Deer Creek Energy Limited v. Paulson & Co. Inc.

Court of Queen’s Bench of Alberta

Citation: Deer Creek Energy Limited v. Paulson & Co. Inc., 2008 ABQB 326

Date: 20080613

Docket: 0601 01834

Registry: Calgary

Between:

Deer Creek Energy Limited

Plaintiff

- and -

Paulson & Co. Inc., Paulson & Co. Inc. as Nominee for Account 102-30752, Paulson & Co.

Inc. As Nominee for Account 102-32544, Les Immeubles Clément Boivin Inc., Steve Boivin,

David Gabai, Donna Gabai, CGS, Ferme A. Boivin Inc., Frederick Boivin, William E. Burt,

Serge Vali Res., 9102-1574 Québec Inc., Les Bandeau Beaucerons (1985) Inc., Diane

Lecourts, Michelle Bernard, Denis Giguère, Nathalie Gosselin, Les Pouponnières Michon

Inc., Stephanie Boswell, Stephane Dolbec, Gestion Sylphia Inc., Richard Croteau, Sylvie

Gagnon Desjardines, Louis-Philippe Dorval, Yvon Dufour, Marthe Lemay, Vicky

Rodrigue, Gaétane Pouliot Boivin, Clément Boivin, Roger Dutil, André Boivin, Alain

Gariépy, Pierre Rancourt, David Gabai as Custodian for Joshua Gabai, David Gabai as

Custodian for Deina S. Gabai, François Caron, Yvon Landry, Denis Lemay, Brian Nichols,

Louison Poulin, Roger Hollick, Bennett Shapiro, Pier-Emil Rodrigue, Daniel Tremblay,

2422-7688 Québec Inc., Collette Audet

Defendants

_______________________________________________________

Reasons for Judgment

of the

Honourable Madam Justice B.E. Romaine

_______________________________________________________

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I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

II. The Relevant Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

III. History of Deer Creek . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

IV. Witness Testimony . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

A. The Deer Creek Witnesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

1. S. Barry Jackson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

2. Glen Schmidt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

3. Jean-Luc Guiziou . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

4. Jonathan Farber . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

5. Stephen Daniel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

6. Ian D. Bruce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

B. The Dissenting Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

1. John Paulson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

2. Steve Boivin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

3. David Gabai . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

C. Expert Opinion Evidence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

1. The Financial Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

a. Ian D. Bruce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

b. William Sembo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

c. Samuel L. Hayes III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

2. The Technical Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

a. Joseph Aiello . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

b. Dana B. Laustsen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

c. James H. Willmon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

d. Gregory Heath . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

3. The Valuators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

a. Darryl S. Derouin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

b. Herman Franssen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

c. Carol Crowfoot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

d. Brian W. Clark . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

i. Market Value Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

ii. Net Asset Value Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

e. William C. Dovey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96

V. Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

A. Statutory Basis for Determination of Fair Value . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

B. Adequacy of Marketing and Market Testing and the Role of Business

Judgment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106

C. Market Value Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

D. Discounted Cash Flow Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119

E. Implications of Investor Presentations and the Deer Creek Model . . . . . . . . . . . . . 122

F. Additional Arguments of the Boivin and Gabai Dissenting Shareholders . . . . . . . . 126

1. The Boivin Dissenting Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126

2. The Gabai Dissenting Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

VI. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132

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I.

Introduction

[1]

This decision involves the fair value assessment of the shares of an early-stage oil sands

company. Three groups of shareholders holding approximately 8.756 million shares exercised

their rights to dissent. Deer Creek Energy Limited (“Deer Creek”) submits that the shares have a

fair value of $31 per share, or roughly $270 million, while the dissenting shareholders submit

that their shares should be valued at between $110 per share and $200 per share, for a total of

roughly $1 billion. The transaction that gave rise to dissenting shareholder rights was the

amalgamation of Deer Creek with a newly-incorporated company in a second stage transaction a

few months after a takeover bid. The bidder, Total E & P Canada Ltd. (“Total”), acquired 82.4%

of the Deer Creek shares through the bid. In the second stage amalgamation transaction, Total

acquired all of the remaining shares.

[2]

At issue are the appropriate valuation methodology, the adequacy of the process

undertaken by the board of Deer Creek in testing the price offered against the value of the

company, the role of hindsight in fair value assessments, the implications of certain presentations

that had been made to investors and the question of whether synergies and benefits that may

have arisen from the acquisition of a control position by Total in the takeover bid either affected

the fair value of Deer Creek or should enure to the benefit of the dissenting shareholders.

II.

The Relevant Transactions

[3]

On August 2, 2005, Deer Creek announced that Total was making a bid for the issued

outstanding shares of Deer Creek, offering $25 a share.

[4] On August 5, 2005, Total issued a takeover bid circular outlining its offer, which was

open for acceptance until September 12, 2005 and required acceptance by 66-2/3 % of the Deer

Creek shareholders as a minimum condition. A Deer Creek directors’ circular accompanied the

takeover bid circular. The Deer Creek board recommended acceptance of the offer, noting that

the offered price represented a 39% premium over the stock trading price on the last day of

trading prior to the offer and a 45% premium over the weighted average trading price of Deer

Creek during the twenty days preceding the date of the offer. The Deer Creek directors’ circular

also included the fairness opinions of Goldman Sachs & Co. (“Goldman Sachs”) and Peters &

Co., Limited (“Peters & Co.”).

[5]

On August 31, 2005, Deer Creek received notice from Shell Canada Limited (“Shell”)

that it intended to make a bid for the Deer Creek shares in the amount of $31 per share. The bid

was deemed to be a superior bid as defined in an agreement reached between the Deer Creek

board and Total which would have allowed the board to terminate certain lock-up agreements

and recommend the Shell offer to the Deer Creek shareholders. In accordance with such

agreement, Total was notified of the Shell offer and given the opportunity to match it. On

September 2, 2005, Total increased its offer to $31 a share and extended the time of acceptance

to September 13, 2005.

Page: 4

[6]

On September 13, 2005, Total took up and paid for all tendered Deer Creek shares,

representing approximately 78% of the outstanding shares. The Deer Creek board was replaced

with Total nominee directors. On September 13 and 27, 2005, Total further extended its offer to

October 11, 2005. By that date, it had acquired 82.4% of the outstanding Deer Creek shares.

[7]

On November 10, 2005, Deer Creek announced a special meeting of shareholders to be

held on December 12, 2005 to consider and approve the amalgamation of Deer Creek and a

newly-incorporated company which would result in Total becoming the sole shareholder of the

amalgamated company and in the termination for cash of the interests of the Deer Creek minority

shareholders.

[8]

At the special meeting of shareholders, a majority of the remaining Deer Creek

shareholders approved the special resolution. The three groups of shareholders represented at

this hearing, the Paulson shareholders, the Boivin shareholders and the Gabai shareholders,

dissented.

[9]

On January 20, 2006, Deer Creek offered the dissenting shareholders $31 per share

pursuant to subsection 191(3) of the Alberta Business Corporations Act, R.S.A. 2000, c. B-9 (the

“ABCA”). Shareholders who did not accept the offer have the right to receive fair value for their

shares, determined as at the close of business on Friday, December 9, 2005 (the “Valuation

Date”).

III.

History of Deer Creek

[10] Deer Creek was incorporated under the ABCA on October 1, 1996. It acquired a lease

(the “Lease”) in the oil sands area of Alberta near Fort McKay and Fort McMurray in 1998. In

1999 and in the second quarter of 2005, Deer Creek purchased additional leased lands. On

August 8, 2002, Deer Creek sold a 16% interest in the Lease and certain additional lands it had

acquired at that time by permit to Enerplus Resources Fund (“Enerplus”), but Deer Creek

remained the operator of the project.

[11] The Lease and the additional leased lands acquired by Deer Creek are collectively

referred to as the “Joslyn Project”.

[12] Deer Creek began development of the Joslyn Project with venture capital invested by

Lime Rock LP (“Lime Rock”) and remained a private company until its initial public offering on

July 29, 2004, when 16,900,000 common shares were issued at $9.50 per share and the company

was listed on the Toronto Stock Exchange. On June 30, 2005, Deer Creek issued a further

3,000,000 shares at $13.60 a share. On the Valuation Date, there were, in aggregate, 53,856,904

Deer Creek common shares issued and outstanding.

[13] The technical attributes of the Joslyn Project require Steam Assisted Gravity Drainage

(“SAGD”) for the recovery of bitumen in certain parts of the property, while mining procedures

can be used in other areas. SAGD is a mining technique that involves drilling two horizontal

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wells, one above the other. Steam is then injected into the top well, which decreases the viscosity

of the bitumen, allowing it to drain into the bottom well where it is pumped to the surface.

[14] Between 1998 and March of 2001, Deer Creek built and operated a pilot SAGD project.

Regulatory approval for a 600 barrel/day SAGD Phase I was granted in May 2002. In July 2003,

Deer Creek applied for Alberta Energy Utilities Board (“AEUB”) approval of a 12,000

barrel/day SAGD Phase II. This approval was granted in May 2004. The company reported that

approximately 65% of the Phase II facility had been completed by September 30, 2005.

[15] Production from Phase I had begun in September 2004, but by late 2005, this phase had

produced at a rate of only 300 barrels/day, compared with an expected rate of 600 barrels/day.

[16] Deer Creek filed an application for a 15,000 barrel/day SAGD Phase III in March 2005.

Approval was expected by mid-2006.

[17] The company planned to build an upgrader. Upgrading involves the conversion of heavy

bitumen into a lighter crude oil that can be more readily sold to the market or used internally in

the mining operation.

IV.

Witness Testimony

[18] Because many of the witnesses in this case referred to one another’s testimony, as well as

to the reports and testimony of the various experts, there is, of necessity, considerable overlap in

the following recitation of the testimony.

A.

1.

The Deer Creek Witnesses

S. Barry Jackson

[19] S. Barry Jackson was the Chair of the board of directors of Deer Creek during the events

that occurred from the fall of 2004 until Total acquired Deer Creek. At the time of trial, Mr.

Jackson was the Chair of TransCanada Corp. and a member of the boards of Nexen Inc. and two

other energy companies. He has been active in the Calgary business community since 1974,

starting out in the facilities construction side of the oil and gas business as a senior facilities

engineer and a manager of operations and serving in senior executive capacities from 1987. He

has been involved in project and economic evaluations since the commencement of his business

career and has had specific experience since 1984 in three high-value Canadian change-of-

control transactions. Mr. Jackson became the Chair of the Deer Creek board in 2001 after being

approached both by Deer Creek’s management and by representatives of its largest shareholder,

Lime Rock.

[20] The board at the relevant time consisted of Mr. Jackson, John Clarkson, Jonathan Farber,

Ron Hiebert, Gordon Kerr, Brian Lemke and Glen Schmidt. Mr. Clarkson, one of the Lime Rock

nominees on the board, is an engineer with 23 years of oil and financial experience. Mr.

Farber’s experience is primarily on the financial side, with considerable involvement in

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corporate analysis, evaluations and financing. Mr. Hiebert is a director of private client services

with ScotiaMacleod. Mr. Kerr is a chartered accountant with 26 years of experience in the oil

and gas industry, primarily on the financial side. At the time of his service on the Deer Creek

board, he was the Chief Executive Officer of Enerplus. Mr. Lemke is a chartered accountant with

experience in the oil and gas industry similar to that of Mr. Kerr. Mr. Schmidt, the Chief

Executive Officer of Deer Creek, is an engineer with an MBA and considerable experience in the

operational side of the oil and gas industry.

[21] Mr. Jackson testified that, in his view, the board of Deer Creek was a balanced, well-

rounded group of directors who were independent and outspoken in their views. He noted that,

even when Deer Creek was a private company, the board functioned as if the company was

public with a technical committee that focussed on operating aspects, management of capital and

reserves determinations, an audit committee and a compensation committee. The board was

relatively stable, with most of the directors having been on the board for four or five years at the

time of the Total bid.

[22] Mr. Jackson described the Joslyn Project as a contiguous lease, with deposits on the west

side of the Lease deep enough for SAGD extraction and shallow deposits on the eastern side of

the Lease, which Deer Creek was contemplating mining. The overall plan was to start with

smaller SAGD projects which were easier to manage and then to “boot-strap” the company up by

adding capacity, then moving to the bigger mining projects. Deer Creek presented itself to

investors and in its annual reports as having a “one-step-at-a-time” philosophy, by which it

meant developing the SAGD projects first and following with mining. Further, the company was

splitting the SAGD projects into smaller pieces so that they were easier to finance. Mr. Jackson

commented that “frankly, we were learning as we went.” The company was proposing to do the

same with the mining part of the Lease.

[23] Mr. Jackson described several versions of the overall business plan:

a)

b)

c)

a “going-concern plan” in that Deer Creek would be actively executing

projects on a day-to-day basis;

a joint-venture business plan commencing in late 2004 that focussed on Deer

Creek finding a strategic partner; and

the prospect of a sale or a substantial reorganization implicit in Deer Creek, as in

every company, because, as Mr. Jackson put it, “there’s always a price” at which

the company is for sale.

[24] Mr. Jackson commented on the difference between conventional oil and gas projects and

oil sands projects, specifically the much longer developmental time frame and the longer

production life. He characterized the risks and uncertainties attached to the Joslyn Project in

2005 as “quite large” as it was a capital-intensive project with technical risks. Mr. Jackson

testified that on the SAGD side of the Lease the Joslyn Project was shallower than most SAGD

Page: 7

projects, which created some pressure management issues. Deer Creek was using a new water

treatment process that had never been used elsewhere. While Deer Creek had drilled

approximately 800 core holes in the Lease, there were areas where there was uncertainty and

reservoir homogeneity was an issue. On the mining side, there were issues with respect to the

quality of the ore. Mr. Jackson stated that, while Deer Creek had also drilled a number of core

holes on the mining side of the Lease, it did not have a complete picture of the reservoir.

[25] Mr. Jackson commented that at the time of the events in issue, the technology that was

being used in mining applications was in a state of flux, with various projects using different

variations of equipment.

[26] He testified that in the summer of 2005, while they were higher, there was noticeably

increased volatility in oil prices marked by dramatic changes over a relatively short period of

time. There were in the industry both high and low forecasts and a wide range of opinions

relating to oil prices. Mr. Jackson commented that the way people tend to look at bitumen prices

is to look at the top line price, such as the price for West Texas intermediate (“WTI”), and

discount that price to account for the cost of upgrading or refining the “heavy oil differential”,

which he noted moved separately from the overlying light oil or WTI price. Mr. Jackson referred

to presentations that had been made to the board and to investors indicating that, during the

period from 2002 to 2005, while the price of light oil was going up noticeably, bitumen prices

went down, and the differential between bitumen and light crude widened pretty dramatically.

[27] Mr. Jackson stated that natural gas is probably the largest component of operating costs

and a very important part of the overall cost structure for oil sands projects. In 2005, natural gas

prices were moving up dramatically. In addition, Deer Creek faced the issue of foreign exchange

risk when buying equipment in United States dollars, and foreign currency risk was also an issue

with respect to oil prices generally, as they are priced in United States dollars. Mr. Jackson

testified that, generally speaking, the higher the value of the Canadian dollar, the lower the value

of Deer Creek’s oil production in terms of revenue forecasts.

[28] Mr. Jackson testified that in the summer of 2005, Deer Creek was executing the first

commercial phase of its SAGD project, planned to be 10,000-barrels a day. It was confident of

capital costs on this phase because it had completed all necessary engineering studies, committed

to all major contracts and was well into construction. This phase was to be followed by two

subsequent SAGD phases of 15,000 barrels a day. At that point, the plan was to do this in two

parts, although Mr. Jackson commented that it may well have been completed as one phase when

matters got to execution stage. There was greater uncertainty on the future phases of SAGD

production as they were farther out in time and there was uncertainty in the costs environment at

the time.

[29] Mr. Jackson stated that Deer Creek was two years away from any definitive cost

estimates with respect to the mining part of the Joslyn Project. The only information the board

and management had was what they were seeing from the experience of other operations. The

same was true of any kind of upgrading facility. He noted that in the summer of 2005, other oil

Page: 8

sands operations were under pressure with respect to costs. Deer Creek had seen cost overruns at

the Syncrude, Suncor and Shell projects in the area of 75-80%, amounting to billions of dollars.

There were in excess of 30 projects being contemplated in the Athabasca area, a large number of

which were trying to work their way through a narrow time frame, competing for engineering

personnel, material, labour, time in front of the regulators, virtually all aspects of development.

In the summer of 2005, uncertainties surrounding capital costs were, in his words, “substantial”.

[30] In the summer of 2005, Deer Creek was on budget and on time with respect to its overall

project time table in terms of its activities on the first SAGD phase of 10,000 barrels-a-day, but

Mr. Jackson pointed out that this was in the range of 1% of total capital requirements for the

project.

[31] Deer Creek’s first phase of SAGD development was small for the industry, since most

projects were at the 30,000 barrel-a-day level. This was deliberate, as it made financing easier

and allowed Deer Creek to work with different equipment suppliers than other project operators.

Since equipment size requirements were smaller, Deer Creek could use some conventional oil

and gas equipment fabricators and could be a non-union operator. It was questionable whether

these cost-savings efforts could continue for the next two phases of SAGD development, and

certainly they would not have been available when Deer Creek got to the mining stage, when it

would be in direct competition for resources with existing projects. Mr. Jackson commented that

virtually every aspect of operating costs had some uncertainty to it.

[32] Deer Creek had not yet commenced the regulatory process and had a two-year window in

its schedule for completing that part of development. It was expected that there would have to be

a public hearing. There were issues relating to environmental impact, water usage and royalty

structures. Specifically, the development of the mining part of the project would require Deer

Creek to reroute a creek that passed through a First Nations reserve downstream, which may

have raised issues. Mr. Jackson stated that delays in the regulatory process would have

implications for the value of the project, as would any requirements related to environmental

impact. He noted that any change in the royalty structure would have a significant impact on the

project, and in the summer of 2005, Deer Creek was starting to see a public call for review of the

oil sands royalty structure. Deer Creek was aware of a disagreement between Suncor and the

government about what could be included in costs prior to payout for the purpose of the royalty

shelter.

[33] With respect to the ability to finance capital costs, the board recognized that Deer Creek,

as a small company, would face issues in the market relating to ability to execute the project and

attract resources for which there was stiff competition. Once in the course of development, the

company would be subject to the vagaries of commodity pricing. Deer Creek recognized that, as

external capital was going to have to be a combination of debt and equity, there would be

dilution of its existing shareholders.

[34] Mr. Jackson testified that, particularly in his experience as a board member of a potential

buyer company, risks of this type of asset would be evaluated on a project-specific basis.

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2.

Glen Schmidt

[35] The CEO of Deer Creek, Mr. Schmidt, who holds a B.Sc. in chemical engineering and a

masters degree in business administration, has worked in the oil and gas industry for over

twenty-five years in capacities at the senior level ranging from the development and operation of

projects to their financing and management. He had previously been involved in two significant

corporate reorganizations, and several smaller corporate transactions.

[36] Mr. Schmidt testified about what he perceived to be the major uncertainties and risks

facing Deer Creek in the commodity pricing area. He identified some “significant drivers”. Mr.

Schmidt cited sensitivity to WTI. Because the Joslyn Project is a heavy oil project, it is “hyper-

sensitive” to the heavy oil differential and the resulting heavy oil price. Mr. Schmidt testified

that since natural gas is the base case fuel for both the mining and the SAGD part of the project,

the price of natural gas dominates operating costs.

[37] Mr. Schmidt noted that there was considerable volatility in the price of natural gas in the

summer and fall of 2005, peaking in the fall. While oil prices were higher, differentials

continued to be volatile. Mr. Schmidt explained that widening differentials not only degrade the

value of the blended heavy oil product, they increase proportionately the cost of the diluent

required to get the product into a pipeline, and can eliminate any operating profit. He gave as an

example the experience of one operator in 2006 which, despite a $70/bbl. price of oil, was left in

a position of an operating loss after the purchase of synthetics required for operation.

[38] Mr. Schmidt testified that when Deer Creek began its detailed project valuation to set the

stage for development, the Canadian dollar was worth about 65 cents U.S., but that, over time, it

had grown to 85 and 90 cents, again affecting the project’s operating margin.

[39] Mr. Schmidt noted that the Deer Creek project was behind Suncor and Syncrude, which

had onstream operations and expansions, Shell, which had obtained regulatory approval and had

come onstream, UTS, which had obtained regulatory approval, and CNRL, which had filed its

application for regulatory approval. Deer Creek thus was further back in the queue of projects

and faced the risk of more onerous conditions to approval. Deer Creek was also aware of the risk

of change to the royalty regime.

[40] Mr. Schmidt testified that, in terms of capital costs, when Deer Creek began to plan the

SAGD part of the Lease, it had used the $10,000 per flowing barrel of production costs that had

been the experience of the McKay River project. Expected costs had grown to roughly $16,000

per flowing barrel. In 2005, Deer Creek recognized that further inflation of costs was a

possibility. Mining capital costs were following a similar trend.

[41] With respect to financial risks, Mr. Schmidt testified that the issue for Deer Creek was

always its ability to raise capital, its price and availability and the impact of dilution. He

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commented that the portion of the Joslyn Project that the then current shareholders would be able

to retain was a function of Deer Creek’s ability to raise capital and advance the project.

[42] In 2004, when Deer Creek undertook its initial public offering, Mr. Schmidt had a target

share price of $12.50 in mind, based on the Company’s financial model and feedback from a

number of investment bankers. The price Deer Creek was able to obtain, however, was $9.50 a

share, reflecting the risking of the Deer Creek project by the market. In June 2005, although the

share price had peaked at about $18.00 a share, Deer Creek’s need for capital had required it to

issue securities at $13.60 a share. This sent the message to the board and management that, while

Deer Creek could approximate its expectations on price, the market would always tell it what it

was prepared to pay.

[43] Mr. Jackson and Mr. Schmidt described the shareholder base of Deer Creek from its

initial public offering to the Total transactions as being largely institutional, to the extent of 60 to

70%, particularly as Deer Creek raised money for execution of the project. It was thus relatively

stable, and the Deer Creek board hoped such institutional shareholders would continue to invest

in Deer Creek’s equity. These were very sophisticated investors and thorough in their analysis.

Mr. Schmidt commented that many of them had investments in other oil sands projects. Mr.

Jackson noted that Deer Creek’s second largest shareholder after Lime Rock was the Wellington

Fund which, like many long-term institutional investors, had depth in research capability. Mr.

Jackson compared the investor analysis that this type of institutional investor did with the kind of

analysis outsiders would do before making an acquisition of assets.

[44] Deer Creek undertook a large number of investor presentations in 2005 throughout North

America and Europe in order to communicate Deer Creek’s development strategy to the market.

Mr. Schmidt testified that it was clear from investor feedback that they had a clear understanding

of the “hot button” issues, the points that Deer Creek had to address. He said that resource risk

was a risk that Deer Creek could address relatively easily, but that the issues of capital cost,

capital cost uncertainty, price uncertainty, and more importantly, uncertainty over the issue of

upgrading came into sharper focus in the spring of 2005.

[45] Mr. Schmidt testified about his understanding of the relationship between the Deer Creek

step-by-step approach to development and the prospect of shareholder dilution. Deer Creek had

very few staff. In order to develop the project, Deer Creek had to continuously bring in new

shareholders, thus diluting its shareholder base. It had to demonstrate that it could develop the

project with its relatively small staff by taking a step-by-step approach, demonstrating to the

market that it could execute on its plans. The one-step-at-a-time approach was necessary,

financially and practically. Deer Creek expected that it would need to raise capital annually.

[46] Mr. Jackson testified about a strategy session that the Deer Creek board held from

October 4 to October 7, 2004. He noted that the board typically held a set of meetings once a

year where it took a break from day-to-day matters to focus on critical issues, “critical threats”,

and whether the company needed to change course. At these sessions, the board would also look

at cost estimates, the status of development and opportunities that might need to be pursued.

Page: 11

Outside speakers would be brought in to address the directors about commodity prices or

reserves, depending on the agenda. In addition to these strategy sessions, the board would meet

quarterly to review financial information and to be updated on operations. It would also meet

between quarterly meetings as necessary.

[47] Mr. Jackson referred to the materials from the October 2004 session. Under the title

“Opportunity/Threat Session”, the directors reviewed key opportunities and threats. They also

reviewed a presentation on Deer Creek’s trading history. Mr. Jackson testified that these

presentations told the board that the market was valuing the company differently than might be

done by looking merely at the reserve and resource evaluation done by the company’s

independent evaluators, GLJ Petroleum Consultants (“GLJ”) and assuming that the project

would be executed on time at the costs and price assumed in the reserve and resource reports. It

appeared that the market would take a different view of risk and how Deer Creek would fare in

comparison to other projects in execution. Mr. Jackson indicated that the directors decided to

continue with project execution and, as time went on and more of the project was completed, to

communicate with the market about Deer Creek’s accomplishments and the results it had

achieved to minimize risk. He noted that this was the reason for the number of investor

presentations in 2005, to communicate with the market and to make sure it was informed about

the potential of the company and where it was in terms of development.

[48] Mr. Jackson testified that it was probably during the October 2004 session that the Deer

Creek board decided that bringing in a partner would be a good thing. The board decided that

there were a number of companies with in-house expertise in oil sands development and

potentially a better opportunity to attract the kind of resources needed to develop a project like

the Joslyn Project. He noted that in early 2005, the board would have seen the market’s

favourable reaction to the UTS/Petro-Canada transaction. Deer Creek was looking for a company

that had oil sands experience (the “Shells of the world, the Suncors” as Mr. Jackson put it),

mining experience, financial capability, upgrading experience and large project management

experience. Mr. Jackson testified that there were not a lot of companies in that category and,

given that Deer Creek was looking for an entity with integrated oil sands experience, that

decreased the number in the pool.

[49] In the spring of 2005, Deer Creek created a list of eleven companies that had what it

perceived were the necessary qualifications. Mr. Jackson testified that, broadly speaking, there

were three groups - a small group with integrated oil sands experience which was the most

attractive, another group with mining experience and third group that simply had the money

required.

[50] Mr. Jackson’s involvement was to concentrate on the first group. He participated with

Mr. Schmidt and other Deer Creek senior officers in meetings with representatives of Total,

Chevron, Shell and Suncor. He also spoke several times with the CEO of ConocoPhillips

Canada. These meetings spanned the first two quarters of 2005.

Page: 12

[51] Mr. Jackson said that he learned that these companies were very knowledgeable about

Deer Creek. This did not surprise him as, in his view, there was not a lot of confidential

information about Deer Creek, given the way it was disclosing itself to the public. Deer Creek’s

core hole drilling information had to be disclosed publicly within a year of drilling, so it was

only the last season of such drilling that was not publicly available. Some of the companies on

the list had, as Mr. Jackson put it, “scrubbed down Deer Creek”, and were not looking for

additional information.

[52] Mr. Jackson referred to an e-mail dated May 4, 2005 that Mr. Schmidt had sent to him

and other members of the Executive Committee of the board. The e-mail referred to a document

to be put before the board at its next meeting in May entitled “Corporate Valuation and Scenario

Mapping”, designed to be an overall view of value of Deer Creek. Mr. Schmidt set out a list of

questions that were to be addressed by this mapping. The first was “[w]hat is the total

undiscounted project value”. The valuation material included a slide that defined unrisked net

project value using both the GLJ valuation of reserves and resources and Deer Creek’s internal

model. Mr. Schmidt in the e-mail explained that the slide showed that, in general, the net

economic value expected to be created by the Joslyn Project would be approximately $3, $6, or

$9 billion at real oil prices of $30, $40 or $50. When Mr. Schmidt started the process, he was

interested in seeing how the Deer Creek internal model compared to the GLJ valuation. In

addition, this allowed the board to look at the unrisked project value, in Mr. Jackson’s words, “to

give us a view of the size of the prize.” This calculation used WTI prices, assumed a heavy oil

differential of 30% between those prices and bitumen and used an 82 cent Canadian dollar. Mr.

Schmidt used the then current view of capital costs, timing of those costs and operating costs.

[53] Mr. Jackson testified that virtually none of the risks he had identified earlier in his

testimony were taken into account in calculating these $3, $6 and $9 billion values. He noted that

the discount rate of 8% used in the modelling also did not factor in any of these risks. Mr.

Jackson verified that a table found in an investor presentation made to the CAPP Investment

Symposium in June 2005 indicating net present value, net to Deer Creek at WTI oil prices of

$30, $40, and $50 was taken from the same modelling done in the May presentation to the board.

In Mr. Jackson’s view, it was typical for companies at an early stage of development to make

this kind of presentation on project potential, as other companies such as Opti and UTS would

use many of the same assumptions and parameters.

[54] In another slide of the valuation to be presented to the board entitled “Data Table for

NAV Chart”, Mr. Schmidt attempted to show how the market would not accept an unrisked

project value when looking at a company like Deer Creek, as the market’s view of risks was

going to be much harsher given how far Deer Creek was at this time from execution of the

significant mining pieces of the project. This slide attempted to analyse how the market might

risk the project. In the e-mail, Mr. Schmidt commented that the slide

. . .illustrates the risking of a 2010 stock price as a check on a full disposition value. On a

mid case basis it suggests that $30 to $40 per share might be a risked full disposition

Page: 13

value. At $1.5 to 2.0 billion this is a discount of 50% of the low range of the project MPV

to a 85% discount on the high price range.

Mr. Jackson commented that Mr. Schmidt’s assumption of discount rate in preparing this slide

was “reasonably arbitrary”.

[55] The e-mail then proceeded to consider the dilution that might be experienced by Deer

`Creek in the course of its development. Mr. Schmidt prepared a slide that modelled the potential

range of dilution at different oil prices. Mr. Jackson commented that it was important to note in

reviewing this modelling that the company would have to fund virtually all cost overruns with

equity, giving higher values of dilution than shown in the slide. The modelling was based on

Deer Creek’s knowledge of costs and cost of capital as of early 2005. The valuation also

included an analysis of what percentage a partner might need to acquire of the Joslyn Lease and

at what price to make economic sense for both Deer Creek and the partner.

[56] Mr. Jackson was also referred to a presentation made to the board on June 28, 2005

entitled “Summary Valuation Analysis”. In this presentation, Mr. Schmidt compared Deer

Creek’s current market price against what its unrisked, full growth net asset value per share

would be at certain oil prices, with the same information on three other oil sands companies.

Again, this modelling did not take into account the risks that Mr. Jackson had identified in his

testimony. Mr. Schmidt also prepared a slide for the directors that indicated that at $16.49 (the

then trading price), various market analysts showed Deer Creek as having, on average, a net

asset value of $15.89, indicating that Deer Creek shares were trading at slightly more than its net

asset value in their opinion. In this presentation, Mr. Schmidt told the board that Deer Creek’s

full growth risked net asset value demonstrates that the implied market risking discount reduces

with execution. In Mr. Jackson’s view, what was being conveyed was that as Deer Creek

proceeded further along with development of the project and eliminated risks (for example, after

it got through the regulatory process or executed the next phase of SAGD or had completed the

design phase of the mine), the market would reward the company with better share prices. Mr.

Jackson’s view at this time was that the presentation indicated that the market had a different

view of risk for Deer Creek than for other projects, and that, looking at those other projects, that

was not unreasonable.

[57] Mr. Jackson explained that one of the companies that formed part of the analysis, UTS,

was farther along the process of development than Deer Creek, had commenced the regulatory

process, had completed design work, executed major contracts and was well into construction,

putting it many years ahead of Deer Creek. The Western Oil Sands project was an operating

project. Mr. Jackson commented that these companies had dramatically different risk profiles

than did Deer Creek.

[58] Mr. Jackson commented on the wide variance in discounted cash flow calculations found

in the reports of various experts who testified in this case. He noted that, in his experience, this

was common when a development model was long-term, as it was with Deer Creek, as the longer

the duration of the model, the wider the variability in output. Mr. Jackson pointed out that

Page: 14

seemingly small changes in the input assumptions of the models can make dramatic changes in

outputs. For example, he noted that a 10 cent change in the Canadian dollar at a discount rate of

8% would affect the value of the project by approximately $1.5 billion.

[59] Mr. Jackson said that, as Chair of Deer Creek, he looked at a number of views of value,

assessed risks and potential for cost overruns or delays, looked at other transactions in the same

industry sector and listened to Deer Creek’s advisors when coming to a conclusion on value.

[60] Mr. Jackson was asked to comment on the “Future Opportunities” part of the June 2005

CAPP Investment Symposium presentation, particularly the reference to developing an

upgrading solution from an established bitumen base. Mr. Jackson noted that more than half of

the value of Deer Creek would be related to upgrading. Upgrading was characterized as a future

opportunity because Deer Creek had done virtually no work in that area, other than looking at

cost histories of other facilities. He stated that Deer Creek was probably two years away from

making a decision about how it would proceed with upgrading. There was a range of alternatives

available, from building an upgrader to contracting-out upgrading or having a partner with an

upgrader. Not much analysis had yet been done on whether to proceed with a coker or a

hydrocracker type of upgrader.

[61] With respect to the cost estimates that formed the basis for the June 2005 CAPP

presentation, Mr. Jackson commented that design work had not been completed with respect to

either the mine or the upgrader, so that these estimates were based on the cost history of other

projects, revised to the size of the Deer Creek project on a dollars per barrel of capacity basis.

The detailed engineering work on the mine was not scheduled to be completed until some time in

2007. Mr. Jackson testified that costs could not be calculated with any degree of certainty until

after the design work and the execution of major contracts, so that certainty on costs would not

have been available until late 2007 or early 2008. Deer Creek recognized the pressure on costs

from seeing how the cost estimates of other projects turned out to be substantially wrong, and

how the market reacted to that.

[62] The regulatory process on the mine was scheduled to take about two years from filing in

late 2005 or early 2006.

[63] Mr. Jackson testified that Deer Creek used an 8% after tax discount rate in its net present

value presentation to CAPP in June 2005 because that was a typical rate used by other

companies in the early stage of development in this type of presentation. He commented that

there was “no magic” about this discount rate, but that clearly it was not reflective of risk. Nor

did it indicate that these companies would trade at that discount rate, which they did not.

[64] Mr. Jackson testified that an 8% discount rate may be appropriate for specific value

rather than potential value for a project that had a relatively short-term production profile or was

unique in terms of its risk profile. Deer Creek “had lots of risk, very long time frame.” Mr.

Jackson noted that there was no evidence that the market misunderstood this form of net present

Page: 15

value presentation, but that it was important for Deer Creek to continue to tell the market about

its potential.

[65] Mr. Jackson highlighted information in the CAPP investor presentation that showed the

dramatic widening of the differential in price between bitumen and light oil, with the price of

bitumen going down. He also noted information that showed the impact of exchange rate

movements and the heavy oil differential on operating margins, and how they eroded as the

value of the Canadian dollar or the heavy oil differential increased. Other parts of the investor

presentation show how changes in other assumptions affect the operating margins of the project,

including changes in the price of oil, changes in capital expenditures and changes in the price of

gas.

[66] Mr. Jackson addressed the approach taken by the dissenting shareholders in this hearing

in dividing a net present value number like $6.7 billion found in the investor presentations by the

number of outstanding shares of Deer Creek at the time to come up with a value of $140 per

share. He pointed out that the board would not calculate value in that way, because such a

calculation assumes no further issuance of shares and thus no dilution. The board knew that at a

minimum, Deer Creek would be issuing a significant amount of new equity in the future.

[67] Mr. Jackson was not extensively involved in negotiations when Deer Creek was in the

early stages of looking for a joint venture partner, but when Total made its en bloc bid, he

became Deer Creek’s principal negotiator. On Total’s side, Jean-Luc Guiziou was the primary

negotiator.

3.

Jean-Luc Guiziou

[68] Mr. Guiziou is the head of the finance group of Total SA. At the time of the bid, he was

president of Total. Mr. Guiziou is a geophysicist who has been with Total for approximately 18

years, latterly in the corporate finance area.

[69] Mr. Guiziou’s initial role in early 2005 was to support Total’s negotiation team with

respect to a potential joint venture participation with Deer Creek. During the process leading to

the takeover bid itself, he led the negotiation team in Calgary.

[70] Total became interested in Deer Creek through an informal suggestion made by a Lime

Rock director in the fall of 2004. Mr. Clarkson introduced Total to Deer Creek’s management

and negotiations on a standstill and confidentiality agreement began. On Saturday, January 15,

2005, Mr. Schmidt sent an e-mail to Mr. Jackson, Mr. Clarkson and Mr. Farber commenting on

Total and other options to optimize capitalization.

[71] In the e-mail, Mr. Schmidt noted that Total “and several Asian players” had been

“circling trying to determine where they may be able to participate or enter the oil sands.” He

commented that Deer Creek’s strategy with these parties was to advise them that “its data was

Page: 16

public and if they wished to make a compelling proposal, Deer Creek would evaluate it but that,

as a small company we are fully engaged in developing our project.”

[72] Mr. Schmidt stated in the e-mail that the reason Deer Creek management was

recommending this strategy to the board was its recognition that control of the project had

material value and that there was a scarcity of oil sands projects of the scale of Deer Creek. Mr.

Schmidt referenced a discussion he had with William Sembo, an investment banker with RBC

Dominion Securities Inc., relating to advice on negotiating with the Asian prospects, and Mr.

Sembo’s confirmation that Deer Creek should continue with its existing strategy. Mr. Schmidt

commented that “(t)he punch line is; our strategy is based on the conclusion that our asset is

scarce and becoming more valuable, ie. the least dilution today is our mantra.”

[73] In the e-mail, Mr. Schmidt queried how motivated Total was to do a deal, and noted that

its upgrading experience could advance Deer Creek’s prospects of upgrading from 2014 to 2011.

He set out the advantages and disadvantages of doing a deal with Total and noted that Deer

Creek’s modelling, “full cycle for the project”, anticipated dilution of between 25-50% to current

shareholders. He commented that a current future development net asset value per share,

including all requirements, would be between $15 and $25 per share. He stated that the starting

point for a discussion with Total should be a structure that would have Deer Creek receive $450

million for half of Deer Creek’s interest in the Joslyn Project.

[74] Mr. Schmidt commented that “[t]his analysis reflects that to be indifferent to staying the

course, Total has a material valuation threshold to reach.”

[75] Mr. Schmidt suggested in the e-mail that there was no pressure on Deer Creek to act

“now”, that if it could extract a non-binding proposal from Total, it should, and that it should ask

Enerplus to express an interest in increasing its share of the project to 30%. The e-mail referred

to the need to update the financial scenario modelling once Deer Creek had more public year-end

reserve data on other oil sands projects. Mr. Schmidt testified that his conclusion was that further

discussions with Total were merited because it could “bring things to the table”, but that these

discussions should be done on a measured basis.

[76] The e-mail concluded with some recommendations on the negotiations with Total

relating to the standstill and confidentiality agreement, including a recommendation to undertake

a full data room-like process if Total made a proposal of material value to stretch the time, since

a partnership between UTS and another company was being discussed (which Mr. Schmidt

testified did eventually materialize) and the results might provide price support for Deer Creek

and decrease Total’s options.

[77] The e-mail suggested that Total’s interest raised the following issues that should be

addressed by management:

-

Can [Deer Creek] manage its financing risk through the sale of an additional

interest opposed to equity?

Page: 17

-

Update the financial scenario modelling to define the valuation indifferent points

for [joint venture] and equity options

Provide this information by April 1, noting that any work with Total will take

time and the reserve data on Deer Creek’s peer group would not be available until

March 1.

