate in the BMO/Genuity Update to the Value Creation board of directions, a Genuity Analyst Report, the Macquarie Analyst Report; and undisclosed discussions with Value Creation management but did not consider any of the McDaniel evaluations of the TriStar contingent resources. It also did not consider the Genuity advice given to the board of directors that TriStar had an NPV in excess of $1 billion, thus raising concern about its selective use of the Genuity Analyst

Report. [ 178 ] The MNP report discussed the rationale for discounting the data in the Genuity and Macquarie reports as follows: Accordingly, we initially estimated that a value range of $0.25/bbl to $0.30/bbl would be applicable to the TriStar leases ( based on our review of data contained in the Genuity and Macquarie Reports ).

However, assuming that the companies from which the pricing data in the Genuity and Macquarie Reports had been obtained enjoyed access to capital markets, were financially healthy and were not ( from what we understand ) facing potential material regulatory risk (e.g., HRS that may prohibit further development of a portion of the lease area and/or possible forfeiture of certain leased sections), (whereas VCI, as operator of TriStar, was in a distressed situation as at the Valuation Date), we applied a distress discount of 25% to the $0.25/bbl to $0.30/bbl bitumen-resource value range (Schedule 1).

Assigning the resulting $0.1875/bbl to $0.2250/bbl discounted price range to the McDaniel contingent resource estimate of 876 million bbls, we arrived at values in the rage of $164.20 million to $197.04 million for TriStar under this method. [emphasis added.] [ 179 ] As noted previously, I do not accept a “distress discount” as I have found that Value Creation was not in a position of financial distress on the Valuation Date. In addition, it appears from Mr.

Dorweiler’s testimony that MNP chose the lowest of the ranges suggested by Genuity and Macquarie on the basis that TriStar was “pre-production”, thus starting MNP’s assessment from the lowest point possible pre-discount. [ 180 ] The “HRS” regulations mentioned in the MNP report are an issue that impact only a small portion of the lease, about 7% of the resources. Mr. Clark considered this to be negligible and notes that the issue was not cited by McDaniel in its contingent resource reports. [ 18

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