[78] On February 2, 2005, Mr. Guiziou and his colleague Barry Anderson met with Mr.

Jackson to verify that Deer Creek might be looking for a joint venture partner. Mr. Jackson

explained Deer Creek’s business plan and current status, including its recognition that it needed

a strategic partner to undertake downstream operations and upgrading and to provide

competence in mining. Total saw Deer Creek and the Joslyn Project as a good fit for its

development strategy in the Athabasca oil sands. Total already had an interest in a thermal

project and saw Joslyn as a very early stage project, a resource base for future development.

[79] Deer Creek and Total entered into a standstill and confidentiality agreement in February

2005. Mr. Jackson and Mr. Schmidt testified that, from Deer Creek’s perspective, the standstill

provisions of the agreement were its most important aspect. Mr. Jackson and Mr. Farber noted

that there was little confidential information on Deer Creek because of its stage of development

and public disclosure requirements. Mr. Schmidt described the confidential information that

would be made available to Total under the agreement as the detailed information behind the

publicly-disclosed reserve report and the detailed back-up to Deer Creek’s publicly-disclosed

financial statements, information that would confirm value and the size of the reserves. Mr.

Guiziou noted that the most important data Total received under the agreement was related to the

last drilling season’s wells, which turned out to confirm Total’s view about the quality of the

resource from its review of the publicly-available data.

[80] Mr. Schmidt commented that the process of negotiating a joint venture agreement

allowed Total as a potential partner the opportunity to evaluate the management of Deer Creek,

rather than just the project. The board and management of Deer Creek were focussed on the

standstill provisions, which would prevent Total from side-stepping the board and dealing

directly with the market. Deer Creek recognized that when a prospective joint venture partner

evaluated the Joslyn Project, it was a very small step to being interested in acquiring 100% of the

company. It was essential that a potential partner not be allowed to go directly to the market and

issue a hostile takeover bid after it had been given the opportunity to evaluate the project for

joint venture purposes.

[81] Mr. Guiziou and his team did some work internally and met with Mr. Schmidt on April 4,

2005, hearing much the same message about Deer Creek’s staged development plan and need for

a partner to provide support and solutions for downstream production.

[82] Mr. Schmidt sent a memo to the Deer Creek directors on April 20, 2005 in preparation

for a board meeting on April 21, 2005. Mr. Schmidt testified that it was clear that Deer Creek

had come to the point of having to address upgrading. It had assessed the parties that had the

Page: 18

ability to be involved in a joint venture transaction of this magnitude and that had upgrading

capability. It had conducted “well over a dozen more serious discussions” with potential joint

venture parties, which proved valuable in Mr. Schmidt’s view when it came to negotiating the

corporate transaction with Total. Mr. Schmidt noted that this process informed Deer Creek of the

capability of prospective partners and what their needs and expectations would be.

[83] On April 21, 2005, Total made an offer to buy 51% of the Lease, which translated to

roughly 60% of Deer Creek’s interest in the Joslyn Project, for $240 million, payable in three

stages. The first $90 million would be payable on closing, the second upon the first two phases

of the mine being approved by the AEUB and the last $90 million would be payable when the

joint venture partners decided to proceed after obtaining regulatory approval. Mr. Guiziou

testified that the offer was designed to be close in equivalent value to the prevailing share price

for Deer Creek. Mr. Guiziou commented that it was out of the question for Total to offer a

premium to the equivalent share price on a single asset company merely to acquire a piece of the

asset.

[84] Deer Creek refused the offer, advising that it was prepared to sell only a minority interest

in the project and would require a premium to equivalent share price. Mr. Schmidt commented

that Deer Creek “rejected [the offer] out of hand”.

[85] Deer Creek updated its internal corporate valuation and scenario mapping in early May

2005. The document that was sent to Deer Creek’s board was developed to address, among other

issues, Deer Creek’s total undiscounted project value. The documentation included a slide which

showed unrisked net project value using both GLJ’s reserve and resource valuation and Deer

Creek’s internal model valuation of $3, $6, or $9 billion under real oil prices of $30, $40 or $50.

Mr. Schmidt described the purpose of this slide as a view of Deer Creek’s resources, applying a

price forecast and a capital assumption, without taking into account any risks of execution or

capital and without taking into account dilution. He noted that this was not a corporate

evaluation; it was a project evaluation. The e-mail that was provided to directors with the

updated valuation noted that one of the slides illustrated a risking of a 2010 stock price as a

check on a full disposition value. Mr. Schmidt noted in the e-mail that “[o]n a mid case basis it

suggests that $30 to $40 per share might be a risked full disposition value.” Mr. Schmidt

explained that this was just one way that Deer Creek management and the board measured value

and that it was an early stage analysis from which refinements were made as time went by.

[86] On May 20, 2005, Shell offered to buy the mine portion of the Joslyn Project for $450

million. The offer commences with reference to a “fulsome” exchange of views on upgrading

options and a statement that there were too many significant uncertainties and variables to

provide any definitive commitments with respect to upgrading at that stage. Again, Deer Creek

was not interested in the offer. Deer Creek’s analysis of the Shell offer was that it amounted to

roughly $15 to $17 a share. Mr. Schmidt in an analysis to the board dated May 23, 2005 on both

the Shell and Total offers commented that a proposal in the order of $20 per share (equivalent)

potentially would motivate Deer Creek to hire an advisor to work with a short list of interested

parties which met the criteria of credibility and capability to deliver access to upgrading with the

Page: 19

objective of using a competitive process to identify the most attractive proposal. He noted that a

proposal approaching $30 per share (equivalent) could be considered for exclusive negotiation.

The Deer Creek stock price was about $13-14 per share at that time. Mr. Schmidt testified that

the management and board of Deer Creek had recognized the possibility that a third party might

make a bid to acquire Deer Creek’s shares from about the time of the October 2004 annual

strategy session. Deer Creek had decided to attempt to counter that threat through its strategy of

communicating with the market.

4.

Jonathan Farber

[87] Jonathan Farber, one of the Lime Rock nominees on the Deer Creek board, had worked at

Goldman Sachs, first as financial analyst and then as a research analyst on oil and gas

exploration companies from 1990 to 1995, covering many Canadian oil and gas companies

active in Alberta. After a short period managing an energy portfolio for an investment company,

Mr. Farber returned to Goldman Sachs on the investment banking side for two years, working on

a number of large Canadian corporate transactions. In 1998, Mr. Farber was one of the founders

of Lime Rock, a firm that focuses on making investments in small oil and gas and oil service

companies. Lime Rock had investments in about 40 companies globally at the time of the

hearing.

[88] Lime Rock’s investment strategy is to make long-term investments in what it considers to

be well-managed small oil and gas companies. It requires a 10-year locked-up commitment from

the investors, with a further two-year optional extension period. In 2005, Lime Rock managed

four different investment funds totalling approximately $2.1 billion.

[89] Lime Rock had been involved with Deer Creek since its inception in early 1998 and

ultimately invested approximately $13 million in the company, initially through a debenture

financing that was converted to common shares before Deer Creek went public. At the time in

question, Lime Rock held approximately 32% of Deer Creek’s common shares.

[90] Mr. Farber echoed Mr. Schmidt’s view of the board’s recognition of the risks of the joint

venture process, testifying that, while Deer Creek was looking for a joint venture partner, the

directors recognized that many of the companies Deer Creek was talking to would not be

interested in a minority position in the project and that there was a strong chance that the

discussion would move in the direction of an outright business acquisition.

[91] Mr. Jackson referred to a valuation update prepared by Mr. Schmidt and his staff on June

7, 2005. In this document, Mr. Schmidt analysed the extent to which the market was risking Deer

Creek as it moved forward in its development plans and applied these risk values to share price,

assuming a certain range of commodity price differentials and exchange ratios. Mr. Jackson

commented that this analysis was still based on base case unrisked cost assumptions. Mr.

Schmidt testified that the analysis reinforced Deer Creek’s understanding from the potential joint

venture partners to whom it had been talking that no-one viewed Deer Creek as having a credible

plan for upgrading, such that upgrading value was “was discounted to 0". The analysis looked at

Page: 20

the project from two different perspectives. One of them forecast future share prices and

discounted those back to present day, taking into account the prospective rate of return investors

would demand in order to invest in the project at this early state. This analysis yielded a

calculated range of values of between $13 and $60 per share. The other analysis showed an

unrisked net asset value per share including upgrading of between $25.56 and $107.26 per share

and a risked net asset value per share of between $8.48 and $35.45 per share. On June 10, 2005,

Mr. Schmidt provided the Deer Creek directors with another valuation analysis, looking at value

on the basis of comparable transactions on a dollar per barrel of resource analysis and a

percentage of the mine basis, and comparing these approaches to Deer Creek’s corporate model.

[92] Negotiations continued with Total and others on the possibility of a joint venture. Mr.

Guiziou testified that Total began to conclude that it would be very difficult for it and Deer

Creek to find common ground on a joint venture, given their respective expectations. Internally,

Total determined that the only way it would consider offering a premium to the existing market

price would be through an offer to purchase the entire company.

[93] Mr. Guiziou described the roughly six months of negotiations with Deer Creek as being

very professional, well-informed on both sides, serious and quite intense at the takeover bid

stage.

5.

Stephen Daniel

[94] Mr. Schmidt testified that Deer Creek had begun the process of engaging Goldman Sachs

as a financial advisor in mid-June 2005. Stephen Daniel was the senior member of the Goldman

Sachs team. Mr. Daniel has a degree in mechanical engineering, spent the next seven years post-

university at Esso Resources in Calgary working on its oil sands technologies and completed his

MBA in 1994. He then joined Goldman Sachs in New York, attached to the energy and power

group with some work in mergers and acquisitions and moved to Houston in 1998 to help build

Goldman Sachs’ energy team. He is a partner and managing director of Goldman Sachs, heading

the energy sector of investment banking for the Americas.

[95] Mr. Daniel testified that he met with Mr. Jackson and some of the other Deer Creek

directors in early June 2005 to discuss whether Goldman Sachs would be engaged as financial

advisor to the company. A Goldman Sachs team then began to meet with Deer Creek

management to review the company and its assets and begin its modelling and review of external

issues affecting Deer Creek at that point in time, subject to being able to work out a satisfactory

engagement letter. The team consisted of Mr. Daniel, Brady Paris, Anastasia Deulina, Rakesh

Wilson, Ian Patel and one or two analysts.

[96] Mr. Daniel testified that the focus at this time was the various alternatives for Deer Creek

going forward given its business plan and its needs. A presentation made by Goldman Sachs to

Deer Creek on June 24, 2005 focussed on the concept of exchanging assets, trading some of the

Deer Creek resource for downstream components. However, Mr. Daniel noted that the

negotiation of the Goldman Sachs engagement letter and the work undertaken in June 2005

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contemplated the possibility of an en bloc offer for Deer Creek emerging and included the

engagement of Goldman Sachs for that type of transaction, as well as the exchange of assets type

of transaction. The engagement letter confirms Goldman Sachs’ retainer as financial advisors:

in connection with the possible creation of a joint venture, alliance or other

similar business combination, or asset sale, swap or exchange between the

Company and a third party, and in connection with responding to any proposals

the Company may receive to acquire a majority of the common stock of, or merge

with, the Company.

[97] Mr. Daniel testified that at the time of the June 24, 2005 presentation, Mr. Schmidt was

contemplating that Deer Creek would devise a process to seek out alliances or partnerships with

parties who could help Deer Creek to effect its business plan and the presentation sets out what a

timeline for that process might look like. Mr. Daniel testified that the negotiation of the

engagement letter took quite a period of time because the Deer Creek people were tough

negotiators, but it was accelerated once the Total offer of July 15, 2005 was received.

[98] Mr. Daniel testified that Goldman Sachs begins an engagement such as the one it had

with Deer Creek with diligence to understand the company’s assets and financial modelling. By

the time the process is finished, it amounts to “a fairly rigorous exercise ... to scrub the model

down” and to ensure that Goldman Sachs is satisfied with it. Mr. Daniel noted that Deer Creek

had a fairly elaborate model that tried to forecast cash flow over a very long period of time. The

Goldman Sachs work was not focussed on valuation per se, but on understanding the assets, the

alternatives and the potential of the assets. In this case, it culminated in the fairness opinion on

the takeover bid.

[99] Mr. Daniel noted that Goldman Sachs’ early work was on launching a process to seek a

partner. On June 30, 2005, Mr. Schmidt reported to the board that Goldman Sachs was a little

behind in understanding the oil sands business, but that management was pushing them. He said

that Goldman Sachs had progressed to a very full understanding of Deer Creek management’s

views of value and were working on a confidential information memorandum for discussions

with potential joint partners. Mr. Schmidt disagreed with the suggestion that Goldman Sachs was

to undertake a sequential process, first understanding the business and then getting down to

actually looking for potential joint venture partners. He described the retainer as a “dual

process”, with Goldman Sachs “getting up to speed” at the same time it was participating in

negotiations with potential joint venture partners and concurrently preparing a description of the

company in a confidential information memorandum.

[100] Mr. Jackson referred to a report prepared by Deer Creek management during the last

week of June 2005, indicating the status of discussions with eleven companies that had the

characteristics that Deer Creek was looking for in a joint venture partner. These characteristics

were an interest in oil sands development, experience in mining and financial capability. As

previously described, Mr. Jackson had personally had discussions with five of the companies on

the list. One had indicated an interest at an extremely low per share equivalent price. Of the other

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three excluding Total, Mr. Jackson commented that the Chief Executive Officers he had

contacted had indicated that they had done “a full scrub down of Deer Creek’s assets” based on

publicly available information. When Mr. Jackson attempted to interest these companies in

executing a confidentiality agreement, they declined because they were not interested in limiting

themselves with any standstill obligations.

[101] Mr. Schmidt noted that discussions with some of the companies on the list had been

ongoing from early in 2005, and others for a much longer period of time. He also testified that it

was clear that these companies were well aware of the characteristics and dimensions of the Deer

Creek project. He said that in most cases, they neither needed nor wanted confidential

information about Deer Creek, noting specifically that Shell had indicated a lack of interest in

executing a confidentiality agreement, Suncor had told Deer Creek that it had already evaluated

the project, and Deer Creek had similar feedback from ConocoPhillips.

[102] Mr. Daniel testified that it was clear to Goldman Sachs when the list of eleven potential

parties was formally put together that Deer Creek had communicated with these parties at some

point going back to the latter part of 2004 and, according to his notes, Goldman Sachs started to

round out its knowledge of the contacts the company had made previously with potential third

parties around June 17, 2005.

[103] Mr. Daniel commented that the release of confidential information about Deer Creek to a

third party in the context of an acquisition proposal was, because of the characteristics of Deer

Creek’s assets and the amount of publicly available data, something a third party might want to

confirm what it had already developed, but not nearly as critical as it would be in a case where

there was less transparency about the company.

[104] In a Summary Valuation Analysis prepared for Goldman Sachs dated June 28, 2005,

Deer Creek management graphed Deer Creek’s unrisked project value on a per share basis

against that of three other oil sands projects. The documentation also includes a “full growth

risked” net asset value per share number for Deer Creek of $15.28 at $30 oil and $28.26 at $40

oil, noting that analysts were using price targets of $40 oil. Mr. Schmidt stated that the $30 and

$40 oil price range was what Deer Creek was comfortable with for business decisions.

[105] The Goldman Sachs presentation also indicated that Deer Creek was viewed by the

market as having higher risk than UTS, Opti or Western Oil Sands. Mr. Schmidt testified that, in

his view, the dominant reason for this was uncertainty about upgrading, as the other companies

had partners and financing for an upgrading solution.

[106] Mr. Schmidt stated that the assessment of a range of risked value of $15.28 to $28.26 was

not used in presentations to investors because Deer Creek was not in a position that it felt

comfortable forecasting dilution for its shareholders, that that would be “pretty aggressive”

disclosure.

Page: 23

[107] In referring to the presentation he had made at the CAPP conference in June 2005, Mr.

Schmidt indicated that the $3, $6 and $9 billion figures in the table entitled “Net Present Value -

Net to Deer Creek” were included as a description of the dimension of the project. He testified

that Deer Creek used unrisked numbers of this sort in an investor presentation because it needed

to be consistent in its disclosure with the peer group of UTS, Opti and Western Oil Sands. He

testified that that peer group in their internet presentations and in their communications with

investors had to address the issue of the size of their projects. Deer Creek did the same, applying

the same economic parameters, leaving to investors the assessment of relative value, risk,

uncertainty and dilution.

[108] Mr. Schmidt noted that in the June investor presentation, upgrading was described as a

“Future Opportunity” because Deer Creek had done only conceptual work on an upgrader and

did not have the capacity to address it. He testified that the presentation recognized that the

project could supply the production to support an upgrader but “corporately, we had not put in

place the plans to in fact execute, or the capability to execute.” The conceptual studies that had

been done on costs of an upgrader were on an “order of magnitude estimate.” Deer Creek had

not assessed whether it might eventually use a coker or a hydrocracker upgrading process, and

was still several years away from assessing this.

[109] Mr. Schmidt testified that the costs used in the CAPP presentation were the then current

costs. Deer Creek was at a fairly advanced level on costs estimates on its first commercial phase

of mining, but only at the preliminary feasibility, or about 50% uncertainty, level with respect to

the rest of the mining, and only at the conceptual level on upgrading. Deer Creek was cognizant

of the inflationary trend in project costs.

[110] Mr. Schmidt commented that the 8% after tax discount rate included in the assumptions

that underlie the $3, $6 and $9 billion numbers in the Net Present Value table in the investor

presentations was “just a time value discount to give you an economic picture.” He testified that

Deer Creek used this discount rate for consistency with its peer group and because it was used by

a majority of the analysts. He stated that for a project to be valued at an 8% discount rate for

risked value rather than project potential would require certainty, and clearly there was

uncertainty about the long-term commodity forecast, the heavy oil differential, true capital costs,

inflation on capital costs, the price and availability of equity and dilution. He testified that to

take a value from the investor presentations of $6.7 billion and divide it by outstanding shares to

get a per share value of $140, as the dissenting shareholders had done, had no meaning, as it did

not “address all of the drivers.”

[111] Mr. Schmidt commented that the numbers in the presentation were based to the extent of

about half of the volume of production on upgrading, and Deer Creek had no degree of certainty

on upgrading. It also had no degree of certainty on dilution, but expected that half of the value of

the project would have to be relinquished through dilution.

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[112] Mr. Schmidt also noted that the possibility of project delays loomed large in the summer

of 2005, as there was a queue of projects attempting to get regulatory approval. If the project was

delayed by four years, that would have truncated value on a per share basis by about half.

[113] On July 13, 2005, Total’s management made a presentation to its executive committee

(“COMEX”) for approval to make an offer to acquire the shares of Deer Creek. The presentation

was authored by various teams within Total with different expertise in geoscience, project

development, costing and finance. The authority to approve the offer rested with the COMEX.

Mr. Guiziou had a supporting role in the presentation to provide an overview and local context.

[114] Mr. Guiziou commented that Deer Creek management had conveyed to Total that it felt

Deer Creek was most comparable to UTS as a project, and had also mentioned Opti and Western

Oil Sands. Total came to agree that UTS was probably the closest comparable company to Deer

Creek, but that the former was further down the road to development, having received AEUB

approval to develop its project and having aligned itself with a strategic partner.

[115] Mr. Guiziou testified that, while Deer Creek management had indicated from the start of

negotiations that it wanted to capture value in terms of upgrading the bitumen produced from the

project, it had no specific plan as to how to achieve that objective. When Total prepared its offer,

it fully factored in the development of an upgrader for the project.

[116] The Total COMEX authorized an offer for Deer Creek at a price of $20.50, which was

delivered to Mr. Jackson by Mr. Guiziou and another Total team member on Friday, July 15,

2005. The market price of Deer Creek shares at that time was $16.75, so the offer represented a

22% premium to trading value. The offer was open until 10:00 a.m. the following Wednesday.

[117] Mr. Jackson advised some of the directors, Mr. Schmidt and Mr. Kowal (the Chief

Financial Officer of Deer Creek) by e-mail of the offer presented to him that evening. He said

that his initial reaction, expressed to the Total representatives, was that the offer was too low,

but, given that it involved a noticeable premium to the market price, he would take it to the

board. Mr. Schmidt was in China at the time, talking to an Asian company on the potential joint

venture partner list, and Mr. Jackson’s e-mail noted that it was likely that Total was concerned

that Mr. Schmidt might come back with a deal, and that this may have prompted their proposal at

that particular time. Mr. Jackson’s e-mail indicated that he advised the Total representatives that,

while the offer was at a premium to market, “the market was not fully evaluating the company”,

and that, given the plans to complete the second phase of the mine and prepare a regulatory

submission, Total’s offer would be competing with the Deer Creek board’s view of where the

market would be in a year. The e-mail noted that, while Total could not launch a hostile takeover

bid given the standstill provisions of the confidentiality agreement, the board had a fiduciary

duty to consider the offer fully, even if it decided not to accept it.

[118] Mr. Guiziou confirmed Mr. Jackson’s reaction on being presented with the offer and

noted that Mr. Jackson advised the Total representatives that Deer Creek had a business model in

which it believed, that this business model was the offer’s biggest competition, that a corporate

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offer was a different route from previous negotiations and that the board would assess the value

of such an offer to shareholders on the basis of where the share price would be if Deer Creek was

further down the road in its development. Mr. Jackson advised the Total representatives that the

Deer Creek board believed that when it achieved the milestones of the start-up of the second

phase of its mining operations and the regulatory filing, the market would recognize this in the

share price.

[119] At this point, Deer Creek formalized arrangements with Goldman Sachs and then with

Peters & Co. as joint financial advisors. Mr. Jackson testified that Deer Creek engaged these

advisors for assistance with the Total proposal and also to facilitate an extended reach into the

chief executive offices of the companies on the potential joint venture list. The focus for

Goldman Sachs was the ability to provide access to senior management of other potential

companies quickly, and the focus for Peters & Co. was its detailed knowledge of Deer Creek

from its past involvement with the company and its knowledge of local business. Mr. Jackson

noted that there were no limits on the mandate of the financial advisors, contrary to what was

suggested by one of the experts called by the dissenting shareholders.

[120] A board meeting was scheduled for 5:00 p.m. on Saturday, July 16, 2005. By Saturday

morning at 10:00, Mr. Jackson had prepared a memo listing a range of alternatives for the board.

The memo was prepared before the financial advisors had been formally retained and was based

on Mr. Jackson’s experience with this kind of situation. These alternatives, which Mr. Jackson

noted were not in any specific order, ranged from “just saying no” to formalizing a public

auction process. Mr. Jackson commented that he thought that the “just say no” option was where

the board would land, but that his memo was just a list to get the directors to think about the

possible alternatives.

[121] The memo also refers to the retainer of Goldman Sachs and Peters & Co. and comments

that Goldman Sachs had, as Mr. Jackson explained it, a “reasonably harsh view of the risks”

facing Deer Creek and initially held a low view of the company’s value. Mr. Jackson noted that

Goldman Sachs needed further education on the value of the company. He noted that Goldman

Sachs did come to understand how the Deer Creek board and management was viewing risk and

to agree with it.

6.

Ian D. Bruce

[122] Ian D. Bruce, the President and Chief Executive Officer of Peters & Co., testified for

Deer Creek as both a factual witness, given his involvement as one of Deer Creek’s financial

advisors during the period of time in question, and an expert witness.

[123] Mr. Bruce is a chartered business valuator in addition to being a chartered accountant. At

the time he testified, he had been with Peters & Co. for nine years, its president for four. Prior to

joining Peters & Co., Mr. Bruce had been associated with Dominion Securities for twelve years

and with Scotia McLeod Markets for four years. Mr. Bruce testified that, while his job does not

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require analysis and judgments on valuation matters on a daily basis, it is a continuous part of the

firm’s business.

[124] Mr. Bruce testified that he and the other members of the Peters & Co. team who had been

retained as financial advisors on the transactions in issue had previous intensive involvement

with Deer Creek. Peters & Co. had been involved in all of Deer Creek’s public issuances of

securities, in most cases as lead equity agent or underwriter and had acted as advisor to Deer

Creek on the sale of a 16% working interest in the Joslyn Project to Enerplus. Mr. Bruce himself

held a significant investment in shares of Deer Creek.

[125] Peters & Co. was first formally engaged as co-advisor on July 17, 2005 in the wake of

Total’s offer of $20.50 per share. There had been earlier discussions between Deer Creek and

Peters & Co. about adding Peters & Co. to the Goldman Sachs team on the joint venture partner

search as a Calgary-based local advisor.

[126] Mr. Bruce was personally present at all of the board meetings that were held between

Deer Creek’s receipt of Total’s initial offer and the completion of the takeover bid, other than the

first board meeting of July 16, 2005. Peters & Co. set up a “war-room” in its offices, and Mr.

Jackson and some of the other directors spent a great deal of time there between board meetings.

Members of the Goldman Sachs team were also present in the war-room most of the time.

[127] The Peters & Co. team was led by Mr. Bruce and included Chris Potter, Peters & Co.’s

head of corporate finance, Brad Fedora, and two or three more junior professionals. Mike Tims,

another senior partner of Peters & Co., became involved later in August. The team was engaged

in the Deer Creek process for about 90% of their time during the period from initial engagement

to the completion of the bid.

[128] At noon on Monday, July 18, 2005, the board met again. The directors were given advice

by outside counsel about their fiduciary duties in the face of the Total offer. They were updated

on the status of negotiations with potential joint venture parties. They reviewed the Total offer

and concluded that the offer was not sufficiently compelling to push the board into exclusive

discussions with Total, particularly given the process underway to identify a joint venture

partner. The minutes of that meeting note that the board recognized its duty to review and

canvass all opportunities, including the company’s current business plan, prior to rejecting the

offer. The board discussed which of the eleven potential joint venture partners would be in a

position “to respond expeditiously with a focussed proposal for a third party participation

arrangement”, and management identified six possibilities. The board decided to ask the

financial advisors to a) assemble a list of potential parties to approach about a participation

arrangement, b) draft a framework for responding to Total and approaching other parties and c)

draft a formal response to the Total offer. The next meeting was set for 8:00 p.m. on Tuesday,

July 19, 2005 to finalize a response to Total.

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[129] Mr. Daniel stated that, once the process began, the question for the board was “[w]hat is

the right place to land in terms of process all the way from ‘just say no’ to running a public

auction.” He characterized the discussions as follows:

It was one of on the one hand we have a proposal by a party that is well

positioned to consummate at a premium that is respectable. And so we have that

on the one hand. On the other hand, if we wanted to go to the right hand of that

spectrum, we would run the risk that this all becomes a public exercise, which

could result in stock generated in places it didn’t belong. And if ultimately

nothing happened, then we could end up with, you know, a very bad outcome for

a bunch of our stockholders. So there were all kinds of conversations about that

balance, and debate. Ultimately the board had to decide what actions it would like

to take, if any.

[130] Mr. Bruce’s notes confirm that Mr. Daniel gave the board a briefing on the process and

the options available to them. He reminded the board that, in a situation of this kind, conducting

a high-quality, high-tone process was critical to putting the board in a position to make a well-

informed decision as to what to do. One of the board members commented that if a full-shop

process was conducted, it would be very difficult for anyone to ascribe any liability to the board,

a comment that Mr. Bruce described as not a suggestion to engage in a full auction, but a

reminder of one of its benefits.

[131] At the July 19, 2005 meeting, the board discussed whether it would be necessary to

establish an independent committee of directors and concluded that it was not. Mr. Jackson

testified that the board looked at the position of each director. Mr. Schmidt’s management role

was discussed and the board concluded that his equity position in the company outweighed any

potential conflicts. Mr. Jackson commented that, as the process continued, the board revisited the

issue of potential conflicts from time to time, identifying discussions that occurred with respect

to Mr. Farber as a Lime Rock nominated director and Mr. Kerr as an Enerplus nominated

director. He noted that Mr. Kerr was excluded from board discussions when Total was

negotiating with Enerplus about its option to convert its interest to Deer Creek shares.

[132] Mr. Daniel testified that his recollection of the discussion about the necessity for an

independent committee nominee was that the board recognized that, as long as the Lime Rock

directors were acting in the best interests of all the Deer Creek shareholders and not just their

own constituency, they could continue to be part of the board’s deliberations.

[133] Mr. Bruce testified that, during the discussion at the board meeting about whether any of

the board members were conflicted, or could be perceived as having conflicts, the two Lime

Rock nominees, Mr. Farber and Mr. Clarkson, and Mr. Kerr of Enerplus were identified as

having the potential for a conflict. The concern with the Lime Rock nominees was that, given

that private capital firms like Lime Rock typically have an end date for realization on

investments that are raised through various funds, a perception could arise that the board

member was under some pressure to turn an equity position into cash if a fund was close to the

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anticipated wind-up date and still had unliquidated investments. The Lime Rock nominated

directors advised the board that the funds that it had invested in Deer Creek had five years

remaining until their projected end date and that, even at that point, Lime Rock could canvass its

institutional investors and ask for an extension or distribute the Deer Creek shares held in the

funds directly. On that basis, it was decided that there was no pressure on the Lime Rock

nominee directors that would be a concern. Enerplus was a direct, joint-venture working interest

holder in the Joslyn Project. There was discussion as to whether Enerplus might be a potential

acquirer of Deer Creek equity, but it was decided that it was unlikely to be able to afford the

massive capital investment necessary to develop the Joslyn Project, so this was rejected as a

conflicts issue.

[134] Mr. Bruce testified that the board’s collective decision was that the directors understood

the potential conflicts of interest that might arise with respect to the three directors identified,

that they considered the fact that they had been an active, engaged board together for some

period of time, and, having been well briefed on the issue and aware of the possible conflicts,

they preferred to operate as a full board.

[135] The board again reviewed the range of alternatives, received an update on operations and

project costs and heard some initial views from the financial advisors on the value of the

company, the timing of pursuing alternatives and the implications of pursuing one course of

strategy over another.

[136] Mr. Bruce testified that there was protracted discussion at the board meeting as to

whether the Total offer was serious. The financial advisors and counsel collectively advised the

board that it had to be viewed that way, as Total had the capability to finance an upgrading

solution and had offered a price that was materially above the then trading price of Deer Creek.

There was board discussion of whether the offer was “compelling” relative to the business plans

of Deer Creek for the intermediate (18 - 24 months) future. The conclusion was that the offer

was not compelling at that price.

[137] The board concluded that it would reject the Total offer but, given that Mr. Schmidt

would not arrive from China until later that evening, adjourned the meeting to 7:00 a.m. the next

morning.

[138] The minutes of the meeting of July 19, 2005 reconvened to 7:00 a.m on July 20, 2005

reflect that Mr. Schmidt updated the board on his positive discussions with the Asian company.

According to the minutes, Mr. Schmidt also commented that, in his view, the greatest value for

shareholders in the relatively near term would be a joint venture agreement with a significant

industry participant. Mr. Schmidt testified that the Asian company was a credible alternative,

with financial and upgrading capacity, but that it had informed Mr. Schmidt that the Deer Creek

opportunity was competing with another international opportunity it was considering. After

hearing Mr. Schmidt’s comments, the board confirmed its rejection of the Total offer.

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[139] Mr. Bruce’s notes of the board meeting indicate that a comment was made that the offer

reflected an “uptick” of $1 billion over the then-estimated cost of providing an upgrading

solution for the project, but that Mr. Jackson commented that these early costs estimates were

“heroic”, implying that it was very early in Deer Creek’s stage of development to be estimating

costs and that the costs could be much higher than forecast at that point. Mr. Schmidt followed

up with a comment that the early estimates as to costs did not have enough rigour and discipline

to be dependable. The discussion that followed focussed on the fact that, at Deer Creek’s then

state of development, the costs estimates were a “scoping estimate” as opposed to a fully-

developed, forensic-quality estimate.

[140] Mr. Bruce’s notes of the board meeting reflect that Mr. Daniel again reminded the board

that the sanctity of the process was essential. Mr. Bruce commented that he made the notation

“broken record” to reflect the fact that Mr. Daniel said this so many times to the directors.

[141] Mr. Jackson testified that, in addition to the two- or three-hour board meetings that were

held in this five day period, there were discussions among the board members, management and

the financial advisors. The retainer of the advisors was being finalized and the advisors were

busy refining their valuation models. There was contact with some of the companies on the list

of potentially interested parties.

[142] Shell had made a joint-venture proposal the day before the July 18, 2005 board meeting,

essentially to acquire a 68% working interest in the mine and a 16% working interest in the

SAGD part of the Lease with a loose commitment on upgrading. That proposal was discussed,

and the board was advised that Shell’s financial advisors were suggesting that its proposal gave a

“huge” premium over the underlying or trading share price of Deer Creek, something in the area

of $20 - $24 per share. The Deer Creek financial advisors did not agree with that suggestion, and

their calculations reflected a value to the Shell proposal more in line with $13 - $15 a share.

[143] One of the elements of the process of looking at value involved Deer Creek’s

management reviewing and updating its costs estimates to see if there were any changes. In an

analysis dated July 21, 2005, management reported a projected cost increase for the project of

approximately $818 million, giving a new estimate of total development costs of $9.6 billion.

[144] This “Preliminary Updated Capital Projection” report indicated net asset value per share

on an unrisked basis ranging from $14.40 to $82.60 depending on the price of oil and the

discount factor used. Mr. Schmidt indicated that these numbers did not take into account any of

the risks he had described.

[145] The full working group of Goldman Sachs, Peters & Co., some of the Deer Creek board

members and senior management developed a list dated July 19, 2005 of parties that might be

interested in Deer Creek as potential transaction partners. This “Potentially Interested Parties”

list was divided into three parts: A for potential parties that the working group believed would be

very interested in participating and that were involved in the oil sands business in some fashion,

B for mildly interested parties and C for parties that were less likely to be interested. The criteria

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for the A list were financial capability, followed by an expression of interest in oil sands and the

ability to bring an upgrading solution to the project. There were seven companies on the A list,

two below a line. The five companies above the line were Total, Shell, Chevron, ConocoPhillips,

and the Chinese National Petroleum Corporation (“CNPC”). Suncor and Murphy Oil were below

the line in view of the tenor of previous communications with Deer Creek. Mr. Bruce explained

that generally in this type of process, the advisors prefer to have five names on the A list, but had

added the other two as parties that, while it was sensed they might not be interested, should be

contacted as well. Mr. Jackson commented that the working group thought that if Total came

back with a bid that passed an acceptable threshold for Deer Creek and it was clear that there

would be a bid for the whole company, the companies above the line were the ones that the

working group would want to hear from before concluding anything with Total. There were eight

companies on the B list and eight on the C list, plus two broad categories of entities that might

have an interest. Mr. Bruce commented that the working group members did their utmost to

contact the A list names, knowing that if an interested party was left out, it would have an

opportunity to make an offer during the minimum 35 days required by securities regulations for a

takeover bid to be outstanding from the time it was announced. Mr. Jackson noted that the five

companies above the line on the A list were those with which Deer Creek had already had

relatively recent and significant contact.

[146] Mr. Daniel noted that the financial advisors and the company recognized that parties who

might be interested in acquiring Deer Creek would recognize that they were not talking about a

billion dollar takeover deal, but effectively an eleven billion dollar deal over time, given the

costs of development. He commented that companies on the B and C list were lower priority as

candidates given what the company and the financial advisors knew about their financial

capability, size or existing stake in the oil sands. He stated that his personal view on the

probability of the Asian company producing an offer was that this was fairly remote.

[147] Expanding on the issue of contact with potentially interested parties, Mr. Schmidt

testified that:

a)

b)

Deer Creek had held discussions with Suncor dating back to 2002, that it

had had “continuous dialogue” with Suncor;

Deer Creek had concluded a number of discussions through the second quarter of

2005 with Chevron, both in Calgary and in Houston, and Chevron had engaged

financial advisors to support it in its goal of considering expansion in the oil

sands;

c)

d)

Mr. Jackson knew the chief executive officer of ConocoPhillips and had

discussed Deer Creek’s plans with him;

Deer Creek had held active discussions with CNPC; and

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e)

Deer Creek had held discussions with Murphy Oil in some detail through

members of its management team in the previous year, and Deer Creek knew

Murphy had funds and was looking for acquisitions in the oil sands.

[148] Mr. Schmidt testified that Deer Creek recognized that some of the names on the A list

lacked sufficient motivation to move quickly and, from existing feedback, were not going to

reach the price level Deer Creek thought appropriate. He stated that one of the reasons for not

talking to everyone on the list was that Deer Creek was concerned about confidentiality of the

process and wanted it to be well-managed. Deer Creek still had in mind as a possible outcome

the continuation of a search for a joint venture partner. The B parties on the list did not have

either the financial or the upgrading capability that Deer Creek was looking for, or had made

decisions that Deer Creek expected to interfere with their ability to make an offer, and the C

parties had only one or two of the three factors Deer Creek was looking for. Mr. Schmidt

described in some detail the previous feedback Deer Creek had received from the companies on

the B and C lists to explain why Deer Creek management felt they were less likely to be

interested in making an offer.

[149] Mr. Jackson contacted the chief executive officers of three of the companies above the

line on the A list to enquire whether they would be interested in making an offer and to advise

them that Deer Creek was potentially receptive to an en bloc transaction. He suggested that they

might be interested in executing a confidentiality agreement, but no-one took up that suggestion.

One of these companies suggested that the time frame for response was too tight, although Mr.

Jackson suggests that this may have been a bargaining position given subsequent events.

[150] Mr. Bruce testified about a meeting of the working group held on Sunday, July 17, 2005

at which the group discussed an agenda for the board meeting that would follow on Monday,

July 18, 2005. The working group recognized that, in any process of the kind faced by the Deer

Creek board upon the delivery of the Total offer, there were really four alternatives: to do

nothing, to undertake a one-off transaction where no other parties would be approached, to

undertake a limited scope private marketing or to undertake a broad, full auction. These

alternatives were discussed intensively by the board at the July 18, 2005 meeting. Mr. Bruce

noted that the board’s external counsel had prepared a memorandum on the obligations of the

board in such a situation, including a full review of case law with respect to the duties of

directors faced with an unsolicited offer. Mr. Bruce testified that, in his view, the board and the

financial advisors were well-informed by counsel about the law in this area.

[151] Mr. Bruce’s notes, taken during working group meetings and board meetings, disclose

comments by members of the working group and board members on the likelihood that parties

on the potentially interested list would be interested in discussing an offer, and include

comments on the history of past discussions and comments that had been made by those parties

more recently to working group members.

[152] Mr. Jackson and Mr. Schmidt hand-delivered the formal refusal of the Total $20.50 offer

to Mr. Guiziou and other members of the Total team on July 20, 2005. Mr. Guiziou testified that

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Mr. Jackson told the Total team that the en bloc offer made by Total was not Deer Creek’s prime

alternative, but that, at the end of the day, the mandate of the board and management of Deer

Creek was to maximize value for shareholders, so they would not preclude any alternative. In

response to Total’s request for a period of exclusivity to finalize a deal, Mr. Jackson advised

them that Total would have to earn such exclusivity. Mr. Bruce commented that the board and

advisors expected that Total might have more money to put on the table. It was decided that Mr.

Jackson should meet again with Total.

[153] Mr. Daniel testified that the working group discussed who, tactically, would be the best

person to go back to the other A list parties and solicit either a joint venture or an en bloc offer,

and that, then, the whole group would report back and re-assess the situation. Mr. Daniel

testified there were “numerous conversations” that occurred about contact with the A list. He

explained that the board had to make a tradeoff between the possibility of generating additional

offers and the risk of the whole exercise becoming public. He noted that the board thought that

the $20.50 offer could be improved upon, but also that, if Deer Creek shareholders knew that the

board had an offer at such a material premium to the stock price in hand and just dismissed it

outright, they would not view the board as having done a good service for shareholders.

[154] Mr. Schmidt testified that Deer Creek’s strategy throughout its negotiations with Total

was a) to maintain confidentiality so it had control of the process and could manage outcomes; b)

to come to a clear understanding of value; and c) to determine what would accrue the greater

value through negotiations. Prior to the Total offer, there had been “a lot of tire kicking” and

Deer Creek had not gone through the process of answering the question of what number would

be a value at which there would be an equivalence between carrying on the project through a

joint venture and a disposition.

[155] On July 22, 2005, the board met with its legal and financial advisors and Mr. Jackson

provided an update on further discussions he and Mr. Schmidt had had with Total since the

rejection of its offer. Mr. Jackson advised Total that its offer was not compelling and that Deer

Creek wished to carry on joint venture discussions. Total indicated it still preferred an en bloc

transaction. Total asked whether the Deer Creek board had received a “proposal” as

contemplated in the confidentiality agreement from any other party. Mr. Jackson confirmed that

it had not, but was discussing joint venture transactions with various parties. Total indicated that

it was interested and wanted to negotiate on an exclusive basis, and Mr. Jackson indicated that

Deer Creek was not prepared to do that.

[156] The minutes reflect that the board discussed with its financial advisors what a compelling

offer would be in light of historical industry transactions and the opportunities available to the

company. The board concluded generally that unless an offer exceeded $24 a share the company

would be able to create greater value for shareholders in the near term by moving forward with

its joint venture efforts. Mr. Jackson indicated that, by this time, there had been a number of

discussions about value. He stressed that a great deal of business judgment had to be brought to

bear in coming to this conclusion, because it was necessary for the directors to look at the

valuation models, the project, the relationships between all the risk areas, the level of risks

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compared to other companies in the market and what the market was saying about the company.

He commented that each board member would have a view as to fair value, and that they had

heard from the financial advisors before settling on $24 as a compelling offer.

[157] Mr. Jackson explained that, dating back to the board meeting following the first Total

offer, when the directors looked at the range of alternatives before them, they recognized that if

they were not going to just say no and not going to have a public auction, but if they thought

Total was going to come up with a compelling offer, they needed to think about how they would

get some pre-announcement market feedback to check their value threshold.

[158] Mr. Farber commented on the Deer Creek board’s conclusion at its July 22, 2005

meeting. He testified that, in addition to the work the board had done previously on valuation, it

had by then reviewed work done by Goldman Sachs and by Peters & Co. He stated:

We had thought about comparable valuation metrics in the marketplace,

transactions that other oil sands companies had engaged in, and we also, you

know, [were] mindful of where the stock was trading. We had an actively-traded

stock, the price of which was determined by the consensus of, you know, the top

Canadian institutions which own the shares. And when somebody comes forward

at $24, I think that would have been 70 or 80 percent premium to the settled share

price, and that becomes a level where you have to take a bid a lot more seriously.

So that’s how we came up with that number.

[159] Mr. Farber testified that, given Total’s July 15, 2005 offer for $20.50, the directors felt it

was a significant possibility that Total would come back with a higher offer that might be

acceptable to the board. They thought that if other companies had wanted to do something along

similar lines to the Total offer, they would have previously indicated interest, but the board

decided “just to create certainty” to go back to the other parties with which Deer Creek had had

discussions and which were capable and potential counterparties in this type of transaction to

make it clear that the company would consider an en bloc form of transaction.

[160] The board also discussed the process of obtaining pre- and post- market checks on value

in light of Total’s continued interest. The minutes reflect that the company sought to get relevant

information from the other parties with which it had been having discussions with a view to

soliciting joint venture or en bloc proposals, thus obtaining additional independent evaluations as

to the value of Deer Creek in a change of control situation.

[161] On July 24, 2005, the financial advisors met with Shell’s financial advisor, who

presented a new proposal for an investment in the Joslyn Project, which Shell was suggesting

should be valued at $21.95 per year.

[162] On July 25, 2005, Mr. Guiziou and other members of the Total negotiating team met

again with Mr. Jackson and Mr. Schmidt. Mr. Guiziou testified that while Total was still

interested, it realized it did not know what price would be compelling enough to move forward.

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The Total team conveyed the message that a meeting of financial advisors had not been a

productive exercise. Mr. Jackson noted at the meeting that since the joint venture process had

been informal, Deer Creek lacked feedback on price, but that Deer Creek understood that Total

was willing to pre-empt the joint venture process, and that in order to do so, it would have to

meet a price that Deer Creek found attractive. The Deer Creek team indicated that, on a dollar

per barrel basis, Deer Creek still had a gap in its share price vis-à-vis its peer group and noted

that transactions that had occurred earlier that year involving UTS, Opti and Western Oil Sands

were predicated on valuations using a price of oil close to $40 a barrel. In short, Mr. Jackson

said, Total should put its best offer on the table.

[163] On July 26, 2005, in response to what Mr. Schmidt referred to as a “giddy-up phone call”

to the Chinese company he had met with previously, Mr. Schmidt received a letter from the

company indicating it was interested and had started to assess the Deer Creek project.

[164] The board met again on July 26, 2005 with its legal and financial advisors. Mr. Daniel

reported on the meeting between the Deer Creek and Total financial advisors at which Deer

Creek’s financial advisors relayed the message that the board was not in a position to advise

what price Total could offer to be in a position of exclusivity, and that the company believed that

a joint venture arrangement might be best for shareholders. Mr. Daniel also reported on the

meeting with Shell’s financial advisor and its model designed to explain Shell’s view of the

value of Deer Creek.

[165] Mr. Daniel’s notes disclose that the board was brought up to date on how the process

began with discussions for finding a joint venture partner, conversations with the eleven

Potentially Interested Parties over several months, and then the focus on the smaller group of

Total and four others and the results of those discussions. Goldman Sachs also advised the board

of how it was progressing in refining its work on the Deer Creek discounted cash flow modelling

and the results that were emerging.

[166] Mr. Daniel testified from his notes that he commented to the board that the discounted

cash flow analysis done by Goldman Sachs was based on the company’s model, which ran to

2039 and involved production ramping up from virtually nothing to 200,000 barrels a day net,

resulting on a cumulative basis in production of approximately 1.8 billion barrels of bitumen. He

reminded the board that the total capital program anticipated by the model at that point in time

looked to be about $9.7 billion Canadian unescalated, of which $1 billion was allocated to the

SAGD component, $4 billion for mining, and just under $5 billion for the upgrading component.

Mr. Daniel advised the board that Goldman Sachs had employed other assumptions, the most

important of which was the price of crude oil. Their work assumed full SAGD operations by

2010, mining starting by 2011 and being in full swing by 2020 and upgrading onstream by 2013.

[167] Mr. Daniel reminded the board that the discounted cash flow was the value today of the

cash flows expected in the future at estimated costs of capital, and the cost of capital would

range between 10 - 15% using the classic capital asset pricing theory, as would be typical in an

assignment like this. Mr. Daniel testified that, while earlier modelling by Goldman Sachs had

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used discount rates that started as low as 7 or 8% without necessarily drawing any conclusions

about them, this changed as their financial modelling became more refined and the Goldman

Sachs team made a considered judgment on the range. Mr. Daniel testified that if a 7 - 9%

discount rate was appropriate for this company, he would not invest in it, since it was possible to

buy other investments that would yield higher value and far less risk. He later noted that it

“doesn’t make any sense to me whatsoever” to utilize an 8% rate of return on a company

deploying a huge capital program in areas where it has never gone before. The real question was

“[w]hat would investors be expecting to hold the stock at, taking into account the riskiness of the

investment?”

[168] In the presentation to the board, Mr. Daniel gave the directors a “glimpse” of what “some

of the outputs” looked like using after tax discount rates of 10, 12 and 14%. Goldman Sachs

assumed an oil price using a Five-Year Forward Strip to US $35 WTI flat reverting to a “more

normalized level” of $30, $35 and $40, which produced certain per share values.

[169] The numbers at $35 oil were $37.45 at a 10% discount rate, $22.55 at a 12% discount

rate and $12.69 at a 14% discount rate. Mr. Daniel testified that he was sure he emphasized to

the board that they could see “how incredibly sensitive the answer is to the discount rate one

uses” and the commodity price assumptions. He also emphasized that over half the discounted

cash flow of Deer Creek was attributable to upgrading in which the company had little

experience.

[170] Mr. Daniel explained that Goldman Sachs was using long-term oil prices on a flat basis

because the project was a very long-date project, to reflect that commodity prices go both up and

down. In addition to assumptions about commodity prices, Goldman Sachs had to tie in cost

assumptions, which it left unescalated. Mr. Daniel testified that, given the concern at that time

about the cost and availability of labour, and what was happening to costs in other projects, the

modelling could probably be criticized for being low on the issue of costs.

[171] Mr. Jackson reported on his meeting with Total in which he again stressed Deer Creek’s

preference for a joint venture, but suggested that Total put its best offer on the table. Mr. Jackson

testified that Total had asked what he characterized as a bizarre question, that, if it offered a

compelling price, would Deer Creek consider a pre-emptive arrangement or would it feel there

had to be an auction. Mr. Jackson’s answer was that, in the event of a compelling offer, Deer

Creek would consider the kind of arrangement that eventually was reached in this case, being

some feedback from the market pre-announcement and then a process that allowed other bids

post-announcement.

[172] Mr. Jackson described how he had concluded the discussion with Total by advising Total

that, as Deer Creek was still in a process to seek out a joint venture partner, he would have to

talk to the board to see if he could “get some colour” on what a compelling price would be. Mr.

Jackson testified that he was getting the sense by this time that Deer Creek would be able to get

an offer from Total that exceeded the board’s previously identified $24 threshold.

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[173] Mr. Schmidt summarized the status of negotiations with other parties and the minutes

specifically refer to five of them. He reported that, while all these parties had expressed an

interest in pursuing some kind of transaction with Deer Creek, they were having trouble with the

current market share price, which by then had moved to $18 a share. Mr. Farber explained that

the directors were aware that other potential bidders had been advised that there was potentially

an imminent transaction and that, if they wanted to put something forward, they should do it, but

that they were balking as their valuation of Deer Creek did not reach the current share price

level. He referred to this as “a market check that determined that superior offers were not going

to come from those parties.”

[174] The minutes of this meeting reflect that, if Total offered $25 per share, the directors

would consider doing a deal, provided that the deal arrangements allowed for an uninhibited

post-offer market check (i.e., no or minimal deal protection mechanisms). Mr. Jackson testified

that this meant that if there was nothing in the structure of the deal that would inhibit other

parties from coming in and presenting counterproposals, the board would be inclined to accept a

$25 offer, given the kind of feedback it was receiving from other possible joint venture partners.

He testified that the arrangement that eventually was reached with Total was close to what was

referred to at this meeting. He commented that “these are judgment issues”, whether the deal

protection is acceptable or not.

[175] On July 27, 2005, Deer Creek received a joint venture proposal from Shell in which Shell

was offering $400 million for a 64% interest in the mining portion of the project, leaving Deer

Creek with 20%, and a 10% interest in the SAGD portion, leaving Deer Creek with 74%. There

were problems with Shell’s proposal with respect to access to an upgrader and with respect to a

price differential for the bitumen produced from the project. The offer suggested that it was the

equivalent of $24 per share. The Deer Creek working group was not impressed with the offer.

[176] The offer included reference to an en bloc transaction and indicated that Shell was not in

a position to make such a proposal. Mr. Jackson testified that it was his perception that it would

not have been difficult for Shell to convert their offer to an en bloc offer, given the work that had

been done in evaluating Deer Creek for the purpose of the joint venture proposal. Mr. Daniel

testified that the working group thought that Shell’s position on an en bloc offer was a tactical

statement, given that if Shell had done the kind of work necessary to generate the kind of

proposal it had made, it would be able to make a proposal to buy the whole company, and given

that the proposal itself referenced a number of $24 per share equivalent.

[177] Mr. Daniel commented that Shell would have been a very appropriate buyer for Deer

Creek, given their upgrading experience and the position of their existing oil sands project.

[178] Mr. Daniel testified about the follow-up discussions the team had with the four parties

other than Total. He referenced the discussions with Shell, which indicated that $24 was the best

price it could get to in a change of control transaction, his personal discussion with senior

management of Chevron, who indicated that it had its hands full with another acquisition, and

the discussions with ConocoPhillips, which said it would not react as quickly as Deer Creek had

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suggested because it would not be worth its time, indicating a waning level of interest. Mr.

Daniel referred to the letter received from the Chinese company on July 26, 2005 which he said

was from a relatively junior person in the company and indicated that it was completely on the

wrong track. Mr. Daniel commented that no-one had any sense that there was a lot of promise

there. While evidence of what these other parties said to members of the working team about

their interest in responding is hearsay, other than discussions Mr. Bruce had with Mr. Sembo

who was financial advisor to one of them, it is clear from the record that only Shell responded to

these follow-up discussions with an offer.

[179] Mr. Bruce’s notes of July 28, 2005 reflect discussions on the negotiating position that

Mr. Jackson should follow when taking the message to Total that its offer had to be above $25 a

share. The working group agreed that the strategy was to advise Total that, for an offer at $25, it

would be able to obtain “minimal protection”, but for a number greater than $25, there could be

better deal protection.

[180] Mr. Jackson used a comparison of Deer Creek to UTS and Opti, two projects that were

further along the development track, to attempt to push Total’s offered price past $25 per share.

He agreed that the message he delivered was that, conceptually, Total could expect to have more

deal protection the higher the price they were prepared to offer.

[181] Mr. Bruce’s notes indicate “no market check, no deal protection”. Mr. Bruce pointed out

that, immediately after the July 18, 2005 board meeting, an active process to seek out possible

proposals had been initiated with respect to the seven names on the A list of Potentially

Interested Parties. The strategy proposed was that Mr. Jackson should advise Total that it was

difficult to do a one-off transaction without a market check and to imply that Deer Creek was

dealing only with Total. In reality, the working group was actively pursuing potential parties on

the A list, asking for joint venture proposals on a faster time line or for other offers.

[182] Mr. Bruce’s notes of July 29, 2005 again reflect the working group’s negotiating strategy

with Total that included Mr. Jackson telling Mr. Guiziou that he was going to have to advise the

Deer Creek board that there had been no pre-market check, that the directors had a fiduciary

obligation to their shareholders and that if they did not discharge that obligation, they had the

prospect of personal liability.

[183] Mr. Guiziou testified that he and Mr. Jackson had several short meetings in the days

following the rejection of Total’s offer in which they tried to see if there was any potential for a

deal. Through those meetings he gradually came to understand that perhaps “north of $25” a

share would be in the range of what Deer Creek called “company prices”. Mr. Jackson conveyed

this message by using a spreadsheet that illustrated a range of implied market values for Deer

Creek shares if part of the Joslyn Project Lease was divested through some kind of joint venture.

Mr. Guiziou testified that Mr. Jackson circled a range of values from $26.93 to $32.07. He was

very cautious, having told Mr. Guiziou that he had no mandate formally to give a price to Total,

but was hinting at a range of the values that the company might feel were attractive.

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[184] Mr. Guiziou testified that $25 per share was far higher than Total’s initial offer and his

instructions from senior management were that, if Total were willing to approach that price, it

would need to reach agreement with Deer Creek about deal protection terms. Mr. Jackson

responded very quickly to Total’s request for a “hard-lock” commitment from Lime Rock,

saying that, while he could not speak for Lime Rock, if it accepted a hard lock for its shares, the

Deer Creek board would not endorse it or support the deal and would perhaps consider releasing

Total from its standstill obligations, leaving it to go directly to Deer Creek’s shareholders

without board endorsement. Mr. Guiziou testified that Total preferred to have a deal that it had

negotiated with the Deer Creek board, and did not want to be in the position of having to make a

hostile bid for the shares.

[185] Mr. Daniel described the biggest issue with respect to what Total wanted in terms of deal

protection terms was a lock-up of the Lime Rock shares. He noted that, had Total been able to

achieve that, it would have had an enormous chilling effect on a party who wanted to tender a

superior offer. Mr. Daniel described what was eventually agreed to as a “soft-lock”, and

commented that he would argue that it wasn’t a lock-up at all, since if the board exercised its

fiduciary out, the lock-up would go away. He described the process of negotiating the deal

protection terms with Total as “cantankerous”, referring to discussions over the minimum tender

provision and Total’s attempt to insert a 90% minimum tendering condition, which was hotly

debated and on which the Deer Creek board held firm at 66-2/3%.

[186] Mr. Jackson, although he could not remember the specific date, had a meeting with Mr.

Guiziou during the period of July 29 and July 30, 2005. Although he had no specific memory of

the conversation, he agreed with the suggestion on cross-examination that Mr. Guiziou probably

took the position that it was making an offer subject to there being no public auction of Deer

Creek and that he probably expressed a concern that there had not been a public auction and that

thus Total should offer a compelling price for the shares. He recalled, and Mr. Guiziou

confirmed in his testimony, that Mr. Guiziou expressed Total’s concern that it did not want to be

a “stalking horse” for a higher offer.

[187] Mr. Bruce met with Mr. Guiziou during the late evening of Friday, July 29, 2005. He had

instructions from the working group to press Total for an offer higher than $25. The strategy was

to offer better deal protection for a higher price. Mr. Bruce’s notes reflect an entry that reads

“hard lock does not happen at any price, Board cannot be in that spot without a full process”. Mr.

Bruce explained that Total had asked for a “hard lock” form of deal protection, in particular from

Lime Rock as holder of roughly 32 percent of the shares. Mr. Bruce testified that “the reality was

there was never going to be a Lime Rock hard lock”, as the Lime Rock directors had their own

fiduciary obligations that precluded this. It was Mr. Bruce’s belief that there would never have

been a hard lock from the Deer Creek board and senior management either. The working group

had reviewed some examples of precedent language from counsel on recent hard and soft locks,

but the working group did not view these examples as being particularly representative and, at

any rate, in Mr. Bruce’s view, had decided there would be no hard lock. The strategy was to

persuade Total that a right of first refusal gave Total some help in terms of deal protection. This

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was the negotiating position, although Mr. Bruce conceded that it was clear that from Total’s

point of view that a hard lock would be vastly superior to the right of first refusal being offered.

[188] From Mr. Bruce’s notes, Mr. Schmidt commented that Total’s “nervousness [in the

negotiations] is a function of the fact that this was so easy to step over”. Mr. Schmidt testified

that by this, he meant that the relative magnitude of the 3% break fee involved in the transaction

was de minimis. He noted that Deer Creek refused to agree to a hard lock agreement because it

would preclude a post-market check or an opportunity for a better bid. Mr. Farber also testified

that the $40 million break fee was viewed as not significant by Lime Rock because a potential

purchaser of Deer Creek was not looking at a $1.4 billion transaction, but a $1.4 billion

transaction with a subsequent investment of $8 to $10 billion or more. Mr. Farber characterized

the arrangements with Total as a “soft lock”, and pointed out that another bidder had in fact

come forward in the post-bid period.

[189] The script provided by the working group that Mr. Bruce was to follow with Mr. Guiziou

stressed that Deer Creek had not had a full process and must have the ability to do a post-market

test to ensure that the directors had properly exercised their fiduciary duties. Mr. Bruce testified

that, although the working group was underway contacting the possibilities on their short list, in

the event that the deal became essentially a one-off negotiation with Total, Deer Creek needed to

be able to have a mechanism in the deal for a post-market check and to ensure that there was

sufficient time for another bidder to come forward. The working group thought that, with a soft

lock, a right of first refusal and a fiduciary-out, Deer Creek would be able to achieve this.

[190] Mr. Bruce said that the meeting with Mr. Guiziou was very difficult, as Mr. Bruce was

pressing very hard to push Total up from $25 a share. Mr. Guiziou was unhappy with Mr. Bruce

and unhappy with the process. He indicated to Mr. Bruce that he thought he had a gentleman’s

agreement that if Total increased the price to $25, there would be a deal. Mr. Guiziou expressed

surprise when Mr. Bruce advised him that there was no deal, that Lime Rock would not support a

deal at $25 and that Total had to come up with a better price. Mr. Bruce left the meeting feeling

that they had pushed Total “extraordinarily hard”.

[191] Mr. Guiziou testified that the purpose of the meeting from his point of view was to clarify

what kind of deal protection terms would be acceptable to Deer Creek. He recalled that Mr.

Bruce explained to him that at $25 a share, not only would Lime Rock not accept a hard lock, it

would not accept even a soft lock. Mr. Bruce advised that at the $25 price the Deer Creek board

might accept a soft lock. Mr. Guiziou confirmed that he was quite upset about the meeting, and

advised Mr. Bruce that it was probably the end of it from Total’s point of view.

[192] Mr. Guiziou’s notes reflect that at this point, Christopher de Margerie, a member of the

Total COMEX who was being kept up to date on the status of negotiations by the Total team,

asked Mr. Guiziou to convey to Deer Creek the message that the negotiations were going

nowhere. Mr. Guiziou did so when Mr. Jackson called him the next morning.

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[193] Mr. Guiziou testified that he told Mr. Jackson when he called that Saturday morning, July

30, 2005 that if Total bid $25 per share, it did not want this to be perceived as a starting point for

an open bid. They agreed to meet at 2:00 that afternoon.

[194] Mr. Guiziou’s notes of his meeting with the Total negotiation team and Mr. de Margerie

indicated that it was decided that it should be made clear to Mr. Jackson that $25 would be the

ultimate price and that it could not come without deal protection terms, that “we now are

drawing the line in the sand”. Mr. Guiziou’s notes read: “Rationale : All premiums are at the

ceiling and compelling price was not meant to be a bait”. This again referred to Total’s concern

that it did not want to be put in the position of being a stalking horse for a higher bid.

[195] When Mr. Guiziou and Mr. Jackson met on Saturday afternoon, Mr. Jackson recalls

telling Mr. Guiziou that the board, management and Lime Rock likely would agree to enter into

the type of lock-up agreement that would allow them to pull back the shares they had agreed to

tender if a superior offer surfaced.

[196] Mr. Guiziou recalled that Mr. Jackson advised him that he understood that $25 a share

without deal protection was a deal breaker for Total, that he had spoken to Lime Rock, and that

there was a possibility that Lime Rock would accept deal terms that would come with what Mr.

Jackson called a firm lock-up. Mr. Guiziou understood this to be a soft lock-up with the only

caveat being that Lime Rock would be able to pull its shares from the bid if the Deer Creek

board qualified a competing offer as being a “Superior Proposal.”

[197] Mr. Guiziou conferred with Paris management after this meeting to advise them that

there was no possibility of a hard lock-up but that a soft or firm lock-up would be a possibility at

a price of $25 per share. The following day, Sunday, July 31, 2005, Mr. Guiziou received the go-

ahead from Total’s COMEX to make an offer at $25 per share with the kind of deal protection

terms he had been discussing with Mr. Jackson.

[198] Mr. Guiziou disagreed with any suggestion that, at $25 per share, Total saw Deer Creek

as being significantly undervalued. He testified that the $20.50 per share offer was, in effect,

Total’s valuation of Deer Creek. The first offer at that price was a serious offer that Total knew

was competitive and included a premium to the market price. Mr. Guiziou testified that the $25

offer was not in contemplation at the time of the COMEX meeting, but came about as a result of

the dynamics of the negotiation.

[199] Total offered $25 per share for Deer Creek. This represented a premium of 39% over the

then trading price of $18, and 83% over the best price Deer Creek could negotiate in an equity

offering just a month prior. The offer included proposed business terms that specified that it

would be either a takeover bid or a plan of arrangement, that it would be conditional on

obtaining 66-2/3% of the shares on a fully diluted basis, that Total would require lock-up

agreements with Lime Rock members of the board and senior management and non-solicitation

terms. The lock-up would terminate if prior to the expiry of the offer:

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... another bona fide takeover proposal is announced, proposed, offered or made,

which in the opinion of [Deer Creek’s] board of directors after consultation with

its financial advisors, would constitute a Superior Take-over Proposal. . .which,

after providing Total with 72 hours to match, permits the board of directors of

[Deer Creek] to withdraw, modify or change any recommendation regarding the

Offer ... and if the non-completion fee is paid.

[200] The offer provided that Total would have the ability to complete “confirmatory due

diligence” of a list of matters prior to entering into an acquisition agreement. The non-

completion or “break” fee proposed was $40 million.

[201] Although on Friday, July 29, 2005, Shell had advised the working group that it didn’t

think it could respond in the time frame available to make an offer, Shell’s financial advisors

contacted Mr. Potter of Peters & Co. on Sunday morning, July 31, 2005 and advised him that

Shell would be making a $24 cash offer that it would take to its board that day for approval, and

that it would be “a crisp, clean deal with industry-standard deal protection and reasonably-

vanilla due diligence requests.” Mr. Bruce testified that his understanding of industry-standard

deal protection was that it would be “not dissimilar to what we ended up with Total.”

[202] Mr. Bruce stated that the working group was very pleased to get the Shell offer, as it

showed that Deer Creek was getting some benefit from its limited scope marketing process. In

addition, it was a cash offer at a price not much lower than that offered by Total and from a

credible source financially. Mr. Daniel testified that Shell was perhaps an ideal candidate to

make an offer, given its familiarity with the project and its adjacent holdings.

[203] After the call from Shell’s financial advisors that Sunday morning, there was a working

group meeting and then an 11 o’clock board meeting. The working group concluded, after

discussing whether Deer Creek was bound to a deal with Total, that it should press Shell to make

a better offer.

[204] The Peters & Co. team and Mr. Daniel called Shell’s financial advisors and advised them

that the offer was “materially lower” than it needed to be, that the proposal had to have “vanilla”

deal protection and that Deer Creek would facilitate due diligence. Although Deer Creek did not

have a confidentiality agreement with Shell at this point, there had been discussions on that

issue. Shell’s advisors were also advised that the offer had to be ready before the opening of

markets on Tuesday morning.

[205] The chief executive officer of Shell called Mr. Jackson. Mr. Jackson acknowledged that

he had heard about the offer but advised Shell’s Chief Executive Officer that it was not high

enough, that that message had been conveyed to Shell’s financial advisors and that time was of

the essence as Deer Creek would be likely to see a bid that would motivate it to do something.

Page: 42

[206] Shell’s advisors called back and said that Shell was unable to improve its offer above $24

a share but that they would deliver the $24 offer that afternoon at 4:00 p.m. While what the

advisors said was hearsay, a written offer was delivered.

[207] The Deer Creek board meeting extended into Sunday evening, and then re-commenced at

5:30 a.m. Monday morning. At some point during the meeting on Sunday, the board agreed to

support the Total offer.

[208] The board meeting was attended by all of the directors, Mr. Kowal, outside counsel and

the financial advisors. The board was advised of the Shell offer, including advice from the

financial advisors from discussions with Shell’s financial advisor to the effect that Shell was not

prepared to go beyond $24 per share.

[209] Mr. Farber indicated that, when the board decided to proceed with the Total offer, it

knew that Shell had indicated that, even if it were to make an en bloc offer, it would be at the

$24 level, and therefore not superior to the Total offer. At the board meeting, representatives of

Lime Rock indicated that they were happy to see Shell’s $24 a share en bloc offer as a data

point, since that provided some comfort that Total’s offer was fair market value. Mr. Farber

testified that it was Lime Rock’s view that, since Shell had fixed downstream facilities in place,

it would be a party that would theoretically be positioned to offer premium value on the project.

Since Shell had indicated that it would put $24 on the table, that gave the Lime Rock

representatives some additional confidence that the $25 offer was fair, and that Deer Creek was

unlikely to get a superior offer from another party. He rejected the suggestion that the Deer

Creek board should have started a bidding process with Shell at that time, referring to the risks of

doing that and the ethical assumption in business that “you are not going to shop one party’s bid

to another party,” a practice he characterized as unacceptable in the petroleum industry. He

pointed out that it was his impression that Mr. Jackson had communicated very clearly to Shell

that Deer Creek had a superior bid and that $24 was not going to prevail.

[210] The minutes show that the board’s external counsel advised that Total had wanted to

move into an exclusivity period for negotiations until August 3, 2005 so as to be able to finalize

a pre-acquisition agreement, but that the working group could not accept this, and that therefore

the July 31, 2005 letter of intent that set out Total’s offer had not been executed by Deer Creek.

He advised the board that Total wanted “hard lock-ups” with the major shareholder and the

officers and directors, but that the major shareholder and directors had indicated that they would

agree only to a soft lock-up, which was described as meaning that, if the pre-acquisition

agreement was terminated, the shareholders and directors who had signed the lock-up agreement

could withdraw their shares from the Total offer and tender them to another offer.

[211] Mr. Farber testified that, as a matter of policy, Lime Rock will not agree to a “hard-lock”

as it does not consider it acceptable to exclude its investors from a higher offer simply because it

represents a significant shareholding. He noted that, with respect to the “soft-lock”, Lime Rock

had already determined that at about $25 a share, “we should sell the company. We felt that the

risked value of going it alone was lower than the $25 per share.” With the relatively small break

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fee and the 35 day statutory period for other higher offers, Lime Rock felt there was adequate

potential for a higher bidder to step forward, which was in fact what happened.

[212] Mr. Farber testified that a public auction had been discussed by the board and with its

advisors and the risks that this entailed identified. He commented that Lime Rock did not have

any concerns with respect to the process when the $31 competing bid came in later. He noted

that the fact that the offer came from one of the parties Deer Creek had been negotiating with, as

opposed to a stranger to the negotiations, confirmed to Lime Rock that the board had “structured

the right kind of situation.”

[213] Mr. Farber disagreed that the board had been outmaneuvered in negotiations with Total,

testifying that it engaged in a responsible way, hired the right advisors, looked at available

information and talked to logical counter parties, and structured the deal in a way that allowed a

superior bid to emerge.

[214] According to the minutes, counsel also advised the board that the process of dealing with

Shell and the others on the list had provided the board with a soft pre-deal announcement check

and that, as long as the board was comfortable with the advice of its financial advisors as to

fairness of the consideration and the premium offered by Total, they “should take some comfort

in the exercise of their fiduciary obligations.” Counsel indicated outstanding issues and due

diligence could be resolved over the next twenty-four hours.

[215] The minutes also indicate that the financial advisors advised that:

... given that [the offer] represented a 40% premium to the market price and that

the Board had had the opportunity to conduct a soft pre-deal announcement

market check with a number of potential acquirers and joint venture participants

that had been in various stages of discussions with the Corporation over the past

number of months, shareholders of Deer Creek should review the proposed

transaction favourably. . .

Both firms indicated that, subject to completion of their internal committee reviews, they would

be able to provide favourable fairness opinions on the offer.

[216] The minutes conclude with the board’s advice to management that it was in support of

the principal terms of the Total offer and that management was authorized to negotiate

documentation to bring back to the board for approval.

[217] On Sunday, July 31, 2005 at about 7:00 p.m., Mr. Jackson hand-delivered a letter to Mr.

Guiziou conveying the agreement of the board of Deer Creek with the principal business terms

of Total’s proposal. The letter stated that the board had authorized management to negotiate

exclusively with Total to complete acceptable documentation for approval by the board prior to

7:00 a.m. (Calgary time) on Tuesday, August 2, 2005. Monday, August 1, 2005 was a statutory

Page: 44

holiday. The letter also confirmed that the board had requested management to provide Total

with the documentation it had requested for due diligence purposes.

[218] The 11:00 a.m. meeting of the board on Monday, August 1, 2005 was attended by all of

the Deer Creek directors other than Mr. Kerr. Mr. Kowal, outside counsel and the members of

the Peters & Co. and Goldman Sachs teams were also in attendance. The minutes note that the

issues relating to the negotiation of the pre-acquisition, lock-up and support agreements relating

to Total’s latest proposal were “not insignificant”, and that it was “clear that Total would have to

capitulate on a number of points before an acceptable agreement would be reached.” Mr. Bruce

and Mr. Jackson testified that this referred to Total’s wish that the bid be conditional upon it

being able to acquire 90% of the shares. Mr. Bruce also testified that the board discussed the fact

that Total was trying to ensure that Enerplus’ ability to convert a portion of its interest to equity

would be resolved, as Total did not want to face the risk that there would be an opportunity for

someone to use this ability to acquire a base shareholding in Deer Creek to commence a

competing takeover bid. Mr. Schmidt reported to the board that Mr. Kerr, the Enerplus nominee

on the Deer Creek board, had advised him that it was Enerplus’ intention to remain a participant

in the Joslyn Project, and he had no authority to agree to anything on behalf of the Enerplus

board, which probably could not meet on this issue before the following Thursday. Total wanted

to be able to obtain over 90% of the Deer Creek shares through its bid and was leaning on

Enerplus very hard to commit its shares to the offer or to commit to remain neutral. The minutes

note, and Mr. Jackson confirmed in his testimony, that the board was firm that Total would have

to be advised that the board of Deer Creek was unable to assist in the Enerplus matter and that

Total would have to discuss this directly with Enerplus. The board “felt strongly” that any

condition related to Enerplus’ rights with respect to Deer Creek shares could not be a condition

to the offer, and the minutes note that:

... [t]he rationale was that if the Board was prepared to accept that as a condition,

it would essentially give [Enerplus] a veto on the transaction (and in fact an

advantage in negotiating with Total on the value of its 16%) Deer Creek could

potentially be left at the altar with an entirely new shareholder base comprised of

arbitrageurs.

[219] Mr. Jackson testified that the board was aware of and concerned about a “hard-lock”

fettering Deer Creek’s ability to attract offers after the announcement of a bid. The board

recognized that, if Lime Rock’s shareholders were locked-up in a hard-lock, other bidders would

realize that they could not obtain enough shares for a statutory squeeze-out follow-up

transaction. He noted that “we were just not prepared to go there”. Mr. Jackson also commented

on the notation in the minutes relating to arbitrageurs, explaining that the board was concerned

that if the bid was conditional as Total was suggesting and failed because the condition could not

be met, the arbitrageurs that inevitably acquire shares during a takeover bid would try to find a

way to sell their shares in the short term, depressing the share price and enabling a predatory

takeover bid at a lower price. He testified that it was this kind of concern that affected earlier

board thinking on whether to engage in a full auction. Mr. Jackson commented that auctions are

“pretty unusual” in the Canadian market, particularly the energy sector because, as soon as an

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auction is announced, the company loses all business momentum. He also noted that an auction

foreclosed the joint venture process, which Deer Creek was using as leverage with Total.

[220] Mr. Bruce referred to a joint presentation that was made to the board of Deer Creek on

August 1, 2005 by Goldman Sachs and Peters & Co. He commented that there had been ongoing

versions of this analysis, or what Mr. Schmidt referred to as an ongoing dialogue, starting from

the July 18, 2005 board meeting. The financial advisors had been in the process of performing

the analysis that made up the presentation, working-up the comparables and considering the

discounted cash flow models on an ongoing basis, and some of the material had been discussed

with the board on prior occasions.

[221] To prepare the 22-page presentation, the advisors reviewed all the public market

information available on Deer Creek, including its history, stock prices, trading analysis for the

company and comparable companies. They performed an analysis of its shareholder profile,

reviewed published research, reviewed Deer Creek’s plans, its discounted cash flow models

using multiple levels of price forecasts, cost escalations and flat dollar projections. They had

analysed selected public oil sands company trading multiples to compare with Deer Creek and

acquisition premiums in selected transactions. They had analysed other recent oil sands

transactions, prepared grid tables, and reviewed and summarized the steps that the board had

gone through with respect to approaching other parties who might be interested. The results of

this work were set out in the presentation.

[222] The presentation reviewed the key terms of Total’s proposed offer. It set out the

background to the offer, including the company’s discussions with eleven “notable parties” over

the previous few months relating to the creation of a joint venture for the purpose of enhancing

the company’s business plan, the engagement of the advisors to help with the development of a

joint venture and the receipt of “joint venture indications” from Total and Shell “which were

deemed not to be compelling.” The background summary referenced that the advisors had

contacted selected parties that had already expressed interest in the company, naming Shell,

Chevron, ConocoPhillips and one other, requesting updated proposals for a joint venture or

corporate transaction, and summarized the results of those approaches and the negotiations with

Total.

[223] The board and its advisors met again on Tuesday, August 2, 2005 at 5:30 a.m. Mr. Kerr

was in attendance for only a part of the meeting, leaving when the board discussed issues on

which he would have a conflict.

[224] The advisors reported on the negotiations over the formal documentation and up-dated

the board on the final deal terms. The final pre-acquisition agreement, lock-up agreement and

support agreement were tabled and reviewed by counsel. The Total desire for a 90% minimum

tender condition, as opposed to the board’s position that it should be 66-2/3% was discussed, and

the board resolved to hold firm. The documentation was approved, subject to resolution of the

minimum tender condition issue. Mr. Jackson recalled that he and Deer Creek’s counsel talked to

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Total’s representatives and counsel and advised them that a hard-lock and the 90% condition

minimum tender were “non-starters” and were “not going to happen”.

[225] Mr. Jackson commented that the board was concerned that, if it was going to start a

process, it wanted a bona fide locked-in bid from Total before it took the first step. He explained

that by process he meant the pre-acquisition market check, the board’s internal views of value,

its ability to deal with superior proposals and the fact that Deer Creek was starting on a process

that was about 40 days long during which other parties could respond and potentially put in their

own bids.

[226] The board met again at 1:30 p.m. on August 2, 2005 to approve the directors’ circular

that would be mailed to shareholders in response to Total’s takeover bid. The deal protection

terms agreed to by the board included the following elements:

1)

2)

the cessation of all other discussions and negotiations;

a “no shop” (standstill) clause, with a fiduciary-out to allow consideration of

unsolicited bona fide superior proposals;

3)

4)

5)

a right of first refusal of a superior proposal by Total with a 72 hour notice period;

soft lock-up agreements from management, the board and Lime Rock; and

a $40 million break fee (3%).

[227] On August 5, 2005, Total issued its offer to purchase the Deer Creek shares for $25 per

share. In its bid materials, Total expressed its intention to proceed with a subsequent acquisition

transaction as soon as practicable to obtain any majority shares not tendered to the offer.

Specifically, Total stated that, if the 90% level of approval was not reached and the statutory

right of compulsory acquisition was not available, Total:

... reserves the right (and currently intends to do so in the appropriate

circumstances if Total considers it necessary or desirable) to use all reasonable

efforts to acquire the balance of the common Shares as soon as practicable by way

of a Subsequent Acquisition Transaction (as hereinafter defined). In order to

effect a Subsequent Acquisition Transaction, the Offeror will seek to cause a

special meeting of Shareholders to be called to consider an amalgamation,

statutory plan of arrangement, reorganization, consolidation, recapitalization, or

other transaction involving the Offeror and/or an affiliate of Total and Deer Creek

and/or the Shareholders for the purposes of Deer Creek becoming, directly or

indirectly, a wholly-owned subsidiary of Total or effecting an amalgamation or

merger of Deer Creek’s business and assets with or into Total and/or an affiliate

of Total, carried out for a consideration per Common Share not less than the offer

price ...

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[228] Mr. Schmidt testified that he did not view the announcement of the $25 bid as a

“conclusion”, that the hope of the Deer Creek board was that, with a bar being set, there was

now a legitimate challenge for other parties who might make a proposal.

[229] On August 31, 2005, Deer Creek received a $31 per share offer from Shell. Mr. Jackson

testified that, given that the documentation was virtually identical to the Total offer and there

was no doubt Shell had the capacity to execute on the offer, the board determined that this was a

“Superior Proposal” as defined in the Total agreement, and therefore provided Total with notice

of its right to match the offer. Total did so. The Shell bid was conditional on due diligence, but

Mr. Schmidt testified that this was completed in less than a day.

[230] Mr. Bruce testified that the working group was pleased to see the Shell topping bid of

$31 in late August, particularly as it was so similar in other respects to the Total proposal with

respect to deal protection, including break fee, and had a limited due diligence requirement. The

revised Total offer did not change his view that he and the working group had pushed Total as

hard as it could be pushed at the time for the $25 offer.

[231] Mr. Guiziou referred to a document entitled “Modification of Economics Post COMEX”

that was prepared for the assistance of Total’s COMEX in making its decision on whether it

would match the Shell offer. The purpose of the document was to give the COMEX members a

minimal analysis of the economics of the offer at different oil prices and different share prices to

supplement what had been provided to them back in July. Mr. Guiziou had testified that when

Total was making decisions on a project and looking at base cases for long-term analysis of the

economics of a potential project, it would use oil prices of $25 and $30 per barrel. Since the

COMEX meeting in July, Deer Creek had made it clear that, in its view, previous transactions in

the market had been done on the basis of a $40 a barrel oil price. Therefore, this up-dated

analysis included numbers at $35 and $40 a barrel. The document notes that there had been a

slight change in the exchange rate since the time of the initial offer. It also notes that $31 per

share would be a premium of 150% over the market price of Deer Creek’s shares just prior to

Total’s first offer on July 14, 2005. The document shows a range of projected internal rates of

return for Total from 7.1% at $25/bbl. oil to 12.1% at $40/bbl oil if the price offered was $31 per

share. Mr. Guiziou testified that for Total, the situation was tough but clear. Total had a deal that

it had announced to the financial community. The year before this, it had lost an opportunity to

purchase a different project in the Athabasca tar sands and also had lost a different, unrelated

opportunity, so it was important to Total to protect the Deer Creek deal and achieve its objective.

[232] Mr. Jackson commented that, after Shell’s $31 offer, there remained ten to twelve days

during which a new bid could surface. He testified that approximately 84% of Deer Creek’s

shares were tendered directly to the Total bid, with “virtually” the rest of the shares being sold at

near the bid-affect price in the market. He noted that some of the dissenting shareholders - the

Boivin and Gabai shareholders - held shares prior to the bids, but that those shareholders held

relatively small numbers of shares, so “virtually 100% of the shareholders prior to the

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announcement of the bid tendered to the bid”, which he characterized as “very strong

acceptance”.

[233] The Deer Creek witnesses were credible and candid, and their testimony was supported

by documentation and by other witnesses. I accept their evidence of the process that the Deer

Creek board and management followed in the months preceding the Total bid and, the

motivation and opinions of the board and management and find that it was unshaken in any

material way by cross-examination, or inconsistent in any way with prior statements or opinions

expressed before the Total bid.

[234] The dissenting shareholders submit that much of Mr. Guiziou’s evidence was self-serving

and without merit. I disagree. Mr. Guiziou gave his evidence in a forthright, open manner,

supported by documentation and the testimony of other witnesses, and I found him to be

credible.

B.

1.

The Dissenting Shareholders

John Paulson

[235] Mr. Paulson is the president, portfolio manager and principal shareholder of Paulson &

Co. Inc. (“Paulson & Co.”). He has a background in finance and business administration and

worked as a management consultant before joining the merger and acquisition department of

Bear Stearns in New York. The latter employment involved, as he described it, “representing

companies in purchases of other companies, as well as other advisory assignments for boards,

which could include things like restructurings or recapitalizations.” Mr. Paulson testified that he

worked on dozens of such assignments for Bear Stearns and that the typical process takes

somewhere between two and four months.

[236] After leaving Bear Stearns, Mr. Paulson went to another investment company in New

York and then, in 1994, started Paulson & Co. He testified that the initial capitalization of

Paulson & Co. was approximately $1 million and that the company now manages approximately

$5.5 billion in assets. He described the business of Paulson & Co. as “various event arbitrage

strategies on a global basis ... [meaning] U.S., Canada and western Europe”. He described “event

arbitrage” as follows:

Event arbitrage deals with those situations where there’s a corporate event that

could produce value beyond the stock price independent of the market. So if the

corporate event is achieved, the value of the security could go up, even though the

market is flat. The types of events that we invest in would include mergers,

recapitalizations or restructuring, spinoffs are some of the events that we look at.

[237] Mr. Paulson testified that Paulson & Co. manages assets on behalf of four groups of

investors: high net worth individuals and family offices, foundations and endowments, pension

funds, and other institutions such as banks or insurance companies. He indicated that Paulson &

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Co. has about 20 employees in investment and looks at approximately 300 corporate events per

year.

[238] Mr. Paulson testified that he was not aware of Deer Creek until he saw a press release on

the newswires on August 2, 2005 indicating that Total was going to acquire Deer Creek. He said

that he might also have heard about it from one of the brokerage houses Paulson & Co. deals

with. Paulson & Co. previously had been a significant shareholder in a number of Canadian oil

& gas companies.

[239] In the case of Deer Creek, Mr. Paulson said that the company had $152 million in cash,

that the “cost to the equity” was approximately $1.27 billion and that the transaction value was

$1.1 billion. He said they also looked at the ratio of market capitalization of the acquiring

company, Total, to that of the target company, Deer Creek; in this case, the ratio was 150. This,

Mr. Paulson said, gave them an indication of the strength of the buyer.

[240] Mr. Paulson indicated that, as of August 2, 2005, he had not seen the June 2005 CAPP

investor presentation.

[241] Paulson & Co. purchased one million shares of Deer Creek on August 2 and 3, 2005, that

purchase being Mr. Paulson’s decision. The decision was made following a 15-30 minutes

meeting on the basis of a one-page comparative analysis that was supported by the Total press

release, the latest Deer Creek quarterly financial statements and some media and analyst reports.

This comparative analysis was the only written analysis on the value of Deer Creek prepared by

Paulson & Co. according to Mr. Paulson. This was the first time Paulson & Co. had made an

investment in a “pure” oil sands company and Mr. Paulson had, at that time, no expertise in

evaluating such a company. The decision to purchase was based on rapidly rising oil prices and

considerable merger activity in the oil & gas sector. Given Deer Creek’s substantial resources

and relatively low share price, it was thought that it might attract another bidder, possibly a

Chinese oil company. At the time Paulson & Co. purchased the shares, Deer Creek was trading

at $24.85 per share, only slightly less than Total’s offer of $25 per share.

[242] On September 6, 2005, Paulson & Co. purchased an additional 970,000 shares, again

based on Mr. Paulson’s decision. This decision was based on Deer Creek’s September 2, 2005

announcement that it had a competing bid and Total’s subsequent decision to raise its offer to

$31 per share. Mr. Paulson testified that he felt Deer Creek must have an extremely valuable

asset and that further research should be undertaken. They determined that Deer Creek was the

largest independent holder of reserves in Alberta, which could give rise to significant interest

from another bidder. There was speculation as to who the mystery bidder might be. Further

comparisons were done between Deer Creek and other oil companies. After the $31 bid, Paulson

& Co. reviewed the June 2005 CAPP investor presentation.

[243] Mr. Paulson testified that he felt the CAPP investor presentation gave the best indication

of the value of Deer Creek. He characterized it as a thorough and complete analysis that included

all risks.

Page: 50

[244] Mr. Paulson testified that he thought a discounted cash flow analysis was the most

relevant kind of analysis for a company like Deer Creek. He acknowledged that the “significant”

differences between the resources of one company and another, the development time frame and

the quality of resources made comparisons with other oil sands companies less valuable.

[245] Mr. Paulson took the figure of $6.7 billion from the investor presentation, divided this by

the number of shares outstanding and came up with a per-share value of $134. He then

recalculated this figure using $50 a barrel oil, arriving at a value of $190 per share. Mr. Paulson

said that in his view, the primary risk in oil sands is the exploration risk. Since the Joslyn Project

was in Canada, he felt there was no political risk. In his view, operating risk was limited because

it was not a complicated operating project. The “one step at a time” model reduced financing risk

and the resumes of the board and management gave Mr. Paulson confidence in their experience.

Mr. Paulson admitted that at some point early on he had reviewed Deer Creek’s public disclosure

in its Annual Information Form and Annual Reports, and had seen the risk disclosure but stated

that “the, you know, quantification of those risks. . .I would reserve judgment on.”

[246] Mr. Paulson testified that he thought the 8% discount rate used in the investor

presentations was very reasonable “and probably somewhat conservative”.

[247] Mr. Paulson testified that Paulson & Co. had reviewed the historic price progression of

Deer Creek shares in September 2005, and felt that if Deer Creek had remained a public

company, its value would likely increase at a similarly high rate as it moved on to production,

and that, therefore, the price Total was paying “massively undervalued” Deer Creek’s stock.

[248] He was also referred to analysts’ reports on Deer Creek prepared in early- to mid-2005.

While Mr. Paulson acknowledged the expertise of the analysts, he took the position that they

were “dead wrong” on Deer Creek and, in his view, the market had significantly undervalued the

stock. He stated that the market was “not at all efficient in pricing this asset”.

[249] Mr. Paulson described the deal protection terms in the Total offer as “some of the most

onerous I’ve seen”. He felt that the deal protection terms limited the process and reduced the

probability of another bid being made for Deer Creek. Initially at trial, Mr. Paulson said that at

the time Paulson & Co. had prepared its comparative analysis sheet on August 2, 2005, it was

not aware of the deal protection terms. However, it is clear from the sheet itself that Paulson &

Co. was aware of the break fee and the lock-up agreement when it made its first purchase, and

Mr. Paulson eventually conceded that Paulson & Co. was just not aware of “what the exact terms

were” until three days later, on August 5, 2005, before Paulson & Co. bought further shares.

[250] At trial, Mr. Paulson testified that, at the time of its original purchase, Paulson & Co.

thought that there would be a lot of interest on the part of potential purchasers for Deer Creek,

but that, after seeing the deal protection terms in detail, they thought there was a low probability

that anyone else would bid a higher price. When faced with examination-for-discovery testimony

that Paulson & Co. had concluded, despite its analysis of the deal protection terms, that there

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was a prospect for a further topping bid after the bid of $31, Mr. Paulson attempted to suggest

that, while there was a prospect of such a bid, he did not view it as a high probability because of

the deal protection terms and lack of auction.

[251] Mr. Paulson described the prospect of Total being a major shareholder of Deer Creek as

“the best possible outcome for us”, citing other cases of Canadian oil companies that have

minority shareholders. He said that it was Paulson & Co.’s hope that they would be allowed to

remain a public shareholder. By September 12, 2005 Paulson & Co. owned about 9.2% of the

Deer Creek shares. By October 11, 2005, Paulson & Co. had purchased 8,466,040 Deer Creek

shares or about 16% at an average cost of $30.33 inclusive of commission.

[252] In his testimony in chief, Mr. Paulson indicated that he learned from the November 10,

2005 quarterly report of Deer Creek “for the first time” that there would be an amalgamation, at

“for the first time officially [that] our stock would be essentially taken away.” However, on

cross-examination, he conceded that he had seen from Total’s offer announcement that it

intended to proceed with a subsequent acquisition to obtain 100% ownership, but he drew a

distinction between what Total said was its “intention” and the actuality of the later

announcement. Mr. Paulson unconvincingly maintained that, despite knowing about the

“possibility”, “we had no idea if it was something that Total would do.”

[253] Mr. Paulson was questioned extensively about the difference between proved and

probable reserves and eventually had to admit that he understood the distinction.

[254] Mr. Paulson was not a credible witness. Specifically, his testimony of how Paulson & Co.

used the net asset value portion of the investor presentations to determine value was

unpersuasive in someone of his credentials and level of financial sophistication, his selective

“judgment” of risk was self-serving, and his statement that he hoped that Paulson & Co. would

be allowed to continue as a minority shareholder in a Total-controlled Deer Creek was

unbelievable from a principal in a firm that describes itself as being in the business of “event

arbitrage”. Mr. Paulson’s professed surprise that Total conducted a second stage transaction was

not credible, and his limited and skewed interpretation of Total’s intentions to do so as expressed

in its August 5, 2005 bid circular was self-serving and patently erroneous.

2.

Steve Boivin

[255] Mr. Boivin testified, in part, through two interpreters. Questions were asked of him in

English and he answered in English when he felt able to do so. In other instances, he answered in

French and one of the interpreters translated.

[256] Mr. Boivin has a background in finance and securities and has worked for Canaccord

since 2003. Previously, he worked for the brokerage branch of the Caisse Populaire Desjardins,

managing a portfolio of about $80 million and supervising 40 branches. At Canaccord, he

manages approximately $20 million for about 200 clients.

Page: 52

[257] He heard about Deer Creek through the director of another oil company and, being very

interested in the Alberta tar sands, began researching it. He was surprised to find that Deer Creek

was projecting production of 200,000 barrels a day by 2020 because he knew that Suncor, with a

capitalization of $30 billion, was producing 225,000 barrels a day. On this basis, using what he

called the Rule of Three, Mr. Boivin calculated Deer Creek’s potential value at $26 billion. He

said that he compared Deer Creek to Suncor because Suncor was “one of the pioneers” and “the

other companies alongside it simply had to copy the Suncor model”.

[258] Mr. Boivin testified that he looked at the UTS presentations and at the annual reports of

certain other oil & gas companies, doing research both in paper and on the internet. Based on

Suncor’s growth history, he felt that Deer Creek’s projected growth was “very realistic”. He

described his thought process as follows:

I said to myself: If Suncor can make money and produce growth with the price of

a barrel that is very low, what would that be with the price of a barrel that was

higher? And I was extremely positive with respect to the expected price of a

barrel. Each dollar invested would ... produce a composite value. It would be

greater than what appeared here, a much greater value than what Suncor had in

fact produced.

He stated that he had studied Suncor and determined that Deer Creek was in the process of

replicating the Suncor model.

[259] Mr. Boivin reviewed some projected profit calculations and testified that he concluded

that if oil prices continued to rise, Deer Creek had a very substantial profit potential. He said that

he had seen the June 2005 CAPP presentation and that the figures in it coincided with his

figures. He stated that, in arriving at his figures, he used the industry standard 8% discount rate.

He indicated that this was a reasonable rate compared to that used for conventional petroleum

producers because with oil sands, there is no need for ongoing exploration.

[260] Mr. Boivin testified that he also considered certain reports respecting Western Oil Sands.

He concluded that “the analysts were beginning to increase their target on the oil prices, and

Deer Creek was behind in this”. He was convinced that Deer Creek was going to follow Western

Oil Sands’ and Suncor’s winning model and that he “had a winner in [his] hands”. He referred to

Deer Creek’s 2004 annual report and stated that he took statements in that report to mean that

Deer Creek was going to “replicate exactly what Suncor had done in the past, stage by stage,

step by step.” He believed that Deer Creek was going to build an upgrader just as Suncor and

Western Oil Sands had done. However, he felt that in some sense, Deer Creek was ahead of

Suncor in that certain infrastructure, such as highways, were already in place, whereas Suncor

had to build them.

[261] Mr. Boivin testified that he did not consider the Deer Creek investment risky because

“it’s petroleum and everybody needs petroleum”. He also pointed out that with the oil sands,

there was no exploration risk. He discussed the concept of “peak oil” and the interplay between

Page: 53

supply and demand. In his view, increasing demand for a non-renewable resource such as oil

made Deer Creek, with its large resource reserves, an excellent investment. However, he

acknowledged on cross-examination that he has no expertise in assessing the risks associated

with upgrading.

[262] Mr. Boivin also compared Deer Creek to UTS, saying that he felt Deer Creek was far

ahead for several reasons, particularly Deer Creek’s relatively advanced production level. Deer

Creek was in a position to have funds for expansion come from its existing production. He

testified that it is better to invest in a company that is small but is going to become big, in order

to take advantage of the leverage effect. He understood that, in raising capital, Deer Creek would

be careful not to dilute the company and that it would not be looking for a large partner. He

stated that it is very important with start-up companies to invest at the beginning.

[263] Finally, Mr. Boivin noted that Deer Creek was in an enviable geographical position given

its location on a river next to Shell. However, he was not aware that use of the water at that site

was subject to regulatory approval.

[264] Mr. Boivin purchased shares in Deer Creek after reviewing its public disclosure in 2005,

which assured him that everything was proceeding according to plan. He bought shares for

himself, for various family members and for a number of other individual investors for whom he

acted as broker. He bought shares for some investors in July 2005. The Boivin dissenting

shareholders had acquired only 66,750 shares prior to Total’s offer, and started acquiring

additional shares just after Paulson & Co. made its first public announcement that it had acquired

shares of Deer Creek. Mr. Boivin admitted that Paulson & Co.’s buying activity influenced him

in making further purchases of Deer Creek shares. In total, the Boivin investors hold 257,950

Deer Creek shares.

[265] Mr. Boivin stated that he was initially confident that investors would not accept Total’s

takeover bid because the price of the shares after the deal was announced exceeded the offer

price. He thought he would end up as a minority shareholder and was content with that because

he believed that having Total as a significant shareholder would only make things easier for Deer

Creek in terms of bank loans, etc. He said he thought that Total would simply carry on as

majority shareholder, much as Shell and Exxon had done. He did not think that Total would do a

compulsory acquisition of the minority shares.

[266] Mr. Boivin testified that he had seen Deer Creek’s November 10, 2005 press release

accompanying its third quarter report. That press release indicated that Total was intending to

acquire shares pursuant to a subsequent acquisition transaction and gave a date for a meeting.

Mr. Boivin said he took this to mean that Total would perhaps make an offer to the minority

shareholders. He first understood that Total was going to make a compulsory acquisition of the

minority shares when he saw Deer Creek’s press release of November 14, 2005. He said he

understood at that point that he would lose his shares and he was very upset and disappointed

and did not know what to do. He retained counsel and he and his clients decided to dissent their

shares.

Page: 54

[267] Mr. Boivin received Deer Creek’s formal offer on January 20, 2006. He said he didn’t

understand it because the price offered was the same as had been contemplated in September

2005 but the projected price of oil had increased significantly in the meantime. He said he was

never told that there had been costs increases. In his view, the Paulson dissenting shareholders

expert’s valuation of Deer Creek at $110 per share is “very conservative”. He said that his own

price of $200 per share, calculated at December 9, 2005, was “very logical” given the projected

price of oil.

[268] Mr. Boivin offered strong opinions on the risks of developing an oil sands project, the

risks of SAGD and mining process, reservoir engineering, upgrading and investment banking

generally. While he is certainly entitled to his views, and may genuinely hold them, he has no

expertise in many of these areas, and his opinions are of little utility in the valuation I must

perform. Mr. Boivin was clearly mistaken about securities law and regulation and what Total

was entitled to do by way of a second stage transaction despite the disclosure in the bid

materials, and if he had noted Total’s expressed intentions in that regard before November 2005,

he failed to appreciate what that meant. Mr. Boivin was also naive in his view of valuation and

dilution.

3.

David Gabai

[269] Dr. Gabai is a professor of mathematics at Princeton University. His resumé includes

numerous impressive appointments and research awards in his areas of academic expertise.

[270] Dr. Gabai indicated that he has been investing in oil and gas for about seven or eight

years and monitors various publications to that end. In November 2004, Dr. Gabai made his

initial purchase in Deer Creek, buying approximately 37,000 shares and using self-directed

brokerage accounts in his own name and those of his wife and children. The Deer Creek shares

were trading in the range of $8.70 to $9.05 at that time. He made this purchase after listening to a

webcast presentation indicating that Deer Creek had extensive recoverable resources. He said he

particularly liked Deer Creek’s “one step at a time” common sense approach. He also liked that

Deer Creek appeared to have long-term vision. He said he thought he had discovered “a little

Intel or Microsoft at its early days”.

[271] Dr. Gabai testified that one document in particular that was very influential for him. That

document indicated that at an oil price of $23 per barrel, Deer Creek would be successful and

that an oil price of $28 per barrel would increase the company’s value by a factor of ten. Dr.

Gabai indicated that he had been studying the oil market, that the price of oil at that time was

about $40 per barrel and that he expected the price to increase significantly from there. He based

this conclusion, in part, on his assessment of the international climate and the approach taken by

the OPEC countries, Venezuela and Russia toward their own oil reserves. He formed the opinion

that Deer Creek would “really get into its stride right when they expect oil to be extremely

valuable”.

Page: 55

[272] Dr. Gabai purchased an additional 3,100 shares of Deer Creek in June 2005, having done

further research and been “very, very pleased to see that they were proceeding on track”. He said

that at that point “it just seemed even better than when I saw it in November” and that his biggest

concern was that “someone was going to come in and sort of like, you know, nip Deer Creek in

the bud and claim all the upside for themselves.”

[273] Dr. Gabai indicated that he considered four kinds of risk: price risk, resource risk,

execution risk and financing risk. He felt there was no risk in the first category because he was

certain that oil prices would continue to rise. Given Deer Creek’s significant resources, he felt

there was little resource risk, even if the estimates proved to be slightly off. He didn’t view the

execution risk as significant because Deer Creek was following “a clear path”. Finally, with

respect to financing risk, he said that “that’s a serious issue, but, you know, that’s sort of their

mantra of managing dilution through staged development.” He referred to Deer Creek’s 2005

annual report, in which the company stated that “DCE will not lose sight of the prize, and our

challenge an opportunity remains to capture this value by managing risk and dilution as we

execute.” However, on cross-examination, Dr. Gabai acknowledged that he knew that “any

company at any time could be taken over” and that raising capital was a serious issue for Deer

Creek’s future development.

[274] Dr. Gabai testified that he felt betrayed when he learned of Total’s acquisition offer. He

sent an email to Mr. Schmidt urging him to reject Total’s offer, but got no response. That

notwithstanding, Dr. Gabai tendered 8,000 shares to Total’s offer in August 2006. His

explanation was that he did not understand the legal information contained in the offer circular.

He said he feared that keeping the shares would have serious adverse tax consequences for him.

For tax reasons, he also sold another 3,100 shares in September 2005, but then repurchased an

approximately equal number a few weeks later. Dr. Gabai was in contact with Paulson & Co.,

and referred to the Paulson dissenting shareholders as “the calvary”. At that time, he said he still

believed that Deer Creek shares were worth more than $200 each. He testified that the Laricina

transaction confirmed his view that the Deer Creek shares were worth much more than $31. Dr.

Gabai decided to dissent his shares and testified that the process for doing so was very

complicated.

[275] While Dr. Gabai portrayed himself as a small investor, it became apparent on cross-

examination that he was more sophisticated than his testimony might indicate, and had a

substantial portfolio of investments. He showed little understanding of Canadian merger and

acquisition law and practice, and was particularly aggrieved that such law would allow a second

stage transactions.

[276] The Gabai dissenting shareholders hold 31,780 Deer Creek shares and submit that they

are worth in excess of $200 per share.

C .

1.

a.

Expert Opinion Evidence

The Financial Experts

Ian D. Bruce

Page: 56

[277] Mr. Bruce was qualified to give expert opinion evidence in investment banking, merger

and acquisition transactions and the valuation and marketing strategies utilized therein to

maximize shareholder value for target companies, including oil sands companies.

[278] Mr. Bruce’s expert opinion report was prepared in response to the opinions of three

experts called by the dissenting shareholders, Samuel L. Hayes III, Darryl Derouin and William

C. Dovey. He described the mandate of Peters & Co. when it was engaged on July 17, 2005 as

being to act as co-advisor with Goldman Sachs in connection with the possible creation of a joint

venture, alliance or other similar business combination or asset sale or swap between Deer Creek

and a third party, and in connection therewith, to respond to any proposals that Deer Creek may

receive to acquire a majority of its common shares or to merge. The opinion noted that the

advisors immediately began drafting an offering memorandum or “teaser information package”

on Deer Creek and later helped prepare a list of potentially interested parties.

[279] Mr. Bruce’s opinion was that the Deer Creek board and senior management responded in

a “text book” manner to the Total bid, that Deer Creek had a very strong board with the benefit

of several years of “full engagement” with all aspects of Deer Creek’s business activities, and its

Chairman had participated with senior management in marketing Deer Creek to institutional

investors in Canada and the United States.

[280] His report notes that Deer Creek was in an advantaged position to consider its

alternatives from a variety of perspectives: (a) it had been actively seeking joint venture

proposals for the Joslyn Project for several months; (b) it had taken a prior decision to file

electronically, on publicly accessible data bases, virtually all of its third party reviewed data,

including reservoir engineering reports and mine feasibility studies and (c) it had a

comprehensive and continuous investor relations program in place and the market was well

informed on its activities. Thus, not only was Deer Creek in current contact with parties with the

interest and the ability to transact (on a variety of alternative concepts), the vast majority of the

information necessary to conduct a comprehensive evaluation of the Joslyn Project was

accessible in the public domain.

[281] Mr. Bruce in his written opinion stated that, as Deer Creek had already embarked on its

process of contacting qualified joint venture partners, including to the extent of entering into

confidentiality agreements with some of them, it was well prepared to respond quickly to an

unsolicited en bloc proposal. It had a comprehensive valuation model that it had been working

on and upgrading over the course of several years as new data became available. Peters & Co.

was very familiar with the model and had worked with previous drafts since 2001.

[282] Mr. Bruce stated in his report that, from Peters & Co.’s previous experience in marketing

Deer Creek’s securities and obtaining financing:

... while investors were very interested in all of Deer Creek’s plans through to a

mine and an upgrader, they were highly focussed on what was achievable in the

Page: 57

context of a single-purpose independent entity that clearly did not yet possess the

financial and human resources muscle to build out the entire project.

[283] In his view, therefore, the market was focussed on Deer Creek’s ability to initiate

commercial SAGD bitumen production. Beyond the near-term step of going from 500 barrels of

bitumen a day to 30,000 barrels of bitumen per day, Mr. Bruce’s opinion was that the “arithmetic

of capital projects” was heavily discounted by the market for a number of reasons, including:

-

reservoir quality risks

technical risk associated with SAGD production

cost experience relative to estimates (capital and operating)

access to capital (equity and debt)

availability of human resources

regulatory approvals and timing (in particular for mining and a new upgrader)

macro decisions on cost, timing and ability to finance regarding the mine and

upgrader projects

-

hydrocarbon price forecasts

physical markets for bitumen and synthetic crude oils and basis risk

cost of capital

[284] Mr. Bruce commented that he meant by this that, while the mathematics of the

discounted cash flow models and their sensitivities were one factor, the requirement of massive

amounts of capital for an early stage oil sands company was also a major factor that the market

took into account, and that values based on higher price forecasts were heavily discounted by the

market as a means of compensating for risk. He commented in his report that theoretical value

net asset values based on discounted cash flows, while interesting information, were treated by

the market with a “healthy dose of skepticism” where the time to actual production was distant,

engineering and construction cost estimates not fully developed and capital was lacking. He

pointed out that if a company has only 250 barrels a day of production, as was the case with Deer

Creek, its business plan is important and significant, but gets risked heavily. He suggested that

this risking can be done in a number of ways: by risking variables such as price and cost, but also

that some projects in the private market “get done at . . . a fifth or a quarter of some discounted

cash flow math. The market just does not pay up for these things at this scale”.

[285] Mr. Bruce in his report referenced the cost of capital for oil sands projects at various

stages of maturity, and opined that Deer Creek’s peer group as a new development oil sands

project had a weighted cost of capital of approximately 16%, and that Deer Creek itself, from

Peters & Co.’s recent experience with raising capital for the company, might have an 18-20%

cost of capital. He opined that Deer Creek at its stage of development would not be able to

access the 8% after-tax or 10-12% before-tax discount rates that were available to more mature

and traditional upstream oil and gas properties. He pointed out that in contrast to this type of

project Deer Creek had negative cash flow, only 250 barrels a day of production and “some

distant time line” to achieving the second phase of SAGD mining “with probably several years

of steaming to get the SORs down to a commercial level.”

Page: 58

[286] Mr. Bruce in his report commented that, given the significant volatility in hydrocarbon

prices, it had been Peters & Co.’s experience that purchasers of these assets typically used the

five-year NYMEX forward strip (a particular kind of pricing forecast) as a price reference in

their value analysis, and then moved to an engineering consultant’s forecast or a flat forward

price. He noted that, at the time of the Total bid, the industry was in a period of high price

volatility, with the suggestion of a “war premium” of $15 in the WTI crude price of oil.

[287] The Peters & Co. report referenced the historical price differential between conventional

oil and heavy crude oil and the fact that in this period of time, the differential was widening as a

result of an excess of bitumen in the market.

[288] The report calculated discounted cash flow values for Deer Creek based on the then five-

year NYMEX forward strip to US $35 and US $40 WTI flat prices with discount rates ranging

from 10% to 16%. The US $35 portion of the report’s valuation table replicated part of the

advice given by Peters & Co. and Goldman Sachs to the Deer Creek board on August 1, 2005.

The report suggests that discount rates of 14-16% were viewed as realistic for Deer Creek based

on Peters & Co.’s cost of capital analysis. At a five-year NYMEX forward strip price merged

with a WTI US $35 flat and crude price and a discount rate of 14%, a share price of

approximately $12.98 was derived. At a WTI $40 flat crude price, the share price was $21.78.

[289] Mr. Bruce explained that the tables used real dollar costs, unescalated, given Peters &

Co.’s view that if crude prices were rising, costs would also be rising. Unescalated costs and flat

prices beyond the five-year NYMEX forward strip were used, as opposed to escalated prices and

costs. The analysis used real dollar costs, rather than nominal-dollar costs because, given the

early stage of the cost estimates and the lack of sophistication in details of costing, it was

considered most appropriate to avoid forecasting inflation.

[290] The report notes that, in work done by Peters & Co. in June 2005 in relation to Deer

Creek’s equity financing (which was obtained at $13.60 per share), investors placed a de

minimus value on Deer Creek’s prospects of building an upgrader, given its stage of

development and the fact that it was “clearly well beyond the financial reach and execution

capability of Deer Creek.”

[291] In commenting on the level of deal protection agreed to by the Deer Creek board, Mr.

Bruce’s report noted that the board gave careful consideration to this issue, the advisors and

outside counsel provided a comprehensive review of the type of deal protection found in recent

transactions in the Canadian energy sector and the board’s goal was that deal protection should

not be set at such a level that it would prohibit other interested parties from coming forward. In

Mr. Bruce’s opinion, the board considered its fiduciary obligations in the context of this issue

and the elements of deal protection provided to Total were “well within the established

parameters of precedent transactions.” The break fee, at 3% of equity value, was slightly under

average for recent similarly-sized transactions.

Page: 59

[292] With respect to the options available to the Deer Creek board, and particularly whether it

should have conducted a full-scale public auction, Mr. Bruce commented that the board had

considered the merits of a broad auction process among other options and had concluded that a

limited scope auction with continued dialogue with Total was more appropriate. The board and

its advisors concluded that a broad auction process would “not likely add material upside when

compared to a quiet shop, due primarily to the fact that the universe of potential buyers was well

known and most were already well informed on Deer Creek.” The report noted that Peters & Co.

believed this conclusion to be well-founded. Mr. Bruce commented that one of the challenges of

a full-scale auction was that it was distracting to employees and consultants, that business

basically comes to a halt and there is a loss of momentum in the company and the potential of

loss of key employees. The report analysed corporate oil and gas transactions between 2003 and

2005, finding that for corporate transactions over $100 million, only 20% were broad auctions,

the remainder being one-offs (40%) or quiet shops (31%). The report noted that in this period,

there were no public Canadian corporate transactions with a value greater than $1 billion

conducted by broad auction.

[293] The Peters & Co. opinion also noted that, in its view, the level of trading volume in Deer

Creek’s shares relative to market capitalization and size of float was indicative of a highly liquid

security and thus a liquid market. In conclusion, it was Mr. Bruce’s opinion that the steps taken

by Deer Creek in response to the Total proposal were entirely consistent with the response

expected by public capital markets and regulators, and with responses taken by public companies

in similar situations. He opined that:

While the time period for response was short, such time pressures are frequently

the norm in such settings and the level of knowledge held by Deer Creek’s

industry competitors, the ready availability of data and the prior discussion it had

had with potential partners were material aids to canvassing alternatives. The

initial transaction agreed to with Total was structured with deal protection at a

level that we believed would allow a post market check for those parties that were

interested but may have needed more time. The emergence of the second bid is

evidence that the level of deal protection did not preclude a post market check.

[294] Mr. Bruce stated in his report that it was his opinion that the Deer Creek board and senior

management were very diligent and understood and discharged their fiduciary obligations.

b.

William Sembo

[295] William Sembo, the Vice Chairman and Managing Director of RBC Dominion Securities

Inc., was called by Deer Creek as an expert in investment banking, merger and acquisition

transactions and the valuation and marketing strategies utilized therein to maximize shareholder

value for target companies. Mr. Sembo is a senior partner of the RBC Capital Markets’ Energy

practice, which provides services to petroleum and energy-related industries. Mr. Sembo has

been with RBC Dominion Securities since 1986 and has broad investment banking, corporate

credit and mergers and acquisition experience. Prior to joining RBC Capital Markets, Mr. Sembo

Page: 60

was with the corporate finance team of another bank for six years and, prior to that, with

Asamera Inc. where his principal responsibility was project assessment and development.

[296] Mr. Sembo became familiar with Deer Creek at the time Deer Creek was looking for

initial capital to commence operations. RBC Dominion Securities was joint book co-lead on

Deer Creek’s initial public offering commencing in June 2004 and the flow-through share

offering done in late fall 2004 and was co-manager of the common share “follow-on” offering

done in June 2005. Mr. Sembo was involved as an advisor to one of the Category A parties that

was looking at the opportunity to either invest in or acquire Deer Creek in early 2005.

[297] Mr. Sembo disagreed with the assertion of the dissenting shareholders through their

expert William C. Dovey that the public trading values of Deer Creek’s shares were not

representative of fair value. Mr. Sembo in his report noted that, in essence, Mr. Dovey was

stating that there was no valid or liquid market for Deer Creek common shares and that therefore

the share trading prices in the period before the announcement of the Total offer were not valid

indicators of value.

[298] Mr. Sembo examined the trading data for Deer Creek from July 29, 2004 to July 29,

2005, the period from the first listing of Deer Creek stock to the time of the offer. He noted that

securities, including Deer Creek, are not perfectly liquid, but analyzing the time it takes to buy or

sell a 1% - 2% position in the company (the average investment in a particular company by a

Canadian institutional investor) is a means to judge the liquidity of a particular security. If the

transaction takes less than a week, a stock is considered liquid; if it takes more than three weeks,

a stock is considered illiquid.

[299] With respect to Deer Creek, Mr. Sembo noted that:

(a)

over 100% of the non-insider float turned over in a 12-month period, indicating

sufficient interest to allow a significant volume of shares to be traded without

impacting the market price, pointing towards liquidity;

(b)

(c)

there were good volumes traded on a day-in and day-out basis;

approximately 78% of the float turnover was in block trading of 10,000 or more

shares, which speaks to liquidity and also indicates that many shares are held by

institutional investors, who tend to be sophisticated investors; and

(d)

there was a good community of broker deals that were trading in and out of the

stock daily.

[300] Based on these observations, Mr. Sembo opined that over the relevant period there was a

valid and liquid market for the Deer Creek shares on the Toronto Stock Exchange, and that,

therefore, trading prices in that market place were a valid indicator of the value of such shares.

Mr. Sembo commented that there was a continuous flow of information and disclosure about the

Page: 61

company in the market and two follow-up transactions to the initial public offering, meaning that

there were, in his view, informed buyers and sellers of the stock.

[301] Mr. Sembo then addressed Mr. Dovey’s unexplained gross-up in his evaluation of the

number for comparable companies by a 20% premium. Mr. Sembo assumed that this was to

reflect a premium paid for control. Mr. Sembo indicated that it is not RBC Dominion Securities’

practice to do this when using comparable company analysis, and noted that, in his view, the

existence of Lime Rock as a significant minority shareholder worked against the implicit

assumption of a minority discount, given the nature of Lime Rock and its business. Mr. Sembo

testified that, in his view, an organization like Lime Rock which focuses on shareholder value

will attempt to maximize value when it sells, and if it is successful in obtaining a premium that

exceeds 115% of the stock price, that same premium must under securities law be passed on to

all shareholders. Because of this, there is no reason why the Deer Creek shares should trade at

any minority discount and, in Mr. Sembo’s opinion, the trading price of Deer Creek shares did

not reflect any minority shareholding discount.

[302] Mr. Sembo testified that his firm and its Category A client had analyzed the Deer Creek

opportunity from publicly-available data, focussing on the ability to exploit the Deer Creek

resources on a commercial basis and the overall cost to achieve that objective. They felt there

was sufficient information in that domain so that they could reach a decision on whether or not

to proceed. Mr. Sembo’s report indicates that his client “ultimately concluded, based on public

information, that Deer Creek did not present the value attributes thought necessary to support the

anticipated market clearing price for a change of control transaction.” Mr. Sembo testified that,

by this, he meant that his client concluded that Deer Creek was not the strategic opportunity it

was looking for. He noted that Deer Creek’s board was aware of his client’s interest and made

several attempts to solicit that company to re-engage in the process during the spring and

summer of 2005.

[303] Mr. Sembo’s report indicates that there were really only a very limited number of parties

with an interest and the capacity to take on the Deer Creek project. He testified that he based this

opinion on his own experience and that of his firm in the developing oil sands sector. He also

noted that it was to be expected that potential parties might seek to acquire Deer Creek, rather

than own a working interest in the Joslyn Project.

[304] Mr. Sembo disagreed with the suggestion by both Professor Hayes and Mr. Derouin that

Deer Creek should have “just said no” to Total and conducted an auction. He stated that it was

incorrect to infer that Deer Creek’s “auction” was ineffective, characterizing it as a private

canvass of the most likely buyers. He did not disagree that there were a limited number of

legitimate buyers and opined that the candidates named in the “Potentially Interested Parties” list

were a reasonable list. He referred to the risks associated with the auction process described by

Professor Hayes, particularly the risk of running a process where no superior proposal was

generated and Total decided not to proceed with its offer. Mr. Sembo testified that a failed public

auction put a company in a precarious position as its shareholder base may have become

acquired by arbitrageurs looking for short-term financial gains.

Page: 62

[305] Mr. Sembo referred to the “both substantial and subtle” differences in Canadian and U.S.

merger and acquisition practice, noting particularly that there is little chance of a Canadian

company surviving on a stand-alone basis once a bidder puts it “in play”, and citing statistics that

demonstrate how difficult a “just say no” defence is to implement in Canada. He noted that:

... Canadian corporate Boards do not enjoy the same degree of latitude to decide

on behalf of the shareholders whom they represent as exists in the U.S. The

magnitude of the premium to market ... was significant relative to Canadian

merger and acquisition transaction precedents. It would have been extremely

risky for Deer Creek’s Board of directors to have “just said no” to the Total offer.

Putting the offer to the shareholders of Deer Creek was the responsible course of

action.

[306] Mr. Sembo also referred to the fact that a number of potential candidates had refused to

sign a confidentiality agreement that contained “standstill” provisions. He opined that, given

Deer Creek’s fulsome public disclosure and active investor relations program, restricted

availability of confidential information would not have been a limitation for other bidders to

consider an offer.

[307] In cross-examination, Mr. Sembo testified that RBC Dominion had been aware that Deer

Creek was receiving “unsolicited interest” as early as the fall of 2004, had in fact facilitated

meetings for some clients with Deer Creek and had suggested in discussions with Deer Creek

management that it should consider partnering. He noted that the confidentiality agreement

negotiated with potential joint venture parties included standstill provisions. Mr. Sembo

disagreed with the suggestion that the process engaged in by the Deer Creek board was

inadequate, commenting from what he knew and the additional information that was being put to

him in cross-examination that the process was yielding “intelligence” to the board. In Mr.

Sembo’s opinion, the confidential information memorandum that was being prepared by Deer

Creek’s financial advisors included the solicitation of an offer to purchase. He noted that in

discussions in July 2005, Mr. Bruce had specifically indicated to him that an offer from his client

could be structured as “a partnering initiative, a purchase of shares or a purchase of all of the

shares of the company.” Mr. Sembo was unswayed by the suggestion that he did not have

enough information on the process that the Deer Creek board had engaged in to give his opinion,

stating that on the basis of the knowledge he had, he was of the view that the board had acted

responsibly. He disagreed that it would have been a good process to play one potential purchaser

against another, noting that the timeline was probably set by the high bidder with conditions in

the offer to purchase. He reiterated that, in his professional judgment, the process should start

with the directors having a clear understanding of the value of their company and then ensuring

that they have the opportunity to review all alternatives, including maintaining the status quo.

The board then has to deal with matters as they evolve and at the end of the day make a prudent

decision on the course of action it should follow. He rejected the proposition that deal protection

terms should be allowed only after the market has been canvassed, noting that every case has to

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be judged on its own merits, that a board has to take into consideration the circumstances that led

to an offer and to weigh an extraordinary offer.

[308] Mr. Sembo noted that often the toughest decision falling on boards is to know when a

process has run its course. He commented that:

... I have a view that processes can run for months, weeks, days. And in the end

it’s a matter of judgment on the part of the Board of directors. If they have

sufficient intelligence information to make informed decisions, then they have to

weigh all of the options with a view of maximising value for shareholders.

He testified that it was important to note that the Deer Creek board retained a “fiduciary out” in

the deal protection terms so that it could deal with a superior offer if it arose. He testified that the

$31 offer was a combination of the process and the particular attributes of Deer Creek, and that

the deal protection terms achieved the purpose of forcing a third party to bid higher.

[309] In cross-examination, Mr. Sembo was asked to give an opinion on a series of

assumptions, some of which were incorrect or had not been established by the evidence. On re-

examination, Mr. Sembo was asked to make the following assumptions:

a)

b)

c)

Deer Creek’s Board and management were soliciting joint venture partners since

at least early 2005;

In the course of this effort, Deer Creek had discussions with eleven significant

industry participants, not merely the Category A parties on the list;

The May 2005 Shell joint venture proposal was in fact the result of Deer Creek

solicitation, as was an initial Total proposal for a joint venture;

d)

e)

Both were rejected by Deer Creek;

Deer Creek in fact recognized that the type of parties it was soliciting for joint

venture proposals were capable of bidding for the entire company instead. Deer

Creek’s Board had recognized the possibility of a hostile bid for the company as

early as a Board strategy session in October 2004;

f)

In part in recognition of that possibility, Deer Creek’s chairman regarded the

involvement of Goldman Sachs in June as having a dual purpose - both to assist in

pursuing a joint venture arrangement and also to prepare for the possibility of an

en bloc offer;

g)

It was contemplated from the outset that Peters & Co. would fulfil a joint advisory

role in light of their deep involvement with the company, and they were retained

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for that purpose shortly after the submission of an en bloc bid by Total at $20.50

on July 15, 2005;

h)

i)

Following five days of deliberations, Deer Creek rejected Total’s offer and urged

it to focus again upon a joint venture proposal;

At the same time, in recognition of the possibility that Total might come back

with a higher offer, Deer Creek made approaches to four other parties, including

Shell, which in its judgment and that of its advisors, were the parties most likely

to be capable and interested in pursuing either a joint venture arrangement or an

en bloc transaction. Deer Creek invited them to consider the possibility of both,

and to do so without delay;

j)

These approaches resulted in two further joint venture proposals from Shell;

k)

While Shell indicated in a letter that it was not in a position to make an en bloc

offer, it in fact advised Deer Creek just two days later that it could present an all-

cash offer of $24;

l)

Through its advisors, Deer Creek advised Shell that it was materially too low at

$24, but after consideration Shell indicated through its financial advisors that $24

was as high as it was prepared to go;

m)

n)

Other parties indicated to Deer Creek that they were having difficulty reaching

valuations at the level of Deer Creek’s current trading price of around $18;

It was in this context that Deer Creek negotiated the $25 offer with Total which

was announced on August 2, 2005;

o)

In the course of these negotiations, Deer Creek refused to agree to the hard lock

agreement requested by Total, insisting instead upon maintaining a fiduciary out

with respect to any superior proposal which might be received during the

currency of Total’s offer; and

p)

Shell’s topping bid at $31 was received during that period, and Total exercised its

right to match that bid. No further bids were received prior to Total’s take-up of

approximately 78% of Deer Creek’s shares on September 13, 2005.

[310] All of these assumptions have been established by the evidence. Mr. Sembo was asked

what impact these assumptions would have on his view of the adequacy of the Deer Creek

board’s process. He replied that a great deal of “intelligence information” was made available to

the board concerning the universe of potential partners and purchasers of the company or

selected assets of the company, and the time period described would have allowed the board to

give careful consideration to, not only third party interest, but Deer Creek’s ability to continue to

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execute its own business plan, taking into account that it required substantial finances and given

the market reaction should the board choose one of the opportunities that was presented to it.

[311] The dissenting shareholders submit that putting these submissions to Mr. Sembo was an

impermissible use of re-examination that exceeded the bounds of propriety, as the assumptions

concerned issues that were either non-contentious or did not arise from cross-examination. The

assumptions, however, were put to Mr. Sembo in response to a flawed set of assumptions in

cross-examination. For this reason, this was a reasonable and allowable use of re-examination.

[312] Mr. Sembo testified in response to the suggestion that every party on the list of

Potentially Interested Parties should be contacted that the board must consider the risk of

communicating with third parties about its business plan and potentially sharing confidential

information. It must be clear on its objectives before doing that. He noted that it is important to

screen a list like the list of Potentially Interested Parties carefully.

[313] The Paulson dissenting shareholders submit that Mr. Sembo “was unequivocal that for

the purposes of valuing Deer Creek, he would use [discounted cash flow] over share price and

premiums to share price”. This submission arises from the cross-examination of Mr. Sembo on

the issue of whether the use of comparables is an appropriate valuation methodology. When read

in context, his answer was hardly unequivocal, and indeed appears to be directed toward the

question of whether a discounted cash flow analysis is more appropriate than a comparables

approach. It is true that the question to which Mr. Sembo was replying mentioned share prices,

but to read into that an unequivocal preference for a discounted cash flow methodology over a

market value approach goes too far, when the question and answer are read in context and in

light of the whole of Mr. Sembo’s evidence. I find that Mr. Sembo either misunderstood the

question or was replying to the earlier line of questioning about the use of comparables.

[314] The dissenting shareholders also suggest that Mr. Sembo made certain “admissions” that

are useful to their argument on process. These “admissions” do not support the submission that

the process undertaken by the Deer Creek board and management was flawed.

c.

Samuel L. Hayes III

[315] The Paulson dissenting shareholders called Professor Samuel L. Hayes III to give opinion

evidence as an expert in investment banking, including mergers and acquisitions, and the proper

process that should have been undertaken by Deer Creek. Professor Hayes is an Emeritus

Professor of Investment Banking at Harvard Business School and holds the Jacob H. Schiff

Chair in Investment Banking. He has taught at Harvard since 1971 and, prior to that, at

Columbia University. Professor Hayes’ research has focussed on capital markets and “the

corporate interface with the securities markets”. He has consulted for various sectors of the

United States government on projects related to the investment banking industry. At the time of

his testimony, he was a member of the boards of Tiffany & Company, Eaton Vance mutual

funds, Telect, Inc., Watermark, Inc. and Yakima Products. Professor Hayes has taught business

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valuation techniques over the course of his teaching career, and has been involved in advising a

board of directors in a merger and acquisition transaction on two occasions.

[316] Professor Hayes conceded that he had no expertise in the energy industry or in the oil

sands business and that he had never been a director on a board that was facing a takeover

proposal. While he agreed that he could not put himself in the position of Messrs. Jackson,

Schmidt, Bruce and Daniel with respect to their assessment of the characteristics of the kind of

company that would be able to take over the Joslyn Project and develop it, he testified that he

felt competent to suggest that there was “a broad array of potential buyers for this asset, this

unique asset in such a a politically safe environment.” He repeated on cross-examination that it

was “reasonable to believe” that there may be potential bidders not within the petroleum sector

for the Deer Creek assets. He conceded that Goldman Sachs should have been in a position to

assess the likelihood of other potential buyers from outside the petroleum industry, but testified

that “my guess is that if they had more time, they would have but they didn’t have the time.”

[317] Professor Hayes also conceded that he was not an expert on Canadian law, but expressed

the opinion that “best practices” in takeovers and mergers and acquisitions were quite common

among the United States, Canada, Europe and Asia, and that he could speak with confidence

about best practices.

[318] Professor Hayes opined that Deer Creek failed to conduct an auction to ensure maximum

value to the selling shareholders. He stated that Deer Creek “apparently jettisoned its plans for a

measured pursuit of a joint venture partner” subsequent to July 22, 2005. Professor Hayes took

from his review of documentation that Goldman Sachs was focussing only on a joint venture

possibility and that the list of Potentially Interested Parties was put together only for the purpose

of obtaining a joint venture partner, although he later resiled from that position and said that he

understood it was “initially” prepared for the joint venture possibility.

[319] Professor Hayes testified that, as far as he could tell from the materials he read, the Deer

Creek board had no process, that it only turned towards the possibility of an en bloc sale when

the Total offer unexpectedly arrived in the middle of July 2005. He set out what he considered to

be a more appropriate process to be followed in the wake of Total’s revised offer, which

involved stepping-back from the offer, following a “structured” process of exploring an

alternative to outright sale, putting together an offering memorandum, getting the financial

advisors “to generate multiple indications of serious buying interest,” setting up a data room,

setting a time frame sufficient for proper due diligence and conducting a bona fide auction,

which, he noted, did not necessarily mean a public auction, but would involve setting up a

“competitive dynamic” to elicit expressions of interest from a number of parties. On cross-

examination, Professor Hayes suggested that Deer Creek should have “explained the need to

make a thorough test of the market” to Total, and should have obtained from Total its consent to

wait for the process to unfold. He suggested that Deer Creek then could have decided whether or

not to take the Total offer or another offer or do nothing. Professor Hayes acknowledged the

large premium over the share price offered by Total and the fact that Total may have chosen to

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pursue other options, but relied on what he considered to be the scarcity of available options in

the oil sands area.

[320] In response to the question of what the Deer Creek board should have said to its

shareholders if the Total offer evaporated, he suggested that it should repeat its mantra that the

stock price did not reflect the intrinsic value of the company and that shareholders should not

worry.

[321] Professor Hayes opined that the downside risks of a failed auction were exaggerated and

overplayed. He conceded that “of course” there would likely be a decline in Deer Creek’s stock

price in such a case, but that the basic situation of the company, in his view, would remain the

same. Professor Hayes agreed that he had never been in a position where he had to be concerned

about losing critical staff, but suggested that it was incumbent on the board to ensure that such

staff was paid the kind of incentive necessary to retain them. He conceded, however, that this

was an element of business judgment. With respect to the risks of a change in base shareholders

and the emergence of arbitrageurs, he conceded that arbitrageurs were “notorious for dumping

shares when they find a deal is not going to go through,” but “hopefully and probably” a stock

decline would be temporary.

[322] Professor Hayes characterized the deal protection terms to which the Deer Creek board

had acquiesced as “anticompetitive”. While in his written opinion, he criticized the break fee and

the lock-up provisions, in his testimony he stated that break fees are very common and that the

size of the fee in this deal was reasonable. He also conceded that, while Total tried to get a hard

lock-up, it ended up with a soft lock-up that enabled Deer Creek to respond to a superior bid. He

testified, however, that he had problems with the no-shop provision, the prohibition on

dissemination of confidential information and the right of first refusal, which he found “quite

restrictive.” Professor Hayes conceded that these were common types of provisions, but testified

that the difference in his opinion was that, typically, when a selling board and management

accepts these types of restrictions, they have surveyed the market and are convinced that the

price is the best that they can achieve. In his view, Deer Creek had not done that, as there was

not enough time for it to have done that kind of investigation.

[323] Professor Hayes testified that it was “almost a miracle” that the Shell higher bid had

emerged from what he characterized as the “thicket of roadblocks,” and opined that, without

these deal protection terms, it was “quite likely” that other bids would have come forward, and

“quite likely” that they would have been even higher. Professor Hayes referred to the “chilling

effect” of a right of first refusal, but allowed that in some cases a purchaser pays a premium for

such a right that accrues to the owner of the asset.

[324] Professor Hayes assumed that the investment advisors were given a limited mandate in

connection with the solicitation of other third party interests and that their fairness opinions were

thus unlikely to constitute an adequate basis for making a recommendation on the sale of Deer

Creek. When he learned that their mandate was not limited, he opined that they did not do their

job, despite his acknowledgement that at least Goldman Sachs was a highly regarded

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international firm and his concession that he was sure that Goldman Sachs did a considerable

amount of work in arriving at its opinion.

[325] In Professor Hayes’ recitation of facts, he suggested that Deer Creek was approached by

several parties in the first half of 2005 with respect to the possibility of a joint venture, although

he conceded in his testimony that he was aware that Deer Creek had itself approached some of

these parties. His version of the facts also suggested that no real effort had been made by Deer

Creek to explore joint venture possibilities before Total’s $20.50 offer. He agreed on cross-

examination that he knew that there were discussions before that time, but that in his view they

were “more of an ad hoc one-off type of activity”, and not organized in the way that Goldman

Sachs was proposing in some of its initial materials. Professor Hayes admitted that he did not

have an understanding of the details of the negotiations that had been carried out between Deer

Creek and Total between the $20.50 offer and the $25 offer.

[326] Professor Hayes also referred in his version of the facts to an “unsolicited” higher offer

of $31 from a third party, although he conceded that he was aware when he prepared the opinion

that Deer Creek had been having discussions with Shell on some kind of business combination

and that Shell had put forward its separate joint venture proposals before its topping bid. He also

acknowledged that, while he had been aware that Shell had indicated to Deer Creek in late July

that it was prepared to make an en bloc offer, but would not go above $24, he failed to mention

this in his opinion. Professor Hayes also conceded that he was aware of Deer Creek’s discussions

with another major potential bidder that had been approached and had decided that Deer Creek

did not have sufficient value to warrant a bid, and that this was “input to be considered” in

evaluating the Deer Creek board’s decision. Professor Hayes acknowledged that business

judgment plays a role in these kinds of decisions.

[327] Professor Hayes conceded that when a potential joint venture partner had done a

complete evaluation to decide what it was prepared to pay for a 51% in the Joslyn Project, it was

well along the path to deciding what it might be prepared to pay for 100% of the company.

[328] He also conceded that the reaction of shareholders if Deer Creek had “just said no” was

something the board could take into account in exercising its business judgment, but suggested

that, if the process of evaluation had been thorough and the board had come to the conclusion

that $25 was not an adequate reflection of value, perhaps Lime Rock would have changed its

opinion that it was a favourable price.

[329] Mr. Guiziou commented on the opinion of Professor Hayes that Total had outmaneuvered

Deer Creek and its financial advisors, stating that, as lead negotiator for Total, he disagreed. He

testified that the Deer Creek board and management were very qualified, very serious, clear

about their objectives and the value they saw for their project. In his view, Total had a strong

counterpart in an intense and tough negotiation. He noted that Total failed in its objective of not

becoming a stalking horse and that Deer Creek had been quite successful in the negotiations in

leading Total into a situation that did not foreclose the possibility that Deer Creek’s shareholders

would get further value from the market.

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[330] In response to Professor Hayes’ opinion, Mr. Jackson described Deer Creek’s marketing

process as very thorough, particularly given his view of how parties interested in a joint venture

could easily convert to an evaluation of the company as a whole. He testified that he thought

Deer Creek had a very extensive pre-market check, secured the Total bid, and went through a 40-

day public phase, concluding that he thought the board did a good job. He noted the comfort of

the Shell $24 bid.

[331] Mr. Jackson testified about his thought process relating to the deal protection terms

negotiated with Total at the time of the offer. He noted that the break fee at approximately 3% of

value was “pretty much mainstream”. He commented that the no-shop agreement with the

fiduciary out provision was “very standard”, and “as long as we protected our fiduciary out, we

were comfortable with the no-shop because we knew that we would be able to respond to any

bona fide proposals that were presented after announcement that in fact were superior

proposals.” Mr. Jackson stated that he viewed Total’s right of first refusal as being “pretty

common”, and did not consider it in impediment to the after-announcement market check. He

noted that Shell obviously did not consider it an impediment and that what a right of first refusal

did was ensure that “a tie goes to the guys who started” the process.

[332] He disagreed that Goldman Sachs were passive or did not demonstrate “market savvy”,

as charged by Professor Hayes, and noted that the firm had assigned a senior advisor who gave

the transaction his full attention. He gave the opinion that, from his experience with advisors, the

quality of advice the board got from both sets of advisors was very high.

[333] Responding to the suggestion that Deer Creek should have conducted a full public

auction, Mr. Jackson testified that the board considered this many times through the process and

each time concluded that there were more risks than benefits to a public auction, including the

risk of a failed process and the implications to a going-concern business plan, and that the board

did not see that there would be much incremental value to an auction. Mr. Jackson commented

that the range of logical buyers for Deer Creek was “pretty obvious” and easily identified.

[334] Mr. Schmidt testified in response to Professor Hayes’ suggestion that Deer Creek

stumbled into an agreement with Total and was outmaneuvered. He noted that Deer Creek had a

strategy that it executed in a deliberate manner, had worked its way through a series of

negotiations with credible parties and came to a satisfactory answer. He stated that Deer Creek

had been testing its communication strategy with investors through the spring of 2005 and had a

read on what the key players could do and when they could do it over a much longer time frame

than Professor Hayes suggested was the case. He characterized the financial advisors as very

active and as challenging management.

[335] Mr. Schmidt testified about the risks of a full public auction, recognizing the “pro” as

being that a party that the company may not be aware of may come to the table and make an

unexpected bid. Mr. Schmidt stated that, while this may work in asset deals particularly, the

Deer Creek deal was different in that it was not just an asset deal, but required the bidder to

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invest about $10 billion and have upgrading experience, which “took a universe of possibilities

and narrowed it to a very sharp focus.” Mr. Schmidt talked about the loss of control in a public

auction, the harm caused by speculation in the stock, the difficulty with retaining staff in an

environment where companies compete for qualified people, the consequences to equity

financing of a failed process, the change to a shareholder base of short-term investors. Mr.

Schmidt testified that the working group had discussed the negative outcome of a recent failed

public auction.

[336] Mr. Jackson testified that the acceleration of the vesting of stock options and

performance units held by directors and senior officers of Deer Creek that was a condition of the

Total offer had no impact on his assessment of the offer, noting that the same thing would have

occurred had there been a public auction. Mr. Jackson pointed out that, if the Deer Creek shares

were worth as much as the dissenting shareholders were suggesting, he and the other directors

and management would have foregone many millions of dollars in value simply for the sake of

early acceleration.

[337] Mr. Sembo was also in disagreement with comments made and conclusions reached by

Professor Hayes. Mr. Sembo opined that the deal protection terms reached in the transaction did

not impede other interested parties and did not, as Professor Hayes put it, amount to “steel

handcuffs”. Mr. Sembo characterized the type of deal protection terms at issue as common in

merger and acquisition transactions in Canada and the United States over the last ten years, and,

in fact, often used to induce a bidder to put forth a full and fair price. Mr. Sembo noted that deal

protection measures like break fees discourage rival offers that top an existing bid only slightly.

[338] Mr. Sembo pointed out that, in fact, a second offer did emerge, evidencing that the deal

protection terms were not a deterrent and demonstrating, in his view, that the board was careful

in its deliberations on the extent of deal protection.

[339] With respect to the comment made by Professor Hayes that Deer Creek had stumbled into

its agreement with Total, Mr. Sembo opined that the Deer Creek board developed a responsible

process to deal with third party interest, and referred to his personal knowledge acting as an

advisor to one of the Category A companies.

[340] Mr. Sembo commented that Professor Hayes’ analysis ignored the substantial premium to

market of approximately 39% secured by the board in its process, assumed without evidence that

more time would have achieved a better outcome, and made no reference to the challenge of

developing an oil sands resource that raises barriers to entry. Mr. Sembo testified that, by late

July 2005, the process that the board followed had probably run four months, if not longer, and

the continuance of the process ran the risk that Deer Creek would lose the attractive Total offer.

He also noted that the period of time between the announcement of the offer and the tender date

did allow a third party to come forward with a superior offer.

[341] I accept these criticisms of Professor Hayes’ opinion. Professor Hayes took a simplistic

view of whether or not Deer Creek had conducted a process, coloured by his contention that

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“best practices” would be the same whether the market was the United States or elsewhere and

without much regard to the specific industry in issue. He took a cavalier attitude towards the

risks of a failed auction and the duty and responsibility of the board to ensure that the

shareholders did not lose an opportunity to tender to an offer that was at a marked premium to

trading prices. His review of the documentation appeared to be incomplete or based on some

fundamental misunderstandings, and he failed to give a satisfactory explanation of why he chose

to omit certain facts that did not fit his theory of the case.

[342] Professor Hayes’ insistence that the deal protection terms were anticompetitive flounders

on the inconvenient fact that there was a topping bid made by a third party in the post-bid period

by a party that made its bid without access to confidential information, subject only to a follow-

up due diligence that it completed within 24 hours.

[343] It is noteworthy that the evidence of the Paulson dissenting shareholders is illustrative of

the weakness of Professor Hayes’ opinion in that regard. The officer produced on behalf of the

Paulson dissenting shareholders at examination for discovery, Michael Waldorf, admitted an

ongoing expectation of the possibility of a competing bid above $31 - long after Paulson had full

details of all of the deal protection terms. At trial, Mr. Paulson attempted to suggest otherwise,

arguing that the deal protection terms were “particularly onerous” and “some of the most

onerous deal protection terms that I’ve seen”. He then attempted to reconcile this contention with

the expectation of a competing bidder on the basis that Paulson was not aware of the deal

protection terms when it made its initial decision to buy on August 2, 2005. However, this

evidence was in clear conflict both with the one-page “comp sheet” upon which the initial

purchase was based and with Mr. Paulson’s own discovery testimony.

[344] Professor Hayes’ opinions with respect to other interested parties and the probability of

higher bids had the kind of auction he was proposing occurred rest only on speculation, as he

acknowledged his lack of expertise in the industry sector. I prefer the informed opinions of other

witnesses in that regard. In short, Professor Hayes’ opinion was not of assistance to me on the

question of the process undertaken by the Deer Creek board and whether it had conducted

adequate marketing and testing of the market prior to approving the Total bid, nor whether its

agreement to the deal protection terms was flawed.

[345] While, as I note later in this decision, the differences between American and Canadian

practice make it doubtful whether Delaware law ought to be applied in a fair value case under

Alberta law, it is noteworthy that Professor Hayes’ comments on American “best-practice” and

his perceptions about the deal protection terms have not always been accepted by the U. S.

Courts.

[346] The Paulson dissenting shareholders cite Roberts v. General Instrument Corp., [1990]

WL 118356 (Del.Ch.) for the proposition that insufficient time was allowed in the Deer Creek

situation for alternative offers to emerge. However, in that case, the Delaware Court of Chancery

dismissed an application to enjoin a merger transaction negotiated with a single party and

incorporating a no-shop provision and a 2% break fee, but with a fiduciary out enabling a 30-day

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post-transaction market check. The merger price of $44.50 fell within a range of values from

$30.69 to $55.61 assessed by the company’s investment bankers, who opined that the price was

fair.

[347] In those circumstances, the court found that the plaintiffs did not have even a reasonable

probability of success in challenging the board’s decision. It was found to meet the enhanced

review undertaken by Delaware courts in assessing every change of control transaction. This was

the conclusion notwithstanding the existence of a feature not present here, that the initial

negotiator on behalf of the company had an expectation of being offered future employment or

equity participation by the buyer. It is thus patent that the court felt a 30-day post-transaction

market check was sufficient in the circumstances.

[348] In McMillan v. Intercargo Corp., 768 A.2d 492, the specific context was the assessment

of a Revlon/Unocal duty of loyalty on facts that are distinguishable from this case. However, the

court commented as follows at 504-7 in striking out a claim based on the failure to conduct a

more aggressive public auction process:

Although the complaint takes issue with the board’s decision to conduct its search

for a buyer through the non-public efforts of an investment banker, this is the sort

of quibble that, at best, raises a due care claim under Delaware law. Whether it is

wiser for a disinterested board to take a public approach to selling a company

versus a more discreet approach relying upon targeted marketing by an

investment bank is the sort of business strategy question Delaware courts

ordinarily do not answer. This case provides no basis for an exception to that

approach.

Nor do the rather ordinary “deal protection” provisions of the merger agreement

provide any support for the plaintiffs’ Revlon claims. Putting aside the lack of any

motive for the board to negotiate preclusive lock-ups, the termination fee and no-

shop contained in the XL merger agreement are not out of keeping with those

which have been upheld by Delaware courts.

Although in purely percentage terms, the termination fee was at the high end of

what our courts have approved, it was still within the range that is generally

considered reasonable...From the preclusion perspective, it is difficult to see how

a 3.5% fee would have deterred a rival bidder who wished to pay materially more

for Intercargo. No doubt the presence of the fee would rebuff a bidder who

wished to top XL’s bid by a relatively insignificant amount that would not have

been substantially more beneficial to Intercargo’s stockholders, but to call such an

insubstantial obstacle “draconian” is inconsistent with the very definition of the

term.

Likewise, the fact that the merger agreement contained a rather standard no-shop

provision does little to bolster the plaintiffs’ claim. The no-shop permitted the

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Intercargo board to consider an unsolicited proposal that the board determined

was likely to be consummated and more favourable to Intercargo’s stockholders

than the XL merger. The presence of this type of provision in a merger agreement

is hardly indicative of a Revlon (or Unocal) breach.

...

In contrast to the usual Revlon/Unocal case involving defendants who have

resisted a sale, this complaint attempts to state a claim against a board with a

disinterested majority that engaged an investment banker to search for strategic

buyers, that consummated a merger agreement with a third-party purchaser, and

that put up no insuperable barriers to a better deal. [Emphasis added.]

[349] In re MONY Group Inc. Shareholder Litigation, 852 A.2d 9 (Del. Ch. 2004), the court

rejected a challenge to a transaction involving a 7.3% premium to market following negotiations

with a single party identified from a prospect list of twelve and incorporating a no-shop clause

with a fiduciary out and a 3.3% break fee. The absence of any competing bidder in five months

following the announcement was found to be a “more than adequate” demonstration that the

price was the best reasonably available, given that “market checks brought before this court

typically last between one and two months”. The court commented at pp. 19-21:

...As made clear in Revlon, this mandate requires a board to get the best short-

term price for stockholders in a sale of control. This requirement, however, “does

not demand that every change in the control of a Delaware corporation be

preceded by a heated bidding contest”. Rather, the basic teaching of Revlon and

its progeny is that “the directors must act in accordance with their fundamental

duties of care and loyalty.”

Specifically, the Delaware Supreme Court has held that a board can fulfill its duty

to obtain the best transaction reasonably available by entering into a merger

agreement with a single bidder, establishing a “floor” for the transaction, and then

testing the transaction with a post-agreement market check. . .

In determining whether the Board met its duty to obtain the best transaction

reasonably available to the stockholders, the traditional inquiry of whether the

Board was adequately informed and acted in good faith is heightened... However,

the court must review the decision-making process in light of the complexity of

the directors’ task in a sale of control.

...

The plaintiffs next argue that the decision to forego an auction and utilize a

market check was in error. Specifically, the plaintiffs point to a decision by the

Board not to solicit interest from several potential acquirors, contrary to the

suggestion of [their investment banker]. The Board, however, acted in a

reasonable manner in making its business decision. As a preliminary matter, “the

mere fact that [a] board decided to focus on negotiating a favourable price with

[one potential acquiror] and not to seek out other bidders is not one that alone

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supports a breach of fiduciary duty claim”. Single-bidder approaches offer the

benefits of protecting against the risk that an auction will be a failed one, and

avoiding a premature disclosure to the detriment of the company’s then-ongoing

business. [Emphasis added.]

[350] While these cases involved a business-judgment type of assessment of the decisions of

directors in accordance with the U.S. Revlon/Unocal approach in breach of duty litigation, and I

have found that it is not necessary for me to invoke the business judgment rule in its classic

sense under Canadian law in this fair value proceeding, these comments support the evidence of

Messrs. Jackson, Bruce, Sembo and Daniel and indicate that American “best practices” do not

always require the type of process suggested by Professor Hayes.

2.

a.

The Technical Experts

Joseph Aiello

[351] Mr. Aiello is the president of Norwest Corporation. His background is in engineering and

he has worked in the oil sands since 1988. He is a member of APEGGA and of the Canadian

Institute of Mining and Metallurgy. His experiences include acting as project manager mining

for a large oil sands project, which required data collection and management, geological

modelling, line planning, costing, reclamation and mine closure planning. Mr. Aiello was

qualified as an expert on the analysis of bitumen property interests and bitumen recovery and

production projects and provided two expert reports to the Court - a “Lease Comparison Study”

and a Rebuttal Report.

[352] Mr. Aiello testified that Deer Creek initially engaged Norwest in 1999 to conduct a

preliminary assessment of the surface mining potential of the Joslyn area. They have continued

to be involved in updating Deer Creek’s geological models as new drilling information became

available. The Lease Comparison Study compared the mining potential of the Joslyn Project with

various other projects in the area. This comparison was made on the basis of a number of factors,

the first being the “resource base”. The resource base is an assessment of the size and quality of

the bitumen resource at the particular site. “Resource confidence” is an attempt to establish

confidence limits around the particular resource base. Mr. Aiello testified that these two factors

have the greatest influence on the final ranking of the project. Norwest also considered

environmental and regulatory issues; Mr. Aiello noted that the regulatory process has become

more complex and rigorous over time.

[353] In making its assessment of the Joslyn Project, Norwest considered a number of mining

factors; essentially, these are technical factors which allow an assessment of the ease with which

the bitumen can be recovered and the potential costs associated with doing so. For example, Mr.

Aiello explained that, using criteria published by the AEUB, they apply a measure of quality to

the recoverable volume of bitumen so that sites having different qualities of resources can be

meaningfully compared. He said that they relied primarily on publicly available information,

though they did have access to the latest drilling information for the Joslyn site. Mr. Aiello

testified that, notwithstanding the geographical proximity of the four sites Norwest compared,

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there are significant differences among those four projects. He said that the ore grade at Joslyn is

not as good as at UTS, that Fort Hills has a significantly greater volume of resource base and that

Muskeg River is further through the regulatory process and is already successfully operational.

[354] Mr. Aiello also discussed his rebuttal report, which was prepared to respond to the

reports of Mr. Dovey and another expert called by the dissenting shareholders, Gregory Heath.

In the rebuttal report, Mr. Aiello expressed concern about these experts including data from the

first quarter of 2006, given that the valuation date was December 9, 2005. He also took the

position that the data from that quarter was skewed because of a significant acquisition by Shell

International during that time frame. Mr. Aiello disagreed with Mr. Heath’s conclusion that

extending the life or increasing the capacity of a mining project would require minimal

additional capital expenditure. He also felt that Mr. Heath had incorrectly interpreted the

recoverable volumes of bitumen set out in the Lease Comparison Study. In his view, Mr. Dovey

made the same mistake. He also felt that Mr. Dovey’s comparison of Deer Creek to Blackrock

was not reasonable, given the differences in resources and current production level.

b.

Dana B. Laustsen

[355] The discounted cash flow calculations that form part of the net asset value per share

opinion given by Brian W. Clark, Deer Creek’s primary valuation expert, were based in part

upon a forecast of upgraded production, operating costs and related capital expenditures for the

Joslyn Project effective December 31, 2005 prepared by GLJ. Deer Creek called one of the

authors of that report, Dana B. Laustsen, to give opinion evidence as an expert in the estimating

of petroleum reserves and resources, production and revenue, generally as these relate to oil

sands properties and in particular, estimates of the reserves and resources, production and

revenue of the Joslyn Project in which Deer Creek holds an interest that are amenable to the

SAGD recovery mechanism.

[356] Mr. Laustsen is a mechanical engineer who joined GLJ after five years at Texaco

Canada. He has been with GLJ since 1982 and was the executive vice-president of the firm at the

time of his testimony. The main practice of GLJ is the provision of independent reserve and

economic evaluations to the oil and gas industry for corporate reporting and transactional

purposes. Mr. Laustsen has been involved in the evaluation and review of SAGD operations

since the mid-90's and has had experience with at least nine proposed and operational SAGD

projects.

[357] GLJ performed independent evaluations for public disclosure and financial requirements

for Deer Creek for the years 2003, 2004 and 2005, in addition to the report prepared for Mr.

Clark. Mr. Laustsen testified that GLJ estimated that Deer Creek’s share of proved and probable

marketable reserves of bitumen for SAGD mining of the Joslyn Project was 279,615 thousand

barrels as at December 31, 2005. He testified that while GLJ received information from the

company in performing its SAGD evaluation, including up-dated, geological data, internal

mapping and the company’s latest development plan and cost estimates, it exercised judgment

with respect to geology and engineering. With respect to geology, the main judgment is the

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identification of potential barriers in a reservoir that may impede a steam chamber. On the

engineering side, there is judgment involved in the estimate of recovery factors and production

rates, as well as on both capital and operating cost forecasts. With respect to costs, GLJ relies on

its own knowledge of the industry and experience in addition to the company’s estimates.

[358] On the 2005 year-end evaluation, GLJ increased operating costs from its experience with

some of the other operating oil sands projects and increased its capital cost structure based on its

review of the Deer Creek Phase II costs to date and the increase in reserves. It also corrected an

error in the inflation factor that had carried over from previous reports. GLJ applied its then-

current price forecast, which was $40 WTI in 2005 dollars, which equated, in nominal dollar to a

minimum price of $45 dollars U.S. a barrel. The GLJ report notes that, while these prices

reflected a reduction from the current prices, they are significantly higher than the long-term

historical average of approximately $US 20/per barrel.

[359] Mr. Laustsen disagreed with Mr. Heath, an expert called by the dissenting shareholders,

in his characterization of oil sands as being less risky than conventional oil and gas. He testified

that in GLJ’s view they are not, that there are just different types of risks in oil sands operations

as opposed to conventional projects. He testified that one of the main risks was the geological

risk of the deposit. He noted that there may be an inference if there has been a great deal of core

hole drilling that there is certainty in the reserves, but the reason for all the drilling is that the

deposit is so heterogeneous that operators need the drilling to decide on a big enough steam

chamber to properly develop the resource. He gave as an example the substantial downward

adjustment in the Norwest Corporation unrisked estimates of recoverable mineable bitumen after

two years of additional drilling. Mr. Laustsen also testified about the risk of the existence of

shale barriers between wells that would prevent a successful SAGD operation, a risk that can be

confirmed only by actual operation. Mr. Laustsen pointed to the results of the pilot well drilling.

He also commented on the fact that the Joslyn Project has the shallowest SAGD project in the

Athabasca area, which means less flexibility in respect to operating pressures. His report stated

that, even if ultimate recoverable volume of bitumen could be “confidently forecast”, operational

factors affecting the timing of production could result in uncertain forecasts.

[360] Mr. Laustsen in his rebuttal statement was critical of the Heath report’s treatment of

resources and reserves as equivalent from a risk profile perspective, and Mr. Heath’s theme that

the estimate of reserves and contingent resources will increase with time, characterizing this as

speculative.

c.

James H. Willmon

[361] Deer Creek also called James H. Willmon of GLJ to give opinion evidence as an expert

in estimating petroleum reserves and resources, production and revenue generally as these relate

to oil sands properties, and in particular:

a)

estimates of mineable reserves and resources, production and revenue of the

Joslyn Project in which Deer Creek holds an interest; and

Page: 77

b)

the economic effects on the said project of upgrading production from bitumen to

synthetic crude oil.

Mr. Willmon is a vice-president of GLJ, a mechanical engineer who, after several years with

Dome Petroleum, joined GLJ in 1982. Mr. Willmon has been conducting surface mineable oil

sands evaluations since 1986, including for Suncor Energy Inc., Western Oil Sands Trust, UTS

Energy Corporation, Husky Oil, Deer Creek, Canadian Natural Resources Limited, the owners of

Syncrude and SINOPEC.

[362] Mr. Willmon prepared a letter dated April 20, 2006 summarizing GLJ’s independent

resource assessment of the Joslyn Project effective December 21, 2005. Mr. Willmon was

primarily responsible for “contingent resources”, which are quantities of petroleum that are

estimated on a given date to be potentially recoverable from known accumulations, but that are

not necessarily considered to be commercially recoverable or that have not been classified as

reserves. Mr. Willmon testified that while contingent resources do not necessarily have to be

economic, he tries to identify volumes of petroleum that he thinks would be economic to capture

in the current environment.

[363] Mr. Willmon was the co-author with Mr. Laustsen of a rebuttal report dated August 10,

2006. In that report, he disagrees with the view of the Paulson experts that resources and reserves

are equivalent from a risk profile perspective, noting that recoverable resources estimates require

a number of contingencies to be removed before they are developed and reserves assigned. A

contingent resources evaluation does not address those contingencies and therefore the risk

profile of contingent resources is not necessarily consistent to that of reserves. I accept Mr.

Willmon’s distinction between resources and reserves as appropriate and consistent with best

practices in evaluations in this area.

[364] In the case of Deer Creek, all of the mining side of the Joslyn Project fell within the

classification of resource at year-end 2005.

[365] Mr. Willmon received and reviewed the following information from Deer Creek in

performing his assessment:

a)

b)

geological reports prepared by Norwest Corporation dated November 21 and

December 1, 2005;

a draft, unfiled regulatory application prepared by AMEC and Deer Creek dated

October 13, 2005 which outlined Deer Creek’s plan to develop the north part of

the Lease in two phases in order to increase production to 100,000 barrels of

bitumen per day;

c)

AMEC documents dated November 30, 2005 relating to the basis for capital and

operating cost estimates which Mr. Willmon used for capital estimates and

timelines for Phase I and II of the mine, but did not find appropriate to use for

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operating cost estimates. Instead of AMEC’s operating cost estimates of about

$10 a barrel, Mr. Willmon used estimates of about $13.40 a barrel. Mr. Willmon

testified that he had problems with the methodology used by AMEC in its report

and its results in forecasting long-term costs, given the reserve evaluation

approach he had selected. He noted that AMEC’s information was not based on

data obtained from operating oil sands facilities but from preliminary planning

estimates. The costs Mr. Willmon chose to use reflected evaluation work done by

him principally for Western Oil Sands; and

d)

a draft preliminary Pre-Feasibility study dated February 14, 2004 prepared by the

Washington Group that included a plan for the south part of the mine.

[366] Mr. Willmon testified that he reviews the information he receives in the course of an

evaluation to ensure that he thinks it is reasonable to use. One way of doing that is to

“benchmark” the information to his knowledge of historic operating costs compared to budget

for current operations for which he has done work, in addition to their projections for the future

expressed in various planning documents. Mr. Willmon testified that while consistency in

approach is very important to his assessment work, it is also important to recognize differences

arising from the geology of a specific lease or specific plans by the leaseholder.

[367] Mr. Willmon’s assessment of the Joslyn Project’s total gross Lease bitumen resources is

as follows:

-

Low estimate (conservative) - 1.14 billion barrels;

Best estimate (realistic) - 1.70 billion barrels; and

High estimate (optimistic) - 2.26 billion barrels.

The “best estimate” targets a 50% probability of being higher or lower. Deer Creek’s 84%

interest of the best estimate on which GLJ chose to run an economic analysis is 1.428 billion

barrels. Mr. Willmon did not accept the proposal set out in the Washington Group’s draft

preliminary Pre-Feasibility study to ramp production of the mine up to four mining trains or

200,000 barrels a day, as he considered that this would deplete the best estimate of resources too

quickly.

[368] He noted that the Washington Group’s proposal was predicated on an estimate of 2.06

billion barrels on a gross Lease basis. He instead assumed that the resource would be developed

by a three 50,000 barrel a day train scenario with a production life of approximately 35 years.

Mr. Willmon pointed out that this was the rate that GLJ had used for all three of its past annual

resource evaluations for Deer Creek and that when GLJ presented its assessment to Deer Creek

management, there was “no pushback” on that scenario. Mr. Willmon pointed out that operators

generally wanted a production life for a pit or mine of 30 to 40 years to ensure an adequate

return on capital investment. Mr. Willmon conceded on cross-examination that Deer Creek, both

before and after the Total transaction, appeared to be planning to proceed with a “four train”

development plan for the mine, despite his opinion otherwise.

Page: 79

[369] Mr. Willmon described the approach he had taken to delineate the edge of the mining pits

in the Joslyn Project and how this approach related to operating criteria set out by the AEUB. He

described judgments that he had to make relating to recoverable volume and to placement of

external disposal areas, tailing ponds and plant facilities. Mr. Willmon also had to make

assumptions in his assessment relating to recovery factor and, in doing so, he recognized from

the draft regulatory application and discussions with Deer Creek that it was going to use a

process referred to as a paraffinic froth extraction process.

[370] Mr. Willmon then arrived at an economic value for the resources he had identified. He

testified that one of the challenges of an evaluation of contingent resources was whether to use a

different price forecast than is current or to assume that new technology would cause a change in

cost structure that would make the resources economic. Mr. Willmon chose to use benchmark

operating costs that were consistent with his evaluations of reserves of existing surface mineable

operations. Because of Deer Creek’s expressed plan to use a paraffinic froth extraction process

and use a third-party built co-generation facility, he decided that the best analogue to use in his

assessment was the Western Oil Sands project. Mr. Willmon assessed an economic value for the

mining resources in both a forecast and a constant scenario, setting out a summary of net present

value at a range of discount rates. He estimated capital costs at $20,000 per barrel a day

productive capacity, sustaining costs averaging approximately $1.00 per barrel, a natural gas cost

of $7/MMBTU and operating costs for the best estimate of resources averaging approximately

$13.40 per barrel.

[371] Mr. Willmon explained that resources had increased in GLJ’s assessment from 2003 to

2004 as a result of GLJ recognizing a higher ratio of recoverable volumes and from 2004 to 2005

as a consequence of recognizing an east pit mine on the project.

[372] Mr. Willmon also explained that in GLJ’s constant oil price scenario economic analysis

of proved plus probable reserves and its best estimate of contingent resources, total undiscounted

cash flow had reduced, primarily as a result of changes to operating costs. He noted that in

forecast price scenarios, there was little change in total undiscounted cash flow as increased oil

price forecasts largely offset increased operating cost forecasts. Mr. Willmon explained that he

had not made a change to his costs estimates between 2003 and 2004, and that, from his

benchmarking of other projects, he recognized that he should have increased costs because of the

greater amount of overburden that had to be removed to access higher volumes of bitumen and

because of the increased costs he was seeing in other projects. He pointed out that there

continues to be no regulatory guidance on how to prepare an economic evaluation of a resource

and the evaluator has to make judgments along the way. During the course of 2004, he had

decided that his resources analyses should be benchmarked against reserve work, and he

therefore decided that he should make a change to recognize increased costs in his 2005

assessment. Again, he felt that the cost estimates he had seen in his Western Oil Sands work

during 2005 were the most applicable to use in assessing Deer Creek’s project. Mr. Willmon

charted the changes in undiscounted values to the GLJ resource and resources from 2004 to 2005

depending on the price forecast used, from which he concluded that costs had increased more

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than revenues and that the biggest driver of the change in costs was non-energy production costs,

followed by energy production costs, with changes to capital costs being relatively insignificant.

[373] In his rebuttal witness statement, Mr. Willmon commented that the recognition in a

number of Paulson expert reports of increased revenue estimates since the end of 2004 without

consideration of increases in development and operating cost estimates is incorrect and

misleading, giving examples from recent GLJ evaluations of Western Oil Sands and Canadian

Oil Sands. He noted that “higher commodity prices have and will impact the demand and costs

for services, and will also impact those costs tied to energy prices, especially in the short term.”

Mr. Willmon testified that he did not chart a correlation between specific prices and costs and

that his comments were on the general theme that it can be misleading to just consider price

changes without addressing the extent to which there will be increased costs.

[374] As part of GLJ’s economic forecast of Deer Creek’s reserves and resources, Mr. Willmon

was asked to provide a potential upgrading scenario to assist in Mr. Clark’s valuation. He

received no direction from Deer Creek or Total on the decision of upgrading method or location

and was to use his own opinion. Mr. Willmon chose a hydrocracking based upgrader to be

located near Edmonton as his underlying assumption in calculating upgrading yields, and days of

trial time were dedicated to the question of whether this was a valid choice or whether he should

have chosen instead a coker-based upgrader located in Fort McMurray for his scenario.

[375] Mr. Willmon was aware that Deer Creek was considering a coker-based upgrader as a

starting point in their exploration of different upgrading alternatives, but he testified that he used

his best judgment in the scenario based on his experience with other operators, specifically

Syncrude, Suncor, CNRL and Western Oil Sands. He noted that these three existing operators

and CNRL’s project currently under construction all have different upgrading configurations.

Suncor uses coking and Syncrude uses a mix of coking and hydrocracking, dominated by coking,

both located at their mine sites. The Western Oil Sands project located their upgrader near

Edmonton and uses a hydrocracking technology. CNRL’s project will use coking at the mine

site. Suncor, Syncrude and CNRL are using an extraction process different from the paraffinic

extraction process used by the Western Oil Sands project, which produces a cleaner bitumen,

albeit with a lower recovery. Mr. Willmon testified that the primary consideration that caused

him to adopt the hydrocracker option located near Edmonton was that Deer Creek had indicated

in its draft regulatory application in the fall of 2005 that it was planning to use the paraffinic

froth extraction process, similar to the Western Oil Sands project. He testified that if Deer Creek

was going to use a process that produced cleaner bitumen, it should use a hydrocracking process,

“otherwise. . .it’s just a mismatch of technology.” He noted that the advantage of using the

Western Oil Sands project for his scenario was that he had good publicly-available data to use in

his analysis.

[376] Mr. Willmon noted that while hydro-cracking, as a more complex process than coking,

had higher costs associated with construction, the cost of constructing an upgrader near

Edmonton was lower than the cost of constructing it at the mine site in Fort McMurray. He

therefore assumed that the costs of construction of a hydrocracking based upgrader in Edmonton

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and a coked-based upgrader in Fort McMurray were the same, assuming access to a third-party

owned pipeline.

[377] Mr. Willmon used a capital costs estimate of $30,000 per flowing barrel to construct the

upgrader, derived through benchmarking. He estimated a 103% yield of synthetic crude oil

(“SCO”) (because of the addition of hydrogen in the process) and forecast a $10.00 per barrel

discount to the Edmonton Light Sweet Crude Oil price forecast, derived from his review of and

the experience of the Western Oil Sands project. Mr. Willmon estimated operating costs at $2.00

per barrel of SCO plus energy costs of $0.55 MMBTU/per barrel of bitumen. He assessed

sustaining capital costs averaging $0.50 per barrel until the expansion of the operation and $1.00

per barrel thereafter, all inflated at 2% per year. He then calculated total product volumes and

economic value arising from these assumptions at different discount rates.

[378] The dissenting shareholders attack Mr. Willmon’s cost assumptions on the basis that

Deer Creek had never publicly disclosed significant cost increases, and that therefore the costs

used are inadmissible hindsight. This confuses public disclosure with the concept of information

about conditions prevailing as of the Valuation Date. Mr. Willmon’s cost assumptions reflect

actual experience, known to the participants in the industry as of the Valuation Date and are

relevant to the determination of fair value. Just because Deer Creek had not disclosed the cost

trends, and there is no evidence that it was required to do so under relevant corporate and

securities laws, does not somehow make the information “hindsight” or “inadmissible” to the

determination of fair value. The Boivin dissenting shareholders suggest that if the assumptions

made by Mr. Willmon were correct, that Deer Creek violated its statutory obligations of

disclosure because the reduction in value from the approximately $198 per share that Boivin

suggests Deer Creek was representing to the public in investor presentations to the $31 Total

offer was a more than 10% decrease in the value of Deer Creek’s shares. Deer Creek was not

representing a value of $198 per share in its investor presentations, and the $31 offer was a

premium to the then share price, and thus could not trigger disclosure obligations. The Boivin

dissenting shareholders also confuse the concept of an informed purchaser in the definition of

fair value with a requirement that, unless the dissenting shareholders were aware of information

that factors into valuation prior to the Valuation Date, it is somehow “hindsight” and

inadmissible, a mischaracterization of the hindsight rule.

[379] The dissenting shareholders submit that the choices made by Mr. Willmon in his report

somehow contravene the fundamental principle of valuation that the subject property will be

valued at its highest and best use. I do not find that the assumptions employed by Mr. Willmon

are “value-destroying”, nor are they premised on a less than optimum use of the asset. They

reflect reasonable assumptions of a course of action that may be taken by a prudent and

knowledgeable owner of the resources, and I have already said that they do not contravene any

plan of the company other than one that was very preliminary and years from proper planning

and execution.

d.

Gregory Heath

Page: 82

[380] The Paulson dissenting shareholders called Gregory Heath, P. Eng. of McDaniel &

Associates Consultants Ltd. to give opinion evidence as an expert in the engineering evaluation

of hydrocarbon reserves and resources. Mr. Heath has been practising petroleum engineering for

ten years. After short periods of time with Shell as a reservoir engineer and as a project manager

for a firm that constructs refineries, Mr. Heath joined McDaniel & Associates as an evaluation

engineer. He then spent approximately three years as an independent consultant providing

maintenance and design services to refineries and pipeline terminals, and returned to McDaniel

& Associates in 2002. Mr. Heath’s client responsibilities at McDaniel & Associates include

Encana, Nexen and Husky, among other smaller clients. He has been involved in the evaluation

of oil sands projects, primarily in situ projects, for about four years.

[381] In his first report, Mr. Heath examined GLJ’s December 31, 2004 evaluation of Deer

Creek’s reserves and resources and then amended it by applying the GLJ pricing forecast dated

as of December 9, 2005. This approach, of course, increased undiscounted net cash flow after tax

substantially. He noted that the results and conclusions presented by GLJ in its 2004 assessment

were reasonable and that he had no reason to believe that he would determine reserves and

resources in a materially different manner had he been engaged within the same time frame and

using the same data. He also commented that the methodology and assumptions relating to the

technical aspects, costs and pricing used in the preparation of the report were reasonable. He

testified that he used up-dated pricing because it was important to understand how the increase in

long-term pricing affected the values in the evaluation.

[382] Mr. Heath did not, however, update the cost estimates in the 2004 assessment, indicating

that he did not think that as of year-end 2005, the costs in the 2004 GLJ assessment were

unreasonable. He stated that he really was not aware in 2005 that the 2004 costs were

unreasonable, although he conceded that in 2005 he did not have any mining project clients to

speak of. He referred to the public indications of higher costs in 2005 as “mixed signals”,

although he conceded that more recently he was starting to see evidence of some capital costs

pressure. Mr. Heath conceded that mining project costs were outside his area of expertise, and he

did not offer an opinion on Mr. Willmon’s estimate of capital or operating costs for the mining

part of the project.

[383] Mr. Heath suggested in his initial report that there existed sufficient data and certainty

with respect to recoverable volumes associated with Phase I and II of the mining portion of the

Joslyn Project that the filing of an application with the AEUB was sufficient to reclassify these

resources as probable reserves. He testified that there was in his mind no reason to believe that

regulatory approval would not be granted to Deer Creek and that therefore submission of the

regulatory application removed the last contingency. Mr. Heath conceded that he did not have

any expertise in evaluating mining projects, but, in his view, there was no difference between a

SAGD project and a mining project on this issue. He was not swayed in his opinion by Mr.

Willmon’s disagreement nor by the information that Enerplus, despite earlier indications that it

might agree with this approach, had later agreed with Mr. Willmon’s opinion on the issue. I

accept Mr. Willmon’s more reasoned and experienced view of this issue and do not accept that

the mere filing of a regulatory application removes final contingencies.

Page: 83

[384] Mr. Heath commented on the difference between GLJ’s December 31, 2005 assessment

as compared to the Deer Creek model, and noted that the main differences arose from Mr.

Willmon’s use of a three-train 150,000 barrel scenario, as opposed to the four-train 200,000

barrel scenario referred to in the Deer Creek model, Mr. Willmon’s choice of the hydrocracker

upgrading technology and the incorporation of higher operating and capital costs.

[385] On cross-examination, Mr. Heath conceded that if Mr. Willmon had assumed a fourth

mine train, it would not have meant an increase in total production, but an acceleration of some

of it, and agreed that Mr. Willmon’s assessment that the Deer Creek resource base did not

support a 200,000 barrel a day production schedule was a valid exercise of his judgment as an

evaluator. He also conceded that, had Mr. Willmon assumed four mine trains, he would have to

build into his assessment the incremental capital cost of a fourth train and that therefore it was

not as simple as suggesting that, by deferring some of the production, GLJ reduced the net

present value of its calculations. Mr. Heath conceded that in order to understand the problem

completely, it would be necessary to prepare a discounted cash flow analysis of the alternative of

a fourth train, and he had not done this.

[386] It is clear that the fourth-train mine scenario originated in the outdated Washington

Group preliminary feasibility study which was based on an overly-optimistic estimate of

recoverable bitumen, although Deer Creek continued to refer to the four-train scenario in later

materials. It is also clear, however, that as of the Valuation Date Deer Creek had committed only

to the first two trains. While Mr. Willmon could have followed Deer Creek’s preliminary

expressed plan for four trains, it was, as Mr. Heath conceded, a valid exercise of his professional

judgment that adding a fourth train would result in unnecessary additional capital and operating

costs. The only evidence of what those additional costs would be was outdated information in the

report prepared by another Paulson expert, Mr. Dovey. There is no evidence that this assumption

materially reduced the economic value of the project once adjustments for higher capital costs

were made in the fourth-train scenario calculations. I accept Mr. Willmon’s assumption on this

issue as reasonable.

[387] The Paulson dissenting shareholders suggest that there must be a net present value

benefit to the fourth train, with the net present value of revenues from incremental production

outweighing the incremental operating expenses and capital expenditures, or management would

not have publicly planned for it. This ignores the fact that as at December 9, 2005 Deer Creek

was at an early stage in its mining planning, working on but not yet finalizing the regulatory

applications for Phase I and Phase II only and there is no evidence that its management in fact

undertook such a cost-benefit analysis.

[388] The issue of a hydrocracking upgrader versus a coking upgrader is closely related to the

pricing differential for SCO and will be discussed later in these reasons. However, the Deer

Creek plans for upgrading were very preliminary, upgrading economics were based on a 2004

“scoping or ballparking” report which, in the words of the Deer Creek witnesses, provided only a

“conceptual order of magnitude”, and a decision on method and location of upgrading was at

least two years away. It is a mischaracterization of the evidence to suggest that Mr. Jackson

Page: 84

confirmed otherwise. I accept Mr. Willmon’s assumption of a hydrocracking upgrader built near

Edmonton as logical and reasonable, given Deer Creek’s choice of a paraffinic froth treatment

process for its bitumen and the fact that earlier references to a coking upgrader were made at a

time when the company’s upgrading plans were far from cast in stone. I am persuaded by the

evidence that there are benefits and draw backs to either kind of upgrading solution and that as

of the Valuation Date, Deer Creek had not landed on a particular scenario. I find that Mr.

Willmon’s use of higher operating and capital costs was reasonable and appropriate. Mr.

Willmon’s opinion, while dated as of December 31, 2005, was based on conditions prevailing as

of late 2005 and unaffected by any changes between December 9 and December 31, 2005.

[389] Mr. Heath also compared the 2005 GLJ evaluation with the 2004 GLJ evaluation and

testified that there were three key differences:

a)

b)

c)

acceleration of capital spending associated with the mining project;

the inflation rates used in the 2005 mining assessment; and

the pricing differential for SCO.

[390] With respect to the acceleration of capital spending, Mr. Heath conceded on cross-

examination that if, as Mr. Willmon testified, he made the change because of Deer Creek’s plans

to pre-invest part of the second mining train capital costs in the first train stage of development

and that this was a reasonable decision in Mr. Willmon’s view, that change was appropriate. I

also note that there was no evidence that this change lowered value.

[391] With respect to inflation rates, Mr. Heath stressed the need for consistency. Mr. Heath

also testified that Mr. Willmon’s approach of increasing operating and capital costs from his

benchmarking data and then applying a higher rate of inflation reflected “a pretty pessimistic

view of where costs ... are going.” Mr. Willmon fully explained why there was a difference

between the inflation rates used for SAGD and for mining in the GLJ report and why there was a

difference between the 2004 and 2005 evaluations. He testified that inflationary pressures on

mining operations were more severe than on SAGD operations, that GLJ’s use of the differing

inflation rates was consistent with their use in other mining evaluations and was bookmarked to

experience, and that such higher rates only applied to the early years of development and not to

upgrading. I accept as reasonable Mr. Willmon’s rationale for the selection of inflation rates.

[392] With respect to the pricing differential for SCO, Mr. Heath did not agree with Mr.

Willmon’s use of a $10.00 per barrel differential. First, he disagreed with Mr. Willmon’s

analysis and use of Western Oil Sands’ blended realization price for 2005, noting that, in his

view, not all of the product upgraded by the Western Oil Sands project upgrader was in fact

upgraded, and alluding to possible marketing reasons and special needs of the owners of the

project. Mr. Heath opined that hydrocracking technology is capable of converting the entire

feedstock of light sweet SCO such that Deer Creek need not suffer a reduction in price for

quality reasons.

Page: 85

[393] The debate between Mr. Heath and Mr. Willmon on this issue was highly technical,

based on references in regulatory approval documents for future projects and expansions to

projects, references in text-books on refineries and charts taken from publications, all concerning

an area of the technical design and construction of upgraders that was not within the core

expertise of either expert. The issue centres on the economics of a hydrocracking upgrader

versus a coker upgrader. In of necessity very simple terms, a hydrocracker upgrader adds

hydrogen in the upgrading process, giving rise to an uplift in output. A barrel of bitumen

upgraded in a hydrocracker will yield 103% of SCO production. A barrel of bitumen upgraded in

a coker will yield somewhere between 80 to 85% of SCO product. Mr. Willmon testified that,

with the higher yield of a hydrocracker, the output is a lower quality product which commands a

lower price. He based his estimate of a $10 differential to Edmonton par on his experience with

Western Oil Sands. This is different from the $1.50 differential Mr. Laustsen assumed for the

cost of better quality SCO used for diluent in the SAGD process.

[394] Mr. Heath opined that a hydrocracker is capable of upgrading 100% of its feedstock to

good quality SCO if it adds a de-asphalting unit to recycle the “bottom” 50% from the

distillation unit, resulting in a better grade of SCO.

[395] However, even if Mr. Heath is correct in his theory, and there are a number of unresolved

questions about his opinion on this issue, his view depends on the construction of additional

upgrading facilities, requiring additional capital costs, reduced SCO yield from the yields

assumed in Mr. Willmon’s analysis and increased costs of hydrogen. It remains clear from the

evidence, therefore, that a choice between methods of upgrading involves trade-offs between

product yield on the one hand and quality and pricing on the other, in addition to trade-offs in

capital and operating costs. Mr. Heath gave no opinion confirming that after taking these trade-

offs into account, a coker would be more economic than a hydrocracker. He acknowledged that

he did not have the requisite expertise to give such an opinion.

[396] Much was made by Mr. Heath of references by Deer Creek in various documents to an

intention to produce 100% sweet SCO from its upgrading process. That was not persuasive given

that Deer Creek was in the very early stages of planning on upgrading. Mr. Heath in fact

conceded that he did not assume that Deer Creek had made a decision by the summer of 2005 on

upgrading technology, although he later indicated that it was his operating assumption that Deer

Creek had made a decision to go with a coker. I do not accept Mr. Heath’s opinion that there is

no difference between upgrading and refining. Mr. Willmon’s explanations of the differences

were sensible and logical. In short, Mr. Heath gave no persuasive evidence to establish that,

when all factors are considered, a coker upgrader located in Fort McMurray would be more

economic than a hydrocracker upgrader located near Edmonton producing a greater volume of

product of a lower quality that therefore attracts a lower price.

[397] In argument, the Paulson dissenting shareholders submit that Mr. Willmon’s $10 discount

was put forward “for the first time” at the hearing and that Deer Creek and GLJ had previously

consistently used a $1.50 discount to the price of SCO. In fact, Mr. Willmon’s report is the first

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evaluation of the economics of upgrading the Joslyn Project and the previous GLJ forecasts of

SCO pricing related the SCO to be purchased for use as a bitumen diluent and not as a forecast

of the price for its upgraded output or to early-stage estimates of the costs and revenues of

upgrading that did not undergo the rigour of Mr. Willmon’s evaluation.

[398] The Paulson dissenting shareholders also suggest that Mr. Willmon’s evaluation assumes

that Deer Creek would upgrade only a portion of its bitumen production rather than all of it,

which is not the case. It is clear from the evidence that the issue is the quality and volume of

upgraded product and the costs involved in the process of upgrading, and that assumptions made

about the process invariably link all of these factors. I accept Mr. Willmon’s premise that there is

a trade-off between product yield and product quality and valid economic reasons why a decision

would be made to use one upgrading technology over another. I accept that the SCO differential

is a logical outcome from the assumption that Deer Creek would chose a hydrocracker upgrader

based near Edmonton, a choice I have found was warranted by the evidence and reasonable in

the circumstances. I accept that the differential is derived from Mr. Willmon’s recent and

extensive experience with these types of projects.

[399] Mr. Heath conceded on cross-examination that his oil sands evaluation experience was

limited to SAGD projects, and that he had only 4 ½ years of experience in that area. He agreed

that he had no expertise in evaluating upgrading projects or upgrader economics or assessing

current forecasts of mining project costs.

[400] I accept the GLJ assessment of Deer Creek’s reserves and resources without the

adjustments implied by Mr. Heath, given that Mr. Heath did not have much material criticism of

Mr. Laustsen’s work, and his criticism of the work of Mr. Willmon failed to demonstrate that

Mr. Willmon’s assumptions were flawed or unreasonable. I find that Mr. Willmon’s assumptions

and choices were not made to depress value as submitted by the Paulson dissenting shareholders

but to reflect the circumstances in the industry and state of technology at the time of his

assessment. I find that his greater depth of knowledge and experience in the evaluation of oil

sands mining projects gives his opinion in this regard greater weight, and that his independence

and professionalism were unaffected by vigorous and lengthy cross-examination or by the

contrary opinions of Mr. Heath. Mr. Willmon did not substitute his own “scheme” for the Deer

Creek model, as alleged by the dissenting shareholders. The Deer Creek model was a

preliminary overview of development plans in this area, not a plan dictating the basis on which

development must be assumed to occur for valuation purposes, and Mr. Willmon’s departures

from the model, to the extent they occurred, do not derogate from his opinion. There is no

evidence that Deer Creek “rejected” the assumptions used by GLJ about development, as alleged

by the dissenting shareholders, other than failing to change the model to reflect Mr. Willmon’s

three-train rather than four-train scenario as at the time of evaluation.

[401] What the material differences between the evidence of the GLJ experts and Mr. Heath

indicate generally is that there can be genuine differences of opinion in the assessment of value

of reserves and contingent resources by qualified experts with respect to an early-stage project

such as the Joslyn Project. Many of these differences of opinion arise because of the speculative

Page: 87

nature of future development and the judgments that must be brought to bear on key assumptions

that have huge cost or revenue implications going forward. It is clear that oil sands technology is

relatively new and is constantly being developed and refined in a relatively few large projects

that have specific geological characteristics and economic challenges. There is little or no

regulatory guidance on the appropriate way to perform a contingent resources assessment and

merely a variation in defined terms can have huge implications. It is also clear that evaluations

and assessments in this industry require broad expertise and relevant experience both in

technological and economic areas that few single assessors possess.

[402] All of this adds force to the argument that I will refer to later in these reasons that the

market value approach is better suited than a discounted cash flow analysis to the determination

of fair value in this case.

3.

a.

The Valuators

Darryl S. Derouin

[403] The Paulson dissenting shareholders called Darryl S. Derouin, P. Eng., the President of

Collins Barrow Securities Inc. to give opinion evidence as an expert in property and corporate

asset marketing and divestiture, including the fair value of Deer Creek’s hydrocarbon assets that

could have been obtained through a properly conducted corporate asset marketing and divestiture

program as of December 9, 2005. It became apparent that Mr. Derouin’s expertise lay in

marketing, primarily asset sales involving oil and gas royalty trusts and conventional oil and gas

transactions of a lower value than the Total transaction, and that he had little expertise or

experience with oil sands transactions. Mr. Derouin was retained on a fairly narrow basis to

provide “an assessment of the value that [he] thought [he] could get in a competitive process as

of December 9, 2005.”

[404] It was Mr. Derouin’s opinion that the fair market valuation of Deer Creek on the

Valuation Date was in the order of $6 to $7 billion, and that this result, or higher, should have

been achievable in a competitive marketing process at that time.

[405] Mr. Derouin had little or no knowledge of the process that had led up to the Total

transaction and his opinion appeared to be based primarily on the concept that “oil is oil”, and

that a long-term oil sands project has no more risk than a currently producing conventional oil

and gas property, an opinion with which even Mr. Heath, as an expert called by the Paulson

dissenting shareholders, could not agree. Further, Mr. Derouin’s opinion was based in part on an

approach to reserve and resource analysis from Mr. Heath that I do not accept.

[406] Mr. Sembo disagreed with Mr. Derouin’s observations and conclusions, commenting as

follows:

(a)

He opined that Mr. Derouin’s report incorrectly analyzed an appropriate rate or

range of discount rates to be used for the purpose of valuing oil sands projects. He

pointed out that the conventional oil and gas transactions and the royalty trust

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transactions used to support the discount rates employed by Mr. Derouin are a

“distinctly different” kind of asset from an oil sands asset; and that there are a

“myriad” of risks associated with the development of an unconventional asset like

an oil sands resource that do not exist with conventional resources. He also noted

that the volume and frequency of conventional oil and gas transactions creates

price expectations that do not transfer to oil sands transactions. Mr. Sembo opined

that there are a limited number of royalty trusts that could contemplate exposure

to an oil sands project, despite the investment by Enerplus in the project, and

noted Enerplus’s relatively large enterprise value in the royalty trust sector, and

the fact that most royalty trusts deal in mature assets with available revenue for

distribution to unit holders.

In Mr. Sembo’s view, most discounted cash flow valuations begin with the

determination of an enterprise’s specific weighted average cost of capital, which

takes into account both debt and equity, with a further risk premium added by

increasing the discount rate. Given that long term Canada bonds were yielding

approximately 4.5% at the time of his report, Mr. Sembo indicated that it was

highly unlikely that discount rates as low as 5% would be used for valuation

purposes.

Mr. Sembo also noted that most enterprises in the oil sands sector assess their

projects on an after-tax basis, rather than before-tax as used by Mr. Derouin.

Mr. Sembo disagreed with Mr. Derouin’s view that a valuation of the Joslyn

Project should use discount rates lower than used for conventional assets,

specifically with the presumption that commercialization of the Joslyn Project is

possible. Mr. Sembo testified that, at the time of the Total offer, Deer Creek was

an early-stage oil sands company producing less than 300 barrels a day in the very

early days of developing plans to exploit its resources and in the very early days

of developing plans for an upgrader. He disagreed with Mr. Derouin’s assumption

that Deer Creek would be able to develop its project on time and on budget to

realize the values he reached in his report.

Mr. Sembo opined in his report that most oil sands project valuations employ

nominal discount rates of 8.5% to 11% after tax. He testified that, in approaching

the appropriate discount rate, it was not only necessary to weigh cost of capital,

but to reflect on other risks, specifically the ability of an oil sands project to be

completed on budget and on time. A nominal discount rate has embedded in it, by

virtue of the cost of capital employed, some reflection of interest expectations, as

opposed to a real discount rate which would go beyond that to attempt to discern

inflation.

Page: 89

Mr. Sembo testified that RBC Capital Markets’ research group used an 8½ %

discount rate in analyzing oil sands opportunities, but then added an arbitrary

“haircut value” derived from their business judgment.

(b)

Mr. Sembo next addressed Mr. Derouin’s comparison of Deer Creek to other oil

sands companies based on an Enterprise Value/Recoverable Resources analysis.

He noted that, while comparative analysis is helpful as an alternate valuation

methodology, the peer group chosen must be defensible. While Enterprise Value

takes into account market capitalization and therefore may reflect the time

necessary to produce first oil, it also may not, and it does not necessarily reflect

capital spent on developing the resource. In Mr. Sembo’s view, UTS Energy

Corporation, OPTI Canada Inc. and Western Oil Sands Inc., the peer group used

by Mr.Derouin, do not present similar operational or financial characteristics to

Deer Creek in that they have advanced states of commercialization relative to

Deer Creek. He noted that UTS had well-advanced plans for development and

were partnered with two other substantive companies. OPTI will be Canada’s

fourth and next major integrated oil sands project, with production likely in the

fourth quarter of 2007 and 80% of budgeted project development costs expended

and facilities near completion. Western Oil Sands was a 20% partner in a project

with Shell as the operator and Chevron as the other partner, both with substantial

financial capability and technical expertise.

Mr. Sembo also stated that Mr. Derouin’s calculations were misleading, in part

because he compared resources to reserves in some circumstances. Mr. Sembo

testified to different Enterprise Value/Recoverable Resource for UTS from the

values calculated by Mr. Derouin, noting that Mr. Derouin failed to take into

account the positive impact in the trading price of UTS prompted by the Deer

Creek transaction.

(c)

Finally, Mr. Sembo opined that Mr. Derouin failed to consider and appropriately

risk the early stage of development of the Joslyn Project, significantly over-stated

the number of prospective buyers and presumed that a public auction would result

in higher values.

I accept Mr. Sembo’s criticisms of Mr. Derouin’s analysis. Mr. Derouin’s comments on the

number of potential purchasers for the Joslyn Project were based on a superficial analysis and

ignored the evidence of the actual process and negotiations that had taken place during the year

leading up to the Valuation Date. Mr. Derouin’s proposed process was more suited to an asset

sale than the change of control transaction that actually occurred, and did not address the risks of

a failed auction identified by other witnesses. The dissenting shareholders, through Mr. Derouin,

suggest that whether a project is a year or two farther ahead than another in development is not

meaningful given project lives of thirty to forty years, but this facile analysis fails to take into

account the risks of executing the development of the project that may be alleviated or

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eliminated in those years, as Mr. Sembo indicated. Given the issues I have identified, I was not

able to find Mr. Derouin’s opinion helpful in my analysis.

b.

Herman Franssen

[407] Dr. Herman Franssen provided an expert report with respect to projected future oil prices.

Dr. Franssen is the President of International Energy Associates Inc., which provides energy

economic analysis of global oil markets, conduct political risk assessment, assists companies in

establishing relationships with governments in the Middle East and elsewhere and conducts

workshops for the private sector and governments on a variety of oil industry issues. He is an

Associate of Petroleum Economics Ltd., a senior fellow with CSIS, and Adjunct Scholar with the

Middle Institute, an Associate of GDP Associates, a Senior Associate with Middle East

Consultants and a visiting Fellow with CGES (Yamani Centre).

[408] Dr. Franssen noted that there are no models that can accurately predict the future price of

oil because there are too many variables and unknowns. His report states “[i]n the end there is no

substitute for critical analysis and sound judgment of each one of the technical, economic and

political components of the oil market.” Dr. Franssen conceded that there were predictions of the

price of oil at every level between $30 and $100 a barrel, and that, the farther one goes in the

future, the more intense the debate becomes. In Dr. Franssen’s view, numerous factors will place

upward pressure on oil prices over the next several years. His report lists the following factors:

-

globalization is accelerating economic growth in China, India and other

developing countries, pushing demand for oil up sharply;

non-OPEC oil production is expected to peak around the turn of the decade and

Middle East oil production growth is constrained by technical and non-technical

factors;

-

oil will remain the dominant fuel for transportation for decades to come.

Alternative transportation fuels will add at the margin but not threaten the

overwhelming dominance of oil in the transportation sector;

transportation efficiency through hybrid technology, diesel and changing car and

airplane designs will continue to improve but will be offset by massive growth in

transportation fuel demand in Asia, the Middle East and other developing regions;

key oil exporting countries (OPEC, Russia) are determined to defend oil prices at

$50 a barrel through supply management;

rising geopolitical tension in key oil producing areas of the Middle East, Africa

and Latin America;

long lead times and high cost of developing conventional and non-conventional

oil resources; and

-

natural gas, a substitute for oil in some sectors of the energy economy is

becoming increasingly scarce and natural gas exporting countries are determined

to maximize rent to the owner of the resources.

Page: 91

[409] Dr. Franssen’s view is that the global oil market is currently experiencing a “major

fundamental shift”. He noted that demand has skyrocketed, particularly in the United States,

China and India. Supply has failed to keep pace, partly because non-OPEC production growth

has been disappointing and partly because OPEC has run out of usable spare capacity, at least in

the shorter term.

[410] Given these factors, Dr. Franssen noted that “senior OPEC officials and Ministers from

the largest member states have publicly stated on a number of occasions that ‘a fair price’ of oil

is somewhere around $50 a barrel and that they will manage OPEC supplies when necessary to

support a floor price of $50 a barrel.” Dr. Franssen predicted that further oil prices rises

considerably above $50 a barrel were possible by the middle of this decade.

[411] He concluded by quoting David O’Reilly, the President of Chevron, at the 2005 CERA

annual energy conference in Houston: “The time when we could count on cheap oil and even

cheaper natural gas is clearly ending ... the era of easy access to energy is over. In part this is

because we are experiencing the convergence of geological difficulty with geopolitical

instability.”

[412] Dr. Franssen’s report was based on data obtained more than six months after the

Valuation Date. His report sets out a high-level commentary but he gave no opinion on oil prices

generally or bitumen prices specifically as of the Valuation Date, nor on what long-term forecast

the market would have used at that date. Dr. Franssen acknowledged that industry experts were

very much aware of views such as his, and yet there remained a divergent range of opinion on

the price of oil in the long-term. Ultimately, Dr. Franssen’s opinion provided a view from one

commentator that I considered in evaluating the discounted cash flow analyses performed by Mr.

Clark and Mr. Dovey.

c.

Carol Crowfoot

[413] Ms. Crowfoot has been a senior energy economist with GLJ for 26 years and is the

president of GLJ Energy Publications, which publishes natural gas historical data and market

information. She described her work with GLJ as follows: “I prepare the commodity price

forecasts for crude oil, natural gas, natural gas liquids and sulphur that are published by GLJ and

utilized in their reserve valuation reports.” Ms. Crowfoot was qualified as an expert in the area of

forecasting oil prices in the context of evaluating petroleum interests.

[414] Ms. Crowfoot was referred to a 2005 survey performed by Chenery Dobson Resource

Management Ltd., in which numerous resource firms in Calgary, including GLJ, as well as banks

that lend to the oil and gas industry were polled as to their long-term oil price projections. Ms.

Crowfoot pointed out that the range of values was smaller than GLJ had observed from other

industry experts and government agencies.

[415] Ms. Crowfoot testified that GLJ tries to maintain a “balanced approach” in the

preparation of its commodity price forecasts. She said they felt this was the best way to deal with

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the “extreme uncertainty” associated with unanticipated effects on supply of and demand for

crude oil. Ms. Crowfoot noted that they had recently seen very, very high oil prices and that the

effect of those prices on economic growth, particularly in emerging economies, remained

uncertain.

[416] Ms. Crowfoot was referred to a table showing long-term crude oil price forecasts made at

the end of 2005 by various industry experts and government agencies. In particular, she was

referred to the forecast made by Petroleum Economics Ltd., Dr. Franssen’s firm. That forecast

was one of the highest, while GLJ’s was in the middle range. Ms. Crowfoot explained that GLJ

tries to take a conservative approach and not to give too much influence to short-term volatility.

For instance, she indicated that the NYMEX forward curve strip influences GLJ’s near-term

predictions, but not its long-term forecasts.

[417] Ms. Crowfoot criticized Dr. Franssen’s analysis in a few respects. First, she noted that

Dr. Franssen referred to the WTI crude oil price in U.S. dollars, rather than Canadian and did not

incorporate any assumptions with respect to exchange rates. Secondly, she testified that he did

not take sufficient account of the difference between WTI crude oil and bitumen, saying that the

latter may not have the same marketability.

[418] On cross-examination, Ms. Crowfoot was questioned about a report from the Energy

Information Administration. She acknowledged that GLJ uses information from the EIA in

preparing its price forecasts and that the EIA’s projected oil price on the Chenery Dobson survey

was just behind that of Petroleum Economics Ltd. She also acknowledged that the EIA’s report

indicates that “major oil exporting countries are likely to be less concerned that oil prices will

cause an economic downturn that could significantly reduce demand for their oil”. However, she

maintained that the impact of high crude oil prices on emerging economies such as China is

unknown.

[419] Ms. Crowfoot admitted that GLJ revises its oil price projection quarterly and that there

had been steady increases in the projected price for the quarters leading up to 2005.

[420] Ms. Crowfoot testified that the AEUB is among the government agencies whose forecasts

GLJ takes into account in preparing its own projections. She was asked about an EUB report

predicting a price of U.S. $55-60 per barrel for WTI. She did not recall specifically if she had

seen that report prior to preparing her own report, but said that she would have taken it into

account if it was publicly available at the relevant time. The same was true for a subsequent

AEUB report predicting prices of U.S. $60-72 per barrel.

d.

Brian W. Clark

[421] Brian W. Clark was called by Deer Creek to give opinion evidence as an expert in the

valuation of business and corporation shares.

Page: 93

[422] Mr. Clark holds a B.A. in economics and has been a chartered accountant since 1972,

performing business valuations since 1973. From 1982 to 1988, he was the partner in charge of

business valuations for KPMG in the Prairie provinces and since 1988 has been president of

Clark Valuation Services Ltd., a firm specializing in financial litigation services. Mr. Clark has

been a chartered business valuator since 1976 and was recognized as a Fellow of the Canadian

Institute of Chartered Business Valuators in 1993. He has been qualified as an expert before the

courts and other tribunals in the Western provinces on a number of occasions. He and his firm

have been retained since 2003 as valuators to assist with damage claims in relation to three major

oil sands project fires in Alberta.

[423] Mr. Clark was asked to provide an opinion on the en bloc fair market value of the Deer

Creek issued and outstanding common shares as of the Valuation Date. As Mr. Clark pointed

out, “fair value” does not necessarily mean “fair market value”, but fair market value is an

important consideration for a court in determining fair value.

[424] Mr. Clark used a standard definition of “fair market value”, being the highest price

obtainable in an open and unrestricted market between informed, prudent parties acting at arm’s

length and under no compulsion to act, expressed in terms of money or money’s worth. It was

his firm’s opinion that the fair market value of the issued and outstanding shares of Deer Creek

as at December 9, 2005 was in the range of $29.00 to $31.50 per share. Mr. Clark opined that, if

he was asked to select a single number, he would land on $31.00, given the weight that ought to

be given to Shell’s $31.00 bid subsequently matched by Total and accepted by a significant

majority of Deer Creek shareholders.

[425] Mr. Clark referred to the four commonly used methods of share valuation and chose to

use the market value approach as his primary methodology, supplemented by the net asset value

approach. He used net asset value as a “check on the reasonableness” of what he determined in

the market value approach, looking both at net asset value based on prices that others have paid

for similar resources and at a discounted cash flow analysis.

i.

Market Value Approach

[426] Mr. Clark testified that it is preferable in a valuation to have a real transaction or, as in

this case, a collection of transactions that demonstrate that informed, prudent vendors have sold

at a certain price to a knowledgeable informed purchaser. He commented in his opinion that the

sales process and arm’s length negotiations that led to the $31 offer by Total provided him with

an important perspective on market value.

[427] Mr. Clark noted that during the 20 days prior to the Total offer of $25, the average

trading price of the Deer Creek shares was $17.34. The trading price was, of course, significantly

affected first by the $25 offer and then by the $31 bid. Mr. Clark noted that many analysts

commented that this was the highest price they had seen paid for an oil sands property to that

point.

Page: 94

[428] He also noted the efforts taken by Deer Creek to seek a joint venture partner and to

actively promote itself to the investment community and the fact that a significant majority of

shareholders endorsed Deer Creek’s efforts by tendering their shares. Mr. Clark testified that it

was his impression that the $31 offer was the result of a concerted effort to obtain a high price

for the company and, therefore, he took the transaction price into consideration.

[429] Mr. Clark noted that, generally, analysts recommended that shareholders tender their

shares at even the $25 level, and that 82.4% of the Deer Creek shares were tendered to the $31

offer. He also found it significant that the offer was accepted by the Deer Creek management

group, its board of directors and its largest shareholder Lime Rock, all knowledgeable parties

with fiduciary responsibilities to consider and that a significant majority (approximately 73%) of

shareholders other than Deer Creek insiders and Lime Rock tendered to the offer. Mr. Clark

testified that he understood that the Paulson group of dissenting shareholders purchased their

shares when the $25 offer had been announced and the trading price of the shares was in the high

$20s and even up to $31. Given that, he observed that almost 100% of the shares of Deer Creek

held by shareholders before the offer changed hands, either through being tendered to the offer

or sold at prices between $25 and $31.

[430] Mr. Clark testified that the failure of Enerplus to convert its holdings to shares and tender

to the offer did not affect his assessment, since Enerplus’ character as an energy trust with long-

term goals and the necessity of a portfolio of properties with long-term return made it a special

case.

[431] On the basis of an analysis of trading prices of Deer Creek and five other oil sands

companies between the announcement of the Total offer and the Valuation Date, Mr. Clark did

not see any significant change in market conditions relevant to his evaluation.

ii.

The Net Asset Value Approach

[432] Using the net asset value approach to valuation, Mr. Clark determined the fair market

value of the Deer Creek shares by restating the recorded book values of the company’s assets

and liabilities to their respective market value, assuming the continuation of the company as a

going concern. In applying this methodology, he:

a)

adjusted the property, plant and equipment asset category on the

company’s balance sheet to reflect the present value of future cash flows

expected from the Joslyn Project; and

b)

made a tax shield adjustment to reduce the market value of the Joslyn Project,

assuming a share purchase and the availability of existing tax pools.

He started with Deer Creek’s balance sheet at November 30, 2005, the date closest to the

Valuation Date. Mr. Clark’s calculations gave rise to a net asset value per Deer Creek share of

$23.50 to $26.75, using a discount rate of 10%.

Page: 95

[433] Mr. Clark testified that a discounted cash flow (“DCF”) calculation such as the one he

used takes estimated future cash flows and discounts them to present value, recognizing the time

value of money. His DCF calculations relied on the GLJ forecast of upgraded production,

operating costs and related capital expenditures as at December 31, 2005. To that data, he

applied several price forecasts and made some other adjustments.

[434] Mr. Clark testified that when his firm looked at the Deer Creek model, they discovered

what he characterized as a “glitch” in it relating to the calculation of royalties, giving rise to a

materially insufficient deduction of royalties. Through consultation between Deer Creek

management and his team, they were able to fix the glitch and worked from an adjusted version

of the model. He did not, however, use the Deer Creek estimates of costs and production rates

because they had been developed in early 2005 and, given cost pressures in the oil and gas

industry, were out-of-date. He was also concerned that the model was used for investor

presentations as a way of promoting the company and he did not want to use the data without

checking it for reasonableness. For these reasons, he decided to use the work of an independent

petroleum engineering firm, GLJ, and arranged to have GLJ expand its normal year-end report

on reserves and resources to include an estimate of the costs of upgrading.

[435] Mr. Clark used the information contained in a survey of oil and gas price forecasts

published by Chenery Dobson dated January 1, 2006 as the basis for the price forecasts used in

his DCF calculation. This publication sets out the forecasts used by 14 petroleum engineering

firms, mainly based in Calgary. He used an average of the six largest such firms for his

calculations and also an average of all of the forecasts excluding the highest and the lowest. Mr.

Clark noted in his report that production in the Joslyn Project is expected to be low for several

years after the Valuation Date and that short-term oil prices were thus less significant to his DCF

calculations than prices in 2010 and beyond.

[436] Mr. Clark explained that the discount rate used in a DCF calculation is the part of the

calculation that brings future dollars back to present value, that it addresses both risk factors and

the time value of money. He noted in his report that the discount rate is the weighted average

cost of capital that reflects both the cost of debt and the cost of equity for a project or company,

reflecting a normal or typical proportion of debt to equity. Mr. Clark listed a number of factors

that he considered important in selecting a discount rate, the most significant with respect to

Deer Creek being:

a)

b)

the economic and stock market conditions as at the Valuation Date, noting that it

was a boom time in Alberta, with a strong economy and a positive outlook;

the outlook for future prices of oil and gas, particularly in relation to the long-

term nature and high capital costs of a project like the Joslyn Project, noting that

it would be nineteen years from 2006 to 2025 before cash flow from production

could be predicted to have paid back capital expenditures, using the Chenery

Dobson average of 12 consultants;

Page: 96

c)

d)

e)

the high cost of developing oil sands and the long term to payout compared to

conventional oil and gas development;

the sensitivity of the DCF calculations to cost overruns and the necessity of using

timely and independent estimates of costs;

the fact that the long forecast period means that good, up-to-date cost estimates

are not enough to eliminate the risks of major cost overruns and delay and that the

discount rate has a role in addressing these risks;

f)

the relative quality of the reserves, which in Deer Creek’s case were ranked “in

the middle of the pack”; and

g)

the uncertainty over the prospect of future advances and improvements in

technology.

[437] Mr. Clark analysed the cost of capital of a range of public companies in the oil sands

sector, and while he found that a smaller company like Deer Creek with little existing production

likely would have a weighted cost of capital in the range of 13%, he also found that a prudent

buyer would focus not only on that but on the Joslyn Project asset itself. Mr. Clark testified that

the principle he used to determine cost of capital to assess the value of a company like Deer

Creek with a project as its single most important asset was to look to the cost of capital that

would apply to the project. In his view, considering advantages that might accrue from Total’s

involvement misses the point, which is what the market would charge to provide capital to this

project. While a buyer like Total may have a lower cost of capital, it would be entitled to be

fairly compensated for the benefits its financial strength would bestow on the minority

shareholders of Deer Creek, which would offset that effect somewhat. Mr. Clark concluded that

a prudent buyer, which likely would be a larger, experienced company with a lower cost of

capital, would not bid based on its own lower cost of capital, but would expect a rate of return

from the Joslyn Project higher than its cost of capital. Accordingly, and having regard to his

analysis of weighted costs of capital of other industry players, he selected a discount rate of 10%

for his DCF calculations.

[438] The dissenting shareholders submit that Mr. Clark improperly analysed the “notional”

negotiations between seller and buyer, ignoring Total’s role as part of the “notional seller” on the

Valuation Date. I find that Mr. Clark was quite clear on Total’s role and not in error in his

analysis on this point. I cannot agree that a notional purchaser on the Valuation Date would pay

more for Deer Creek because Total was an indirect majority shareholder or that whatever

benefits Total could bestow on a wholly-owned subsidiary in the future would have any impact

on the purchase price paid by a notional third-party purchaser on the Valuation Date.

[439] Mr. Clark testified that his choice of a 10% discount rate was not an arithmetic

calculation. He had decided that it was not prudent to base his analysis on Deer Creek’s cost of

capital alone, since Deer Creek’s history in the market was short and in his view the cost of

Page: 97

capital number was unreliable, nor did he think it appropriate to base his analysis on any one

company, but looked at averages of companies with different profiles. This opinion was

supported by the testimony of Mr. Bruce that the actual, as opposed to theoretical, cost of capital

for Deer Creek was even higher than 13%. Mr. Clark took into account the factors explained

above, and had to make a decision on a range between 7 and 13%, using his judgment from the

factors he thought would be in the mind of a prudent and sophisticated purchaser. He recognized

the theory of a “special interest purchaser” in his choice of appropriate discount rate.

[440] Mr. Clark addressed in his opinion the fact that many analysts’ reports refer to net asset

values for oil sands companies calculated using an 8% discount rate applied to after-tax cash

flows. He notes that this is a benchmark calculation to allow comparisons to be drawn readily

among oil sands companies, but opined that calculating net asset value in that way and for that

purpose does not adequately take account of risks. Mr. Clark pointed out “adjustments” that

some analysts use to address the existence of risks, leading to an effective discount rate of higher

than 8%.

[441] Mr. Clark made the following observations:

a)

b)

as at the Valuation Date, Deer Creek had spent less than 2% of what would

ultimately have to be spent to develop the project, which he concluded from

GLJ’s updated forecast would be approximately $15.1 billion;

in nominal dollars, it would be 13 years before Deer Creek could be expected to

fully recover its capital investment, or 19 years if calculated in present value

terms.

[442] He commented as follows:

As an investor in the Joslyn Project at the Valuation Date, it would be necessary

to risk large sums of money in the early years in the hope that positive returns

would follow. This is very different than investing in an established oil sands

producer, making immediate profits and expecting those profits to continue over a

long project life.

[443] Mr. Clark next undertook as an element of his market value approach a review of the

price per barrel paid in other oil sands transactions that occurred in 2005, concluding, after

considering the transactions and deciding that the Teck Cominco transaction was most

comparable, that 80 cents per barrel would be a good indication of value for the Joslyn Project

and a per share value of $29.02 would be the result. This became one of the points in his value

range.

[444] Mr. Clark also applied the per-barrel value of Total’s $31 offer to GLJ’s updated

resource and reserve estimate to calculate value of $31.48 per share, which formed the high point

of his value range.

Page: 98

[445] In conclusion, Mr. Clark considered:

a)

b)

c)

d)

the $31 per share price paid by Total and accepted by most Deer Creek

shareholders;

his net asset value per share range based on his DCF calculation of $23.50 to

$26.75, with a midpoint of $25.12 per share;

the net asset value per share of $31.48 based on an update of the $31 offered by

Total taking into account additional reserves; and

the net asset value per share of $29.00 based on what was in his opinion the most

comparable recent transaction.

He noted that the net asset value approach represents a value based on economic fundamentals,

and the market price-based approach described in a), c) and d) reflects both economic

fundamentals and strategic value. He also noted that Total’s original offer of $25.00 was very

close to the DCF-based net asset value, supporting the assumptions that underlay his calculation,

and that Total’s higher bid at $31 represented that Total recognized the additional strategic value

of the purchase. He commented that the fair market value of Deer Creek shares as of the

Valuation Date would include both economic fundamental value and a measure of strategic

value, and accordingly estimated fair market value to be in the range of $29 to $31.50.

[446] Mr. Clark testified that the huge distance between his DCF analysis and that of the expert

called by the Paulson dissenting shareholders, Mr. Dovey, illustrates how important the

judgment of the valuator in choosing inputs is to the reliability of the analysis. He commented

that, in his view, “speculating about the sales process” is not sufficient to reject the market value

approach. He pointed out that, if he had disregarded the conclusions he drew from the market in

his analysis, the result would be that he would disregard the $31.50 value he had calculated from

applying the cost-per-barrel analysis of the $31 offer to the up-dated reserve report. In that case,

his range would be between his DCF-calculated number of $25.12 and his $29 number derived

from a comparable recent transaction.

e.

William C. Dovey

[447] The Paulson dissenting shareholders called William C. Dovey of Cole Valuation Partners

Ltd. to give opinion evidence as an expert chartered business valuator on the value of the

common shares of Deer Creek as of December 9, 2005.

[448] Mr. Dovey is a Fellow of the Ontario Institute of Chartered Accountants and a chartered

business valuator. He has been a partner of Cole since 2003 and prior to that, was a partner in the

financial advisory services group of PricewaterhouseCoopers. He has been qualified as an expert

on a number of occasions.

Page: 99

[449] Mr. Dovey used the same definition of fair market value as Mr. Clark. His primary

valuation approach, however, was a discounted cash flow approach. He did not take into

account stock price for at least two reasons: in his view, the stock prices available for Deer Creek

were for when it was a “free-standing, stand-alone” company and that had changed by the

Valuation Date, and, in his opinion, “the market doesn’t fully take into account the long-term

value in these types of projects”.

[450] Mr. Dovey used a limited market-based approach in that he looked at enterprise value per

share for Deer Creek compared to UTS, Opti and Western Oil Sands and what he described as a

“market transactions comparable” limited to one transaction, the BlackRock transaction that

occurred in May 2006.

[451] Mr. Dovey testified that he relied on the Deer Creek model and what he described as the

Deer Creek plan, as opposed to what he described as the Willmon plan. He testified that his

inputs came primarily from Deer Creek’s documents and records and he had not retained any

independent consultants for help. Although he had discussed certain matters with Mr. Heath, he

denied relying on him in reaching his opinion. He acknowledged that Mr. Clark was correct that

there were mistakes in the Deer Creek model, and that he re-calculated his original opinion to

take into account those errors and some other criticisms that Mr. Clark had made about his

original calculations. For his revised calculations, Mr. Dovey selected one of his original oil

price and exchange rate scenarios, that of $50 oil with a 9% discount rate. These assumptions in

his original report had resulted in a share price of $157. He testified that this value of $157 per

share, the highest in his range of values, was going to be “where he was going to land” when he

was asked about his single-point estimate of value at trial and this was the reason he chose it for

recalculation.

[452] Mr. Dovey’s explanation of the reason he used his top value scenario with the lowest

discount rate range set out in his original opinion to recalculate an amended opinion of value was

not credible or persuasive.

[453] Mr. Dovey corrected his calculations to:

a)

reflect that in adjusting the Deer Creek model to the Valuation Date he had made

an error in the discounting period, which when corrected resulted in reducing per-

share value by about $10;

b)

c)

include selling and general administration costs in the value calculations as

suggested by Mr. Clark; and

recalculate royalties to correct the model errors identified by Mr. Clark.

Mr. Dovey then went on to further adjust his opinion numbers as follows:

Page: 100

a)

b)

reducing value by about $26 per share to reflect higher capital costs and higher

operating costs, which he characterized as “not all the way to the capital costs in

Mr. Clark’s analysis, but it’s effectively halfway to his”; and

further reducing value by using a December 11, 2005 balance sheet.

The end result was a per share value of $110.

[454] In selecting a range of oil prices between $40 and $55 per barrel in formulating his

opinion, Mr. Dovey considered forecasts published by the AEUB and the National Energy

Board, Dr. Franssen’s $50 oil scenario and average forecast prices published by Spoule

Associates Limited, McDaniel & Associates and GLJ. The AEUB forecast was issued on June

15, 2006 and the National Energy Board forecast in June 2006, both thus constituting

impermissible hindsight evidence, although in the end Mr. Dovey chose to use Dr. Franssen’s

$50 oil forecast.

[455] Mr. Dovey described how and why he had changed his opinion with respect to capital

costs. He referred to the errors in half-year discounting and exchange rate that had made his

original calculations relating to capital costs lower than they should have been. He said that he

had originally relied on the Deer Creek model with respect to capital costs (even though the

model he was referring to was dated July 2005) but then became aware of minutes of a Deer

Creek board meeting dated November 10, 2005 that he interpreted as approving higher levels of

capital costs, primarily related to the mine. It is apparent from a review of these minutes,

however, that the board approved only a 2005 forecast of costs and the 2006 budget and not cost

estimates for the entire project. Mr. Dovey amended his capital costs figure to be about $12.9

billion, compared to Mr. Willmon’s forecast of approximately $15 billion. He conceded that his

change did not reflect any amendment to the costs of upgrading. Mr. Dovey amended his capital

cost estimates for the first two parts of the mine development, but not the third and fourth.

Although his materials indicated that capital costs estimates for those two mining phases were

consistent with the November 2005 AMEC cost estimate, he conceded that this was inaccurate.

Mr. Dovey also testified about the changes he had made to operating costs to bring them roughly

in line with those used by Mr. Willmon.

[456] Mr. Dovey used a discount rate of 9%, as opposed to the 10% used by Mr. Clark. His

explanation of why he chose that discount rate was obscure and focussed more on a criticism of

Mr. Clark’s chosen rate.

[457] With respect to his “limited market-based approach” referencing enterprise values for

three other oil sands companies, Mr. Dovey acknowledged that Western Oil Sands was

producing while Deer Creek was not, but then testified that he did not at any rate use Western

Oil’s high enterprise value per barrel when reaching his opinion on Deer Creek. He suggested

that the stock market recognized different stages of development in the prices at which these

companies traded, an opinion that was inconsistent with his skepticism of stock trading prices as

Page: 101

indicators of value. He acknowledged that he had used the wrong number of recoverable barrels

of bitumen in doing his calculation for Opti.

[458] Both Mr. Dovey and Mr. Derouin before him attempted to use a transaction known as

BlackRock in their analysis of market indicators of value, in Mr. Dovey’s case, to the exclusion

of oil sands transactions that took place in the six months prior to the Valuation Date.

[459] The BlackRock transaction occurred well after the Valuation Date and I accept the

evidence of Mr. Clark that it is not possible to know from public information what value Shell

had attributed to the property, but that it was apparent that Shell valued the property more highly

than did the analysts. I also accept Mr. Clark’s opinion that, even if the use of the BlackRock

transaction was a permissible use of hindsight evidence, Mr. Dovey’s use of $3.33 per barrel as a

Deer Creek comparable was incorrect.

[460] Mr. Aiello testified that there is no basis for a comparison between Deer Creek and

BlackRock given the extensive differences between BlackRock’s asset profile and that of Deer

Creek. BlackRock had already established significant production and held properties in a variety

of locations other than that in which Joslyn Project is located and with quite different

characteristics. In addition, it is apparent from the evidence that the property had special value to

Shell. It is noteworthy that Mr. Sembo, the author of the fairness opinion upon which Mr.

Derouin and Mr. Dovey based their evidence, explained that the per barrel value upon which Mr.

Dovey based his opinion is not meaningful as a comparable to Deer Creek, as the denominator

did not reflect all of BlackRock’s properties.

[461] The approach used by Mr. Dovey in his market comparable analysis, that of treating all

barrels of the underlying resource equally no matter when they may be extracted, is contrary to

common sense and commercial judgment. For this reason, in addition to the other flaws in the

analysis and the use of the BlackRock transaction, Mr. Dovey’s market comparable analysis was

of no use in determining value.

[462] Mr. Dovey disagreed with Mr. Clark’s application of a tax shield deduction. He testified

that the application of a tax shield adjustment was “unrealistic” as he could not see why a vendor

would give up value if he could hang on to assets. Mr. Dovey conceded that tax shield

adjustments are appropriately considered in some valuations. Mr. Dovey’s objection to a tax

shield adjustment ignores the reality of the Total transaction and the fact that the value this Court

must establish is a per share value, not an asset value. Mr. Clark explained his use of a tax shield

adjustment based on authoritatively supported valuation practice and I accept it as appropriate in

this case. At any rate, even if Mr. Clark’s use of a tax shield adjustment was inappropriate, the

practical result is that it would move his DCF valuation midpoint from $25.12 to $29.12, likely

not changing his conclusion that $31 represents fair value.

[463] Mr. Dovey was critical of Mr. Clark for using what he characterized as a “fundamentally,

different development plan” from the company’s plan. In his report, he described four

differences to the plan he used:

Page: 102

a)

Mr. Willmon’s assumption of a hydrocracker upgrader based near Edmonton,

rather than a coker upgrader on site;

b)

c)

a reduction in peak production arising from the 3 or 4 mining train issue;

an extension of the production time frame, which relates to the same 3 or 4

mining train issue; and

d)

an acceleration of the timing of capital costs and an increase in the absolute

amount of such costs.

[464] Mr. Dovey acknowledged that the differences outlined in b) and c) were part of the same

issue and that adding on additional train entailed higher capital costs. He conceded that if Mr.

Willmon made the change outlined in d) because Deer Creek had made this change in its 2005

draft regulatory application, that was properly an element of the company’s plan. He conceded

that he could not make a judgment on the reasonableness or economic viability of the changes

outlined in b), c) and d).

[465] Mr. Dovey conceded that he had no expertise on upgrading projects or upgrading

economics, although he was not prepared to defer to Mr. Willmon’s opinions on costs or the

SCO differential.

[466] Mr. Dovey’s opinion on the involvement of Total as a majority shareholder in Deer

Creek changed in testimony from his written opinion, in which he suggested that a Total

guarantee of Deer Creek debt would allow Deer Creek to borrow at a reduced rate and that Total

would “seek to have Deer Creek maximize its use of lower cost debt”. During his cross-

examination, Mr. Dovey denied that he had assumed that Total would make its financial

resources and its upgrader expertise available to the Joslyn Project on favourable terms that were

less than fair market value and stated that the advantages to Deer Creek would relate to “access,

not pricing”, implying that Total may benefit from borrowing at a lower rate and then lending to

Deer Creek at a market rate. I accept what was essentially the view of Mr. Clark, that the fact

that on the Valuation Date, Deer Creek had a strategic partner with access to expertise and

financial strength is to be reflected not in cash flow but in the choice of discount rate.

[467] Mr. Dovey testified that his revised range of values was thus $64 to $110 per share, and

his single-point estimate would be the $110 per share achieved through the application of $50 oil

and a 9% discount rate.

[468] There are a number of problems with Mr. Dovey’s opinion in addition to the ones already

identified:

a)

Although he sought to deny it on cross-examination, it is clear that Mr. Dovey’s

original opinion of a range of value was based on oil prices that ranged from $40

Page: 103

to $45, yet he chose to use $50 oil when he re-calculated his numbers. His

explanation for the change in his final opinion is not persuasive;

b)

Mr. Dovey’s choice of 2006 average pricing forecasts among the three

engineering firms he referred to, rather than the average as of December 9, 2005

of $39.75 per barrel was not adequately explained;

c)

d)

Although Mr. Dovey charted the decline in spot prices for oil between August and

December 2005, that decline was not addressed in his choice of price forecast;

Although the AMEC capital costs estimates were available to him at the time he

revised his opinion on capital costs for trial, he chose not to use them, using

instead some numbers from a Board presentation in November 2005, although he

adopted the AMEC operating costs estimates in his calculations;

e)

f)

Mr. Dovey used the AMEC operating costs estimates even though they were

qualified in the AMEC document as not being based on operating oil sands

facilities and reliant on engineering work that was less than 5% complete;

Mr. Dovey conceded that comments he made and charted related to the

comparison of value components in the Deer Creek plan and the GLJ analysis in

his rebuttal report were seriously flawed, as pointed out by Mr. Clark, and that his

comparisons on certain pages of his rebuttal report were not sustainable;

g)

h)

In supporting his argument that Mr. Clark should have used an 8% discount rate,

Mr. Dovey referenced to the discount rates used by Total in its pre-bid analysis,

which he wrongly interpreted to be 7 and 9% when on a nominal dollar basis

those rates equated to 9 and 11%. Mr. Dovey conceded that the conclusions he

drew from this analysis were in error, and this error supports Mr. Clark’s use of a

10% discount rate; and

Mr. Dovey wrongly used a reference from one of Mr. Guiziou’s undertakings to

support a suggestion in his first opinion report that Deer Creek had presented its

8% discount rate to investors as being “risked”, and conceded that he should have

included a reference to other presentations where it was made clear that the 8%

discount rate was on an unrisked basis.

[469] Mr. Dovey attempted to address the interesting issue raised by Mr. Clark, the very

significant difference between Mr. Clark’s opinion on value calculated on a discounted cash flow

basis and his opinion. Mr. Dovey characterized the question as “how could smart people agree to

sell at $31 a share when I’m suggesting a value a couple of months later is about $100 a share?”

While acknowledging the skill and experience of Deer Creek’s board and management, Mr.

Dovey appeared to suggest that the Deer Creek board may have been misinformed by the manner

in which Goldman Sachs and Peters & Co. presented their advice on value and would have come

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to a different decision with different advice. I cannot accept his theory, which rests on a view

that the board did not appreciate or have an independent view of the factors that underlie Mr.

Dovey’s opinion, and I find it more likely that Mr. Clark’s view on the reason for the large

discrepancy in views is correct - that the discounted cash flow approach is a sensitive tool,

highly dependent on the quality of inputs and the judgment calls made by the valuator.

[470] Given the many flaws in Mr. Dovey’s analysis, the inconsistency of his approaches to

costs and pricing and his failure to consider the market value approach as it relates to stock

trading prices, the process that led to the Total bid and the overwhelming market acceptance of

the final bid price, I have not found his opinion to be helpful in my analysis, and prefer the

evidence and opinion of Mr. Clark.

[471] The Paulson dissenting shareholders submit that Mr. Clark’s valuation methodology is

incorrect because:

a)

he treated Deer Creek as an independent company and failed to value it as the

82.4% subsidiary of Total;

b)

c)

he relied upon the development plan as outlined by Mr. Willmon; and

he ignored the fact that the August 2005 transaction was separate from the

December 2005 transaction and did not give the dissenting shareholders credit for

what they submit was a substantial rise in long-term oil forecasts in the

intervening period.

Mr. Clark did indeed treat Deer Creek as an independent company and noted that it was in his

view inappropriate to assume that Total’s more advantageous weighted cost of capital might be

provided to Deer Creek for the benefit of Deer Creek’s minority shareholders without

compensation. For reasons that are elaborated later in this decision, this approach was correct.

Mr. Clark did not ignore the fact that the September 2005 completion of the Total bid was a

different transaction from the December transaction and he was clear on the appropriate

Valuation Date throughout his opinion.

[472] With respect to the criticism about oil price forecasting, Mr. Clark used an average of oil

price forecasts from the Chenery Dobson report dated January 1, 2006 which reflected

forecasting for late 2005, the time most appropriate to the Valuation Date, but in any event,

GLJ’s tracking of NYMEX futures pricing through 2010 shows that actual transaction pricing

peaked in late August 2005. The evidence did not, in fact, indicate a linear relationship between

oil prices and oil sands valuations and there was evidence that oil sand project values trended

downwards between mid-September and the Valuation Date.

[473] The dissenting shareholders focus on the theme that the value of Deer Creek is leveraged

to the long-term price of oil. While that is undoubtedly true, it is an error to take into account

increases in long-term oil prices without taking into account increases in long-term prices. For

Page: 105

the dissenting shareholders to say the Deer Creek’s value must be higher at December 2005 than

it was in September 2005, no matter what the value was in September 2005, on the basis of a

short term increase in oil prices and no real analysis of costs is an oversimplification.

[474] The evidence is clear that there was a great deal of controversy and diverging views

about the future price of oil around the Valuation Date and, in fact, before and after that date.

Mr. Clark’s choice of using a consensus of views of knowledgeable and qualified forecasters

published at the relevant time and analysed two ways was a sensible and prudent choice for his

evaluation. The issue is not whether the long-term projections are proven in hindsight to be

correct or not, but what they were reasonably perceived to be at the time of the valuation.

[475] The Paulson dissenting shareholders submit that Mr. Clark applies consistently overly

pessimistic views on Deer Creek. On the contrary, I found Mr. Dovey’s approach to be selective

and self-serving in its assumptions and inputs, and flawed in his unreasonable rejection of the

market-based approach.

[476] The Paulson and Boivin dissenting shareholders presented numerous charts which they

submit demonstrate the pessimism of Mr. Clark’s approach to valuation. These charts were not

helpful, as in many cases they ignored differing stages of development of different projects,

included information about BlackRock that ignored the hindsight objection to that transaction

and the flaws in its analysis, the portrayal of the Deer Creek investor presentations as if they

reflected fully-risked values and the inaccurate used of the Total COMEX valuation

inaccurately. In at least two cases, the charts attempted to introduce in argument new evidence

on which there was no opportunity for cross-examination. I am not persuaded by these or other

submissions on the issue that Mr. Clark’s valuation approach was overly pessimistic or biased in

any way.

[477] In a variation on this theme, the Paulson dissenting shareholders submit that Mr. Clark’s

approach is incorrect as he coupled excessively high costs with low oil prices in his DCF

calculations. I accept Mr. Clark’s assumption on costs and find them to be reasonable and not

excessive. By low oil prices, the dissenting shareholders mean that they have taken Mr. Clark’s

$43 price and reduced it by $10 Canadian, the SCO differential, to come up with what they

allege is an effective oil price of $35. The oil price used by Mr. Clark in his DCF calculation as a

check on his preferred market-based methodology was a different thing from the SCO

differential, which arose from the assumptions made by Mr. Willmon on a choice of upgrader

technology. It is misleading to link them as the dissenting shareholders do in this argument.

[478] The dissenting shareholders submit, based on a portion of the cross-examination of Mr.

Laustsen, that Mr. Clark was “double-risking” the Joslyn Project by applying a 10% discount

rate to GLJ’s cash flow estimates, submitting that Mr. Laustsen admitted that GLJ’s cash flow

profiles were already fully risked. Mr. Laustsen’s evidence cannot be interpreted in the manner

that the dissenting shareholders suggest and GLJ’s risking does not include business risk to the

implementation of the development scheme. Apparently relying on Mr. Derouin, the dissenting

shareholders submit that engineering forecasts tend to be conservative and slow to react to

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changing markets. Mr. Derouin was not qualified to opine on oil pricing and this is at any rate a

mischaracterization of his opinion, which was that oil price forecasts designed for typical eight

year reserve lives of conventional oil projects are not designed for very long reserve life

properties. This was itself an odd suggestion, given that these forecasts typically extend far

beyond an eight year forecast. Nor is it true that Mr. Clark ignored increases in price forecasts

during 2005. He used averages of pricing forecasts as at December 31, 2005, the closest date

available to the Valuation Date.

[479] In short, I prefer and accept the opinion of Mr. Clark, supported by Mr. Laustsen and Mr.

Willmon, over the opinions of Mr. Dovey and Mr. Heath.

V.

A.

ANALYSIS

Statutory Basis for Determination of Fair Value

[480] Under section 191(3) of the ABCA, the dissenting shareholders are entitled to be paid

“fair value” for their shares, determined as of the last business day before the day on which the

resolution from which the shareholder dissents was adopted, the “Valuation Date” being

December 9, 2005 in this case.

[481] The ABCA does not define fair value but it provides that it may be fixed by the court.

[482] In a leading case that combined an oppression action with the determination of fair value,

Brant Investments Ltd. v. KeepRite Inc. (1987) 60 O.R. (2d) 737 (H.C.), aff’d. (1991), 3 O.R.

(3d) 289 (C.A.), the trial court reflected on the meaning of fair value as follows at 774-5:

... 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 I see no reason why

market value is not “fair value”. Market value (in some comment called “fair

value”, in some “intrinsic value”) is defined as the highest price available in an

open and unrestricted market between informed, prudent parties acting at arm’s

length and under no compulsion to act, expressed in terms of money or money’s-

worth. In my view, on the facts of this case, “market value” will constitute “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 determine the award to the dissenting shareholders.

In this context it is necessary to keep in mind the distinction between “market

value” as thus defined and the “market value approach” to valuation referred to in

the judgment of Greenberg J. in Domglas, supra. The latter has reference to use of

the quoted price or prices on the stock market. Such prices reflect actual

transactions of purchase and sale. “Market value” as defined above is a notional

or hypothetical concept; an opinion arrived at by evidence, assumptions,

calculations and judgment, in the absence of an actual transaction. The distinction

is important for the disposition of this case.

Page: 107

[483] On appeal, the Court agreed that, on the facts of that case, “fair value” and “market

value” could be equated, but such is not necessarily always the case. What is clear is that fair

value is a value that is “just and equitable”, one that provides adequate compensation or

indemnity, consistent with the requirements of justice and equity: Manning v. Harris Steel

Group Inc. (1986), 7 B.C.L.R. (2d) 69 at 75 (B.C.S.C.), citing Domglas Inc. v. Jarislowsky et al.

(1980), 13 B.L.R. 135 at 164 (Que.S.C.).

[484] The dissenting shareholders appear to rely on a definition of fair value taken from the

American case of Roessler v. Security Savings & Loan Co., 72 N.E.2d 259 (Ohio 1974), which

refers to fair value as the “intrinsic value” of shares. As noted in Morrison v. United Westburne

Industries Ltd., [1988] O.J. No. 378 (H.C.J.) at p. 11, “intrinsic value” has a particular meaning

that may not make it synonymous with fair value and I prefer not to use that term.

[485] 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 to recognize that a

prudent purchaser will have certain fall-back positions in mind: New Quebec Raglan Mines Ltd.

v. Blok-Andersen (1993), 9 B.L.R. (2d) 93 at 132 (Ont. Gen. Div.). While each party who asserts

a proposition must prove it by a preponderance of evidence on the balance of probabilities, there

is no burden on either side to establish value, as this is a judgment for the court to make: Silber v.

BGR Precious Metals Inc. (1998), 41 O.R. (3d) 147 (Gen. Div.).

[486] Generally, neither the parties nor the court may rely on hindsight evidence. Events that

were not known as of the valuation date or that occurred afterwards are not relevant to

determination of fair value on the valuation date. At trial in Smeenk v. Dexleigh Corp. (1990), 74

O.R. (2d) 385 (H.C.J.), affirmed on this point by the Court of Appeal at (1993), 15 O.R. (3d) 608

at 614 (C.A.), 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 the shares on the valuation

date from the effects of the amalgamation whether anticipated or ex post facto.

Events that were not known on the valuation date or which occurred thereafter are

therefore, in ordinary circumstances, not relevant to the issue which is to

determine fair value on the valuation date; where they may nevertheless have

some relevance or probative value they should on the basis of the same principle

be given little weight.

[487] The general rule on hindsight was clarified in Ford Motor Co. of Canada v. Ontario

Municipal Employees Retirement Board (2000), 48 C.P.C. (4^th) 272 (Ont.Sup.Ct.J.) at para. 5,

where Ground J. comments that factual hindsight information (not opinions) may be used to

compare actual results achieved after the valuation date to projected corporate results said to be

reasonably foreseeable or to challenge the reasonableness of assumptions made by the valuators.

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[488] 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)

(c)

(d)

net asset valuation;

investment valuation; and

a combination approach.

As noted in Grandison v. NovaGold Resources Inc., 2007 BCSC 1780 at para. 154, these options

are not exhaustive and “[e]verything that has a bearing on the question of value must be

considered.”

[489] 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), 33 D.L.R. (4^th) 641 at 652 (B.C.C.A.):

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 to exercise the best

judgment that can be brought to bear on all the evidence and all the factors.

The Court in Cyprus Anvil also noted at pp. 652-3 that no method of determining value that

might provide guidance should be rejected, 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 a process

characterized by mathematical certainty and exact calculation.

B.

Adequacy of Marketing and Market Testing and the Role of Business Judgment

[490] The dissenting shareholders are critical of the process undertaken and decisions made by

the Deer Creek board and management, suggesting that it was inadequate, that the board was

outmaneuvered, that the process was ill thought-out or perhaps that there was no process at all

but merely an insufficiently rigorous reaction to events as they occurred. They dismiss the $31

price offered by Total as evidence of fair value in part because of what they allege are

insufficiencies of process and diligence and in part because of what they allege are imperfections

in the market-based valuation approach generally.

[491] If it was true that the process was flawed or nonexistent, that would weaken the case for a

market-based approach to the valuation of the Deer Creek shares, since bad management and

poor strategy may tend to invalidate the trading prices of Deer Creek at the time of the Total

offer and the final offered bid of $31 per share as indications of “fair market value,” the highest

price available in an open and unrestricted market between informed, prudent parties acting at

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arm’s-length and under no compulsion to act, expressed in terms of money or money’s worth.

Deer Creek submits through its expert Mr. Clark that the market-based approach is the most

appropriate valuation approach in this case, backed up by a discounted cash flow approach.

[492] The dissenting shareholders submit through their primary valuation witness Mr. Dovey

and through Professor Hayes that the discounted cash flow approach is best, arguing that a

market-based approach that focusses on stock-trading prices is unreliable in this case because the

market did not appropriately value this kind of company and because the process was flawed.

[493] In responding to these submissions, Deer Creek called a great deal of evidence about the

process followed by the board and submits that the role of business judgment is of fundamental

importance in the case, both on the issue of the adequacy of the process followed by the board

and management of Deer Creek and on the issue of whether there were powerful indicators of

market value. Deer Creek submits that business judgment was exercised at many different levels

and that it all supports the conclusion that Deer Creek’s fair value as at December 9, 2005 was,

at best, the $31 offered by Total in the takeover bid.

[494] The dissenting shareholders respond that the business judgment rule is a “red herring”,

that it has no place in a fair value case and that deference to business judgment amounts to

placing an improper onus on the dissenting shareholders.

[495] The business judgment rule is not a substantive rule of law, but a presumption applied by

the court that, in the classic statement as expressed under Delaware law, provides that in making

business decisions, the directors acted on an informed basis in the honest belief that an action

taken was in the best interests of the company; see In re Walt Disney Co. Derivative Litigation,

907 A.2d 693 at 750. The Court in that case explained that the business judgment rule exists

because courts are ill-equipped to engage in an after-the-fact substantive review of business

decisions and the rule precludes a court from imposing itself unreasonably on the business and

affairs of the corporation. The Supreme Court of Canada recognized these policy considerations

in quite similar language in Peoples Department Stores Inc. (Trustee of) v. Wise, [2004] 3 S.C.R.

461, 2004 SCC 68. The Court in Walt Disney noted at pp. 747-8 that the business judgment

presumption applies when there is no evidence of fraud, bad faith or self-dealing and does not

apply if a decision “cannot be attributed to any rational business purpose” or if the directors

“have made an unintelligent or unadvised judgment” or have been unduly passive. In the United

States, a variation on the presumption has developed in the context of takeover battles and

change of control situations, namely the Revlon enhanced scrutiny variant: Revlon, Inc. v.

MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 at 179 (Del. 1986). While the rule under

Delaware law is quite specific and well-developed, when it has been used in Canada, it has

sometimes been less than fully nuanced. It often arises when a decision of a board of directors is

assailed in hindsight. The issue arises in this case, not because of allegations of breach of

fiduciary duty or duty of care per se, but to allege that implied breaches of this kind make the

market price of the Deer Creek shares of little or no utility in the determination of fair value.

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[496] It has been suggested that where, as here, a personal remedy is sought, a court should

hesitate before rejecting recourse to it by invoking the business judgment rule as, in such a case,

the issue is not the protection of a business decision or the directors that made it, but instead the

protection of a complainant’s interests against abuse or injustice: Paul Martel, “The Oppression

Remedy and the Business Judgment Rule - Some Reflections” (Paper presented to the National

Judicial Institute Civil Law Seminar: Emerging Issues in Corporate, Commercial and Insolvency

Law, May 9, 2007) at 7. This may be so if an attempt was made to justify a value for shares held

by dissenting shareholders by asking the court simply to defer to the judgment of directors as to

value, rather than to engage in its own duty of valuation, but it is not a “red herring” to consider

the events that led to the Total acquisition in September 2005 or to the second stage transaction

that gave rise to dissent rights and established the Valuation Date in order to consider the

submissions of the dissenting shareholders about process and market flaws and to consider the

submissions of Deer Creek on the propriety of a market value approach to fair value.

[497] In doing so, I am required to review the actions, reactions and decisions of the Deer

Creek board and management. In this case, even if I apply hindsight to the reactions and

decisions of the board in this case, they withstand that rigorous test and I am not tempted to

substitute a different opinion on what was done or should have been done by the board in the

years and months prior to the Valuation Date. This is not a case where deference to the opinions

of the directors may have produced a different result. I do not impose an onus on the dissenting

shareholders to do other than what they are required to do in this kind of proceeding: to establish

on the balance of probabilities their allegation that the process was flawed and the market

imperfect by evidence.

[498] I accept that Deer Creek had a strong board of directors with extensive industry

knowledge and experience and a deep background with the company and its project. They were

aided in their deliberations by a strong management team and two teams of highly regarded

investment bankers with considerable transactional and industry-specific experience.

[499] I find the directors, managers and professional advisors who testified for Deer Creek to

be credible and knowledgeable witnesses who provided the history of a process undertaken by

the company to consider alternatives for the future development of the Joslyn Project during the

period of time most relevant to this case, commencing in the fall of 2004 and extending to the

Valuation Date. The board of Deer Creek, its management and its financial and legal advisors

were faced with the considerable challenge of responding to Total’s bids to acquire Deer Creek

and determining a course of action that would maximize value for Deer Creek’s shareholders.

The directors were required to exercise their business judgment in a compressed time frame, in

the context of tough negotiations with a sophisticated bidder and in the context of an offer that

compelled them to engage in the process of negotiations with the bidder so that Deer Creek’s

shareholders could decide for themselves whether or not to tend to the bid.

[500] Deer Creek engaged in a deliberate and organized process of considering alternatives for

the future development of the Joslyn Project, particularly dating from the board’s strategy

session in the fall of 2004 when it formally recognized the difficulty the company would have in

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continuing its development of the Joslyn Project and the need to involve a party with far greater

financial and technical expertise.

[501] The dissenting shareholders submit that Deer Creek was doing just fine with its one-step-

at-a-time strategy and that it could have continued along those lines without either great dilution

or requiring a strategic partner. This is unrealistic and contrary to the evidence, given the huge

capital outlays required for Deer Creek’s next steps in development and the board’s recognition

of that issue in late 2004, if not earlier.

[502] I am satisfied that Deer Creek had adopted and was following a strategy of ensuring that

the market was better aware of the long-term potential of the Joslyn Project, which does not

mean that it expected its share price to reach the values suggested by the dissenting shareholders,

but that the goal of the board and management was to better align share price with value and

appropriate appreciation of risk. It was making progress in that goal, as can be seen by the

movement of its share price over the spring and summer of 2005.

[503] Deer Creek also undertook the first steps of a process to identify and engage in

discussions relating to a joint venture with a strategically-chosen partner. I am satisfied that the

Deer Creek board and management recognized that the risks of undertaking such a process

included the risk of attracting a bid for the entire company and that they attempted to manage

that risk in an appropriate manner by encouraging and requiring confidentiality agreements that

included standstill provisions from prospective joint venture partners. What they discovered was

that many prospective partners were not interested in tying their hands by entering into such

agreements and that there was sufficient public data available on Deer Creek that a strings-

attached opportunity to review the most-recent drilling core results or to double-check high level

public disclosure against underlying reserve reports was not attractive, at least at the early stages,

to potential partners considering their position. As indicated by Mr. Jackson, the potential joint

venture partners approached by Deer Creek and who approached the company had their own

views of the value of the Joslyn Project from publicly disclosed data, indeed had the company

already “scrubbed-down”. The submission that the process did not allow potential purchasers

sufficient time to enter into confidentiality agreements and review confidential data is not

reasonable or persuasive, given the reality of the extent of Deer Creek’s public disclosure and the

relative sophistication of companies that might have the financial and operational capacities to

take on the project.

[504] I find that the Deer Creek board acted appropriately and responsibly in its negotiations

with Total, that the board, management and advisors were alive to the issues identified in this

proceeding by the dissenting shareholders about the long-term potential of the Joslyn Project and

used those positive aspects appropriately in negotiations both in their search for joint venture

partners and in their reaction to the Total bids for a corporate transaction. The Deer Creek board

considered all of the available options, including a public auction, and the risks inherent in each

option and settled on a controlled pre-market check of potential other parties. The members of

the Deer Creek team were tough negotiators and elicited a process that allowed the Total bid to

be put before Deer Creek shareholders for their consideration, while leaving the door open

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through their insistence on a “fiduciary out” for a post-announcement market check. That

strategy resulted in a higher bid and a large premium to the then-existing market price to a level

that, in the view of the Deer Creek board and management, better reflected value.

[505] I agree that the process was a competitive process among potential purchasers best suited

to acquire and develop the Joslyn Project and allowed those companies best able to pay for and

develop the project the option to bid for the resource at a price that reflected the high end of

valuation at the time. It is noteworthy, while not conclusive of value, that the $31 price

represented a premium of 72% over Deer Creek’s prior trading price and a 128% premium to its

last financing share price. It is also noteworthy that virtually all of Deer Creek’s shareholders,

heavily weighted toward sophisticated institutional shareholders, endorsed the bid price by either

tendering their shares or selling at the newly-set market price. Clearly not all of the shareholders

did so and I will comment on this issue more extensively later in this decision.

[506] I find, therefore, that the board followed a more than adequate process to market the

company and to test the market and that it was not outmaneuvered or out-negotiated. The issue

of whether there were powerful and valid indicators of market value in this case will be reviewed

later in this analysis.

[507] The dissenting shareholders attack the independence of the Deer Creek witnesses. While

GLJ may have performed prior evaluations for Deer Creek, they are a firm of independent

appraisers whose credibility in the market depends on the professional impartiality they are

required to exercise in evaluations. Mr. Bruce had a role in the process leading to the Total bid,

and I have taken his role as advisor during the transaction into consideration in evaluating his

opinion. Mr. Sembo was only peripherally involved in the transaction and his role did not affect

his independence as an expert witness in my view. Mr. Clark, whose opinion on value is the

most important to my decision, is fully independent and was not connected to the acquisition in

any way.

C.

The Market Value Approach

[508] In considering whether to apply the market approach to valuation, courts have

considered, among other factors, the trading volume of the company, the ease of asset valuation,

and possible market imperfections: Silber at p. 152.

[509] In Canadian Gas & Energy Fund Ltd. v. Sceptre Resources Ltd. (1985), 61 A.R.

67(Q.B.), Forsyth J. noted at para. 29 that the shares in question were widely held and actively

traded, that there was no control by a single shareholder or a significant block of shares that

could effect trading patterns, and that:

... [c]ertainly, the extensive evidence heard during this trial from both sides

indicated numerous and variable assumptions as to values of oil and gas assets in

various parts of the world which had a considerable impact and effect on any

ultimate determination of value. The evidence would certainly confirm the fact

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that during this period of time the impact of the National Energy Program as well

as the volatility of the energy situation throughout the world created a situation

where it was most difficult to estimate realistic values. These reasons assisted me

in reaching the conclusion that market value most realistically reflected fair value.

[510] While currently there is no National Energy Program, Forsyth J.’s comments about the

volatility of the energy situation certainly apply to the period of time prior to the Valuation Date

and there was a wide range of views expressed about the future price and value of oil in this

hearing.

[511] While in Montgomery v. Shell Canada Ltd. (1980), 3 Sask. R. 19 (Q.B.), two-thirds of the

shares had been held by a holding company, the court found that such a control block did not

depress the market as the remaining shares were widely and actively traded, and took the market

value approach.

[512] In New Quebec Raglan Mines Ltd., the court considered fair market value, particularly

stock market price, to be “a good starting place” for assessing the fair value of the company’s

shares, even where there was a trading control block. Farley J. described at para. 10 the

“imperfections” of the stock market on a general basis, as well as “greater degrees of

imperfections” that may be a factor in cases where, for instance, stocks are thinly traded or

subject to rumours in the market place and he commented that there may need to be adjustments

to the stock price to take into account special or unusual circumstances. At para. 14, however, he

noted that in his view:

... the preferred approach to the quest for fair value of the shares would have been

first to analyze the stock exchange prices with suitable adjustments. . .then to

check and confirm this valuation process with valuation concepts applied to the

underlying asset of the potential mine.

He proceeded to do just that, despite the fact that the expert opinions he had heard did otherwise.

Farley J. used the undisturbed market price of shares just prior to the announcement of the

transaction in question as compellable evidence of market value, even though the valuation date

was nearly two months later.

[513] In this case, the issues relating to whether the market valuation approach is an

appropriate valuation tool are as follows:

a)

b)

Was there an open and unrestricted market for the Deer Creek shares?

Did the Deer Creek board and management act prudently and in an informed and

thorough manner?

c)

Does the intervening period of time between September 2005 and the Valuation

Date affect the validity of the market valuation approach?

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[514] I accept the opinions of Mr. Bruce and Mr. Sembo that there was a valid and liquid

market for the Deer Creek shares and, in fact, there was no persuasive evidence or opinion to the

contrary. I accept that Deer Creek was well-covered by financial analysts and that Lime Rock’s

significant shareholding, given Lime Rock’s nature as an investor, did not skew their value.

[515] It is true that the Deer Creek board and management were concerned that the market did

not value Deer Creek the way that it should and was disproportionately discounting the company

for risk, but that was in the context of share prices much lower than the $18 a share that had been

achieved prior to the announcement of the first Total bid. The company was taking active and

effective steps to remedy the situation.

[516] On the next issue, the Deer Creek directors were thoroughly briefed on their legal and

fiduciary responsibilities. The board and management were fully alive to the potential of the

company’s sole asset and fully involved in an evaluation of its value and a consideration of the

risks of development, from at least the fall of 2004 if not earlier.

[517] The directors formed their own evaluations of value with advice from independent

advisors which had full access to the company’s data and valuation modelling and had conducted

their own thorough reviews of value. There were 10 formal board meetings in the time between

Total’s initial offer on July 15, 2005 and August 12, 2005, each lasting several hours, and

extensive informal meetings and discussion amongst board members, management and the

financial advisors. Scripts were developed for key negotiating steps and every step of the process

was analysed carefully by the entire negotiating team.

[518] It is patently wrong to suggest, as the dissenting shareholders do, that this was a passive

board and negotiating team or that the directors, management and financial advisors were

manipulated by Total or lacked market savvy.

[519] I am also satisfied from the evidence that there was an adequate pre-deal canvass of the

most likely and capable parties for a joint venture, and that this process aided both Deer Creek

and potential third parties in evaluating the company and establishing value. There was no clear

division between the search for a joint venture partner and the canvass of potential parties for an

en bloc offer, nor did there need to be for there to be an effective pre-deal market check.

Whether or not the market has been sufficiently canvassed is a question of fact in the

circumstances of a particular case. I am satisfied that in this case the list of likely purchasers was

canvassed, the step from joint venture to en bloc offer in terms of necessary due diligence was

not a major factor and Deer Creek’s publicly-available information was sufficiently extensive to

allow prospective purchasers to evaluate an offer without access to confidential information,

which could be accessed relatively briefly after the fact. I am satisfied that the Deer Creek board

and management recognized in the fall of 2004 that it could not continue to develop the project

on its own and that the directors and officers recognized that the process they had begun to

undertake might lead to a takeover offer. I am satisfied that Goldman Sachs and Peters & Co.

were retained to advise on both the joint venture and the possibility of a takeover bid and the fact

that the financial advisors continued drafting a confidential offering memorandum despite the

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Total offer was just prudence while the alternate option of an en bloc offer was being explored. I

am satisfied that the decision not to conduct a public auction was prudent and reasonable in the

circumstances, given the risks of a failed auction and that the deal protection terms reached with

Total were not anticompetitive and allowed other parties to bid in competition in the intervening

40-day period, as Shell in fact did.

[520] In this case, the marketing efforts by the Deer Creek board, management and advisors

were extensive and focussed on achieving value for shareholders. There was no bad faith or lack

of competence by the directors, management or the financial advisors. The Total offer was

supported by carefully-considered fairness opinions and accepted by a vast majority of existing

shareholders. The results of the marketing efforts are relevant and persuasive evidence of fair

value.

[521] The next issue is whether the fact that there was an intervening period of time between

September 2005 and the Valuation Date affects the validity of the market valuation approach or,

indeed, affects market value.

[522] There were slightly less than three months between the closing of the Total bid at $31

and the Valuation Date. During that time, Deer Creek continued its operations with Total as a

major (82.4%) shareholder. Total had indicated in its public bid material that it intended to

follow its bid with a second-stage transaction in which it would attempt to acquire all of the Deer

Creek shares. None of the dissenting shareholders alleged that they were unaware of that

intention, although they rely either on a restrictive interpretation of Total’s disclosure in that

regard that I do not accept, or, in the case of Mr. Boivin and Dr. Gabai, a misinterpretation of

securities laws and regulations.

[523] The dissenting shareholders submit through Mr. Dovey that there were a number of

factors that point to an increase in value of the Deer Creek shares subsequent to the Total bid, as

follows:

(a)

(b)

Increases in long-term WTI price expectations;

The achievement of some additional milestones by Deer Creek, coupled with its

general view that its project would increase in value over time; and

(c)

Advantages allegedly flowing to Deer Creek from Total’s position as its majority

shareholder.

[524] The evidence established that in fact spot prices for WTI crude oil trended downwards

between September and December 2005. This is not the same as long-term WTI price

expectations, but Mr. Dovey’s evidence with respect to the alleged increase in such long-term

price expectations was not specific or quantified as it may relate the market value of the Deer

Creek shares. Nor did he refer to any corresponding increase in costs and how that would affect

his opinion that the value of the Deer Creek shares would increase.

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[525] The evidence also disclosed that prices paid for oil sands acreage trended downwards in

the intervening period. While they may have trended upwards after the Valuation Date, that is an

impermissible use of hindsight evidence to bolster an opinion and, at any rate, Mr. Aiello’s

explanation of the cause for this increase removes any force from this factor.

[526] What is more significant is that the trading process of other oil sands companies trended

downwards after an initial spike following the announcement of the Total bid and its follow-up

bid. While these are prices for different companies at different stages of development, the

general trend supports the submission that the Deer Creek transaction resulted in a short-lived

spike in stock prices, which settled by year-end.

[527] As I indicated earlier, I found Mr. Dovey’s attempts to calculate “per barrel” value

metrics problematic and not reliable to support the submission that transaction prices rose in the

three-month period between September and December 2005.

[528] With respect to Deer Creek’s advancement towards some of its milestones of

development, I accept the evidence that the Deer Creek negotiating team used the upcoming

achievement of additional milestones and the expectation of resulting increases in market

valuation in pressing Total toward a greater premium from its current share price. I do not

believe that the progress made in the three-month period in question, which was in accordance

with pre-existing plans, resulted in any kind of material change to value.

[529] With respect to whether advantages flowed to Deer Creek from Total’s position as

majority shareholder, the problems and inconsistencies in Mr. Dovey’s evidence on this issue

have already been identified. I do not accept the proposition that Deer Creek benefited in any

direct way from Total’s greater financial clout or lower cost of debt during the intervening

period, nor that it would have benefited in the future at other than fair market rates had Total not

become its sole shareholder, a position that Mr. Dovey himself resiled from at trial. It is true that,

with Total as a major shareholder, Deer Creek had better access to Total’s superior technical

capability and an expectation that it would, after the completion of the two-stage transaction,

have access to Total’s superior financial capability. The issue is whether the dissenting

shareholders are entitled to benefit from those potential advantages in the circumstances.

[530] The dissenting shareholders submit that execution risk was largely eliminated as a result

of Total’s involvement, buttressing that submission with a mischaracterization of evidence given

by Mr. Guiziou. While certain risks of financing and execution may have been alleviated by

Total’s involvement, many other risks inherent in a project at an early stage of development

remained.

[531] There appears to be no Canadian authority specifically addressing the determination of

value in the context of a two-stage transaction. There are American cases, but 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

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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. It also appears that United States case law has increasingly come

to favour a discounted cash flow analysis as the core approach to measuring value: Lawrence A.

Hamermesh & Michael L. Wachter, “The Fair Value of Cornfields in Delaware Appraisal Law”

(2005) 33 J. Corp. L. 119 at 125.

[532] In Cede & Co. v. Technicolor, Inc., 684 A.2d 289 (Del. 1996), the Court 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 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.”

[533] The Court harkened back to a decision in Weinberger v. UOP, Inc., 457 A.2d 701 (Del.

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.

[534] Messrs. Hamermesh and Wachter in their article note that the opinions in Weinberger and

Technicolor have left a “troublesome uncertainty” in defining the proper approach to valuation in

the Unites States. They discuss the principles of United States law in these types of cases, dividing

them into three categories, none of which corresponds exactly to the situation in Deer Creek. In

analysing these categories, the authors note as follows at page 148, quoting the latter paragraph from

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Union Illinois 1995 Inv. Ltd. Partnership v. Union Financial Group, Ltd., 847 A.2d 340 at 364 (Del.

Ch.):

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 acquiror’s plans to operate the

post-merger enterprise more effectively. . .

Logically, if this mandate is to be faithfully followed, this court must endeavor to

exclude fromany 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.

[535] However, they also note at p. 149 that, through a “wooden interpretation” of Weinberger and

Technicolor, a reader could draw a contrary inference, but that such literal reading of the cases is

not required, and is in fact “intolerably inconsistent with the language” of the legislation itself.

[536] Two subsequent Delaware cases have distinguishedTechnicolorand interpreted it narrowly.

In Grimesv. Vitalink Communications Corp., [1997] WL538676 (Del. Ch.), dissentingshareholders

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.

[537] 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 on which petitioners became entitled to appraisal rights”.

While there was a plan and an expectation that the acquiror 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.

[538] In Allenson v. Midway Airlines Corp., 789 A.2d 572 (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.

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[539] The court noted that, in Technicolor, the acquiror in implementing its new business plan

before the merger had subjected the minority shareholders to the economic risks that the new plan

posed.

[540] In this case, Total had not implemented a new plan and the evidence fails to establish that

Deer Creek had in fact 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 Total’s strengths in these areas, these were still speculative.

[541] I accept the evidence of Mr. Guiziou that, at the Valuation Date, neither Deer Creek nor

Total as its majority shareholder had formulated any firm plans for an upgrader and that, as long as

Deer Creek was owned to the extent of only 82.4% by Total, any upgrading arrangements would

have been negotiated on an arm’s length basis. Deer Creek was still being run as a separate company

and Total’s financial resources would be made available to it only on arm’s length terms.

[542] To the extent that American law is helpful on this issue, it appears that synergies and benefits

dependent on the consummation of the second stage merger and operating efficiencies that arise

from Total’s further implementation of the business plan, or changes to it, are not to be included in

determining fair value as long as they are not “operationally implemented” before the merger occurs,

even if they build on Deer Creek’s existing assets.

[543] 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. v. Aitken

(1988), 41 B.L.R. 87 at 112 (Ont.H.C.J.); New Quebec Raglan Mines Ltd. at p 109-110. As noted

by Deer Creek, this is not a case of a long-time majority shareholder taking the company private,

as most (albeit not all) of the dissenting shareholders bought shares or bought additional shares only

after the transaction was announced, which purchases must be assumed to have been made with the

knowledge of the risks involved: Morrison at p. 25. While the Paulson dissenting shareholders

bought one million of their roughly 8.6 million shares prior to Total making it clear it would be

considering a second stage transaction, I do not find it credible that investors with the sophistication

that the Paulson dissenting shareholders claim were not aware that the Total takeover bid very likely

would be followed by a going private transaction. After August 5, 2007, the message to the market

was clear and unambiguous - Total most likely would proceed with a second stage transaction.

While Mr. Boivin may have been mistaken in his view of securities law and the likely consequences

of the bid, he made it clear that he continued with his investment and the investments of his clients

on the basis of the Paulson investment, hoping to profit from the coat-tails of a larger dissenting

shareholder in whatever next step occurred. While the timing of purchase and shareholder

motivation should not be taken into account in the assessment of value generally, these factors may

have a bearing on the exercise of the court’s discretion to take into account synergies that may have

accrued in the brief period of time between the first and second stages of this kind of transaction.

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[544] From a policy consideration basis, Total made it clear from the time of its initial offer that

it had the right and intended to take the steps necessary to acquire all of Deer Creek’s shares. The

method it chose, the second stage business continuation, was a legitimate process allowable under

Canadian securities laws and nothing negative should be drawn from Total’s use of this process. The

dissenting shareholders suggest that the minority shareholders were divested of their ownership of

shares, not through the application of statutory rules but merely through the exercise of a majority

shareholder’s clout. If by this they mean that Total was not able to acquire their shares through a

second stage transaction allowable under corporate and securities law, that is patently wrong. The

legislatively-mandated balancing mechanism to such ability to squeeze-out minority shareholders

is the dissenting shareholders’ right to be paid fair value that was exercised in this case. The Gabai

dissenting shareholders suggest that if 90% is not the appropriate percentage to force a compulsory

acquisition, then the legislature could make a change. In fact, the relevant legislation allows such

a second stage transaction, with the protection to the minority of dissenting rights. Going private

transactions are not “legal gymnastics to get around the spirit of the law” as alleged by Dr. Gabai,

but an established part of the Canadian securities landscape, and majority shareholders are entitled

to utilize them even in cases where they are squeezing out a minority with whom they have been co-

shareholders for a lengthy period of time, which was not the case here. The dissenting shareholders

rely on Delaware Open MRI Radiology Associates, P.A. v. Kessler, 898 A.2d 290 (Del. Ch.), but that

case involved very different facts that gave rise to clear issues of fairness not present in this case.

[545] It is noteworthy that the securities regulatory rules that governed Deer Creek as a company

listed on the Toronto Stock Exchange allowed this second stage transaction to proceed without an

independent valuation of the Deer Creek shares, which is consistent with an underlying recognition,

or at least policy decision, under securities law that no increase in value should accrue to dissenting

shareholders simply by virtue of the completion of the first step in a two-step acquisition process

in the usual course. I must agree that to hold otherwise would encourage acquirors to insist on a 90%

minimum tender condition, which would allow shareholders that hold over 10% of the shares the

ability to block transactions that might otherwise receive the support of a great majority of

shareholders, as happened in this case. It could also motivate some shareholders not to tender to the

first-stage bid in order to speculate on the potential upside in value that a majority shareholder may

bring to the corporation in the short period of time before the squeeze-out transaction, leading to

inequity in the treatment of shareholders. This is not “confusing two distinct transactions” as alleged

by the dissenting shareholders, but a recognition that a takeover bid in which the acquisor warns

shareholders that it intends to follow up with a squeeze-out transaction will be treated by the market,

at least, as part of a single complete change of control transaction. That I am mandated by the

legislation to consider fair value as at the Valuation Date does not mean that I am obliged to

disregard the history of what occurred prior to the Valuation Date; indeed, the law in this area

mandates the opposite.

[546] The dissenting shareholders submit that to decline to recognize the benefits arising from

Total’s acquisition of 82.4% of the shares in the takeover bid is to refuse to acknowledge the impact

of that acquisition. The impact of the acquisition, however, was recognized in the transaction price,

in the surge in market price from $18 to the offered price of $31. As admitted by Mr. Paulson, if the

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Total bid had failed, the Deer Creek share price would have in all probability sunk to closer to its

pre-bid levels. The significant premium that Total paid over then-existing share prices reflected the

additional financial and financial capability that it would bring to the project, all on the premise of

owning 100% of the shares.

[547] In the circumstances of the case, and particularly as I accept that the $31 price that was

established through negotiation and Shell’s counter-bid captures some if not all of the additional

benefits attributable to Total acquiring an 82.4% interest in Deer Creek, I am not satisfied that either

fairness or policy considerations should lead me to find that the dissenting shareholders are entitled

to any additional sort of benefit that might have accrued in the brief period of time between the date

the Total takeover bid closed and the Valuation Date, nor that the Deer Creek shares increased in

value during that period.

[548] The dissenting shareholders submit that, because markets are not always perfect, the market

price for Deer Creek is irrelevant. Deer Creek admits that markets are not always perfect, but

submits that “not perfect” and “irrelevant” are a long way from one another, and I agree. To check

the “imperfection” of the market, it is appropriate to do what Farley J. recommended in New Quebec

Raglan Mines and Mr. Clark did in his valuation approach, to check value derived from a market-

based approach against a net asset value calculation to either confirm such value or to justify

adjustment to it.

[549] As noted in M.P.M. Enterprises, Inc. v. Gilbert, 731 A.2d 790 (Del. 1999) at 797:

... [In Van de Walle v. Unimation Inc.] the court stated that “[t]he fact that a

transaction price was forged in the crucible of objective market reality (as

distinguished from the unavoidably subjective thought process of a valuation expert)

is viewed as strong evidence that the price is fair.”

...

We agree with the general statement made by the Court in Van de Walle. A merger

price resulting from arms-length negotiations where there are no claims of collusion

is a very strong indiction of fair value. But in an appraisal action, that merger price

must be accompanied by evidence tending to show that it represents the going

concern value of the company rather than just the value of the company to one

specific buyer. In this case, MPM failed to present this additional evidence with

respect to either the merger or the prior offers.

In this case, Deer Creek presented more than simply evidence of arm’s length negotiations between

Total and Deer Creek to support the market value approach taken by Mr. Clark. There was evidence

that Deer Creek was traded actively in a valid and liquid market. There were market indicators in

the decision of other informed potential purchasers not to bid in the post-announcement period and

there was the acceptance of the bid by an overwhelming number of Deer Creek shareholders, many

of them institutional investors.

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[550] In contrast, it is clear that there are material difficulties in evaluating this project on a

discounted cash flow basis, given its stage of development and it is very clear that attempts to do

so can give rise to highly variable opinions.

[551] The dissenting shareholders also submit that insufficient time was allowed for alternative

offers to emerge. However, the American case they cite in support of this proposition, Roberts v.

General Instrument Corporation, [1990] Del.Ch. LEXIS 138 (Del.Ch.Ct.1990) instead stands for

the proposition that a 30-day post-transaction market check with a fiduciary-out is sufficient time

for an offer to emerge.

[552] The dissenting shareholders submit that Deer Creek’s management and directors did not

believe that Deer Creek was being properly valued by the market. That was certainly true when the

stock was trading in the $8-12 range but, by the time Total was offering a higher range of value, the

Deer Creek board and management had done considerable valuation work internally and had come

to the consensus that a value of $24 or higher was compelling and worthy of serious consideration.

[553] The dissenting shareholders cite the case of Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985)

for the principle that once there is a flawed stock price, it is necessary to resort to “intrinsic

analysis”, and that it is somehow improper to consider a premium to correct a flawed stock price.

The Van Gorkom case is distinguishable on its facts and bears no relation to what happened in this

case, where the result of the previous marketing efforts by Deer Creek and the negotiations between

Deer Creek and Total brought the stock price into line with the value of the company. This was not

a case of an irresponsible board and an out-of-control chairman as in Van Gorkom, but involved a

great deal of diligence and an adequate process to check the market and thoughtful valuation

exercises by the Deer Creek board.

D.

Discounted Cash Flow Approach

[554] It is abundantly clear from the expert evidence in this case that the discounted cash flow

approach to valuation is highly sensitive to the assumptions relied upon by the valuator and, in a

case like this one, where the company is at an early stage of development with plans for further

development lacking specific detail and contingent on a number of future eventualities, it is

necessary for valuators to make a large number of speculative assumptions.

[555] As noted in Cyprus Anvil Mining at p. 657, the discounted cash flow approach must be

viewed with care where, as here, there is little or no historical cash flow to use as a basis for

calculation and minor variations in assumptions, even if reasonably arrived at, have a heavily

leveraged effect on outcome and may, indeed, “become magnified through the calculation into a

gross distortion of the fair value.” This has been shown to be particularly true in this case, given that

not only was the prospect of meaningful revenue for Deer Creek far in the future and highly

dependent on predicted prices and costs but many billions of dollars of future capital investment

were required before these revenues could be fully generated. It must be reiterated that Deer Creek

had invested less than 2% of the total capital investment anticipated to fully develop the Joslyn

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Project, and had achieved production of only 250 barrels per day as compared with a forecast peak

production level approaching 200,000 barrels per day many years in the future.

[556] The quality of the inputs into a discounted cash flow valuation is important and I agree that

the knowledge and experience of the valuator in a specialized industry is a factor that must be

considered in evaluating the expert opinions tendered.

[557] On cross-examination, Mr. Dovey was taken to the standard definition of fair market value,

which he agreed his valuation was trying to achieve. He agreed that his discounted cash flow

analysis was a surrogate for the result of an arm’s length transaction between prudent and informed

parties with no compulsion to act “if all those conditions existed.” He agreed that the transaction is

notional. It was put to Mr. Dovey that if the court was satisfied that $31 was the highest price

available in an open and unrestricted market between informed and prudent parties acting at arm’s

length and under no compulsion to act, then he should be of the view that this meets the definition

of fair market value. He answered “[w]e can’t determine with certainty whether the conditions

existed or not.”

[558] In this case, I am satisfied on a balance of probabilities that the market conditions that

existed at the time of the Total bid were such that it is appropriate to place significant weight on the

market value approach, as Mr. Clark did, as the conditions for the determination of a meaningful and

accurate fair market value existed in this case and the fair value derived from that valuation

approach can be supported by a reasonable and persuasive discounted cash flow analysis such as the

one performed by Mr. Clark. The shares were liquid, adequately traded by sophisticated investors

and there were no circumstances that distorted or skewed the market. Market participants tendering

to the bid price made a judgment on execution and other risks that I cannot find unreasonable.

[559] The dissenting shareholders submit that there is no probative value in the fact that virtually

100% of the pre-existing shareholder base of Deer Creek either tendered to Total or sold into the

market at bid-driven prices, because it is not possible to know why they did it. That may well be true

when analysing individual shareholder decisions, but the logical inference from such an

overwhelming acceptance is that, on an overall basis, the market perceived $31 as a very good price

for Deer Creek’s shares, an inference supported by the recommendations of analysts. No evidence

was presented by the dissenting shareholders that would disturb this inference, and the arguments

of Dr. Gabai and Mr. Boivin to the effect that shareholders may have other reasons for not dissenting

are speculative and unpersuasive.

[560] Dr. Gabai’s contention that shareholder support for the Total bid was actually lukewarm was

dependent upon three invalid premises. He excluded the insiders who tendered to the bid, without

adequate justification. He ignored shareholders who sold their shares at bid-driven prices prior to

the closing of the bid. He wrongly treated Enerplus as if its situation was identical to a Deer Creek

shareholder. The dissenting shareholders submit that the fact that Enerplus did not convert its 16%

working interest into shares and tender them to the Deer Creek offer is “an unambiguous indication

that the $31 per share deal price did not reflect the intrinsic value of Deer Creek as a going concern”.

I do not agree. There may be many reasons why Enerplus did not tender to the offer and a more

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likely scenario is that Enerplus, due to its character and size as a royalty trust, was in a unique

position as a shareholder. At any rate, the dissenting shareholders did not call evidence from

Enerplus as to its valuation of the Deer Creek shares other than Dr. Gabai’s inclusion of ambiguous

hearsay opinion evidence in his written argument.

[561] In addition to the market value approach, however, I have considered the discounted cash

flow approach used as a check by Mr. Clark and as a primary methodology by Mr. Dovey. I have

indicated earlier in this decision the reasons why I prefer the opinion of Mr. Clark to that of Mr.

Dovey. With respect to their calculations of discounted cash flow, it is noteworthy that relatively

little of the original gap in Mr. Clark and Mr. Dovey’s analysis (before Mr. Dovey used $50 oil in

his revised opinion) was attributable to oil prices, but was primarily a function of divergent

assumptions on costs and discount rate and, to a lesser extent, Mr. Dovey’s application of the Deer

Creek model. I have noted the problems I encountered with Mr. Dovey’s opinion relating to his cost

assumptions. However, it is not possible given the huge divergence in the opinions for me to

reconcile the disparity in the estimates with any confidence. As was the case in Grandison, “the best

that can be said is that if each opinion is considered in the context of its material assumptions, it is

possible to determine which of the two ranges of value appears more reasonable”: para. 90. Doing

so in this case leads me to prefer Mr. Clark’s discounted cash flow opinion.

[562] With respect to discount rate, Mr. Clark selected 10% and explained that this reflected the

reality that in a negotiated sale the discount rate would be something between the rate applicable to

a stand-alone Deer Creek and that applicable to a larger company making the acquisition. I agree

that this was a conservative selection relative to many other indicators.

[563] Mr. Dovey concluded that a range of after-tax discount rates from 7% to 12% was

appropriate, using the range of long-term oil prices that he selected. However, what he actually used

was 9% in his low case estimates and 8% in his high case estimates.

[564] Mr. Dovey did not adjust his discount rate at trial to reflect the effective increase in his long-

term oil price assumption, although he had conceded that it would be appropriate to increase the

discount rate as one increases the long-term oil price assumption, especially considering that the

increasing cost structures of oil sands projects require prices to remain high to ensure profitability.

He also, mistakenly in my view, drew a flawed analogy between oil sands and conventional oil and

gas projects that did not account for material differences in development and risk profile. I also

prefer Mr. Clark’s project-based discount rate approach to the approach taken by Mr. Dovey, which

linked the cost of capital for the Joslyn Project to that of Total generally.

[565] The dissenting shareholders submit that 8 to 9% after-tax discount rates represent a generous

assessment of risks. While it is true that an 8% discount rate is not a completely risk-free rate, the

tenor of the testimony of the Deer Creek witnesses was that this rate did not capture all the risks

inherent in an early stage oil sands project. Having heard the evidence, I agree. While an 8%

discount rate may be appropriate for a developed project with material existing cash flow, the risks

inherent in an early stage oil sands project warrant the use of a higher discount rate.

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[566] The Boivin dissenting shareholders buttressed their argument on discount rates with hearsay

evidence of analyst reports. Even if admissible, these reports do not support an 8% discount rate

when analysed properly. The Boivin argument on this issue suffers from selective presentation and

failure to call the analysts sought to be relied upon as witnesses.

E.

Implications of Investor Presentations and the Deer Creek Model

[567] The Paulson dissenting shareholders submit that the investor presentations establish a far

different picture of the value and prospects of Deer Creek than presented at the hearing and that Deer

Creek is “estopped” from putting forth a different valuation.

[568] The dissenting shareholders characterize theinvestor presentations as havingpublishedDeer

Creek’s opinion of its “value” for the purpose of many of their submissions. The Paulson dissenting

shareholders go so far as to, in effect, elevate their alleged interpretation of the investor

presentations to a “promise” by Deer Creek that its per share value was in excess of $100.

[569] The Boivin dissenting shareholders refer to the investor presentations as forming a

“compact” with shareholders, language borrowed from oppression actions in which the test is

whether allegedly oppressive acts are contrary to the reasonable expectations of the applicants,

objectively determined, at the date of their investment.

[570] I cannot accept these submissions as the investor presentations, viewed in their entirety and

in the context of the purpose for which they were presented, do not support them. I note that the

dissenting shareholders:

(a)

(b)

(c)

ignore the fact that the investor presentations are clear that what was being portrayed

was long-term “project potential”, inclusive of “future opportunities”, with no

consideration of the impact of inevitable shareholder dilution to finance the massive

capital costs inherent in developing the project;

ignore the fact that the investor presentations expressly show dramatic potential

impacts on project rates of return which could result from changes in oil prices,

capital and operating costs, natural gas costs, exchange rates, and SCO pricing

differentials;

ignore the fact that the investor presentations expressly state that the projections and

estimates “involve known and unknown risks, uncertainties and other factors which

may cause actual results or events to differ materially fromthose anticipated” and the

“Deer Creek cannot provide any assurance that these expectations will prove to be

correct”; and

(d)

ignore other public disclosure documents of Deer Creek such as its Annual

Information Forms, whichlistdevelopmentalandexternalrisks, thedirectorscircular

recommending the offer, and the fairness opinions of the financial advisors.

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[571] This argument also fails because:

a)

b)

c)

the Paulson dissenting shareholders did not, at any rate, rely on those presentations

before their investment decisions, while they may have reviewed them at some point

in time;

Deer Creek does not deny the presentations, but explains and interprets them in their

entirety and in context, including the references to risks of changes or assumptions,

uncertainties in execution, and disclaimer language;

an investor presentation does not establish fair value. Even if Deer Creek did hold

the view that the value of its shares could be established through the $3, $6 and $9

billion values that form part of the investor presentations, and I do not accept that it

did, this would merely be one of the factors I should take into account in determining

fair value; and

d)

the up-dating of costs projections from those used in the June 2005 CAPP

presentation to information available at the time of the December 2005 Valuation

Date is not only permissible, it is helpful to the Court’s assessment of value. There

is no evidence or expert opinion to support the inference that Deer Creek was

somehow delinquent in making public disclosure of increasing cost trends,

particularly given the disclosure in the investor presentations that costs were based

on preliminary feasibility studies and would have to be updated. The updated costs

information is not hindsight merely because it was not publicly disclosed. The test,

which I find Deer Creek meets, is whether the information existed and was

reasonably known at the Valuation Date.

[572] Deer Creek’s internal assessments of its risked per share value, which included ranges of $30

to $40 a share early on, $8.48 to $35.45 per share and $15.28 to $28.26 per share, make it apparent

that Deer Creek did not regard, or intend investors to regard, the numbers in the investor

presentations relating to Deer Creek’s long-term potential as reflecting all the risks of the Joslyn

Project, nor its current fair value. I accept the evidence of the Deer Creek directors and Mr. Schmidt

in that respect and it is clear from the Deer Creek trading prices that potential investors were not

deceived. I also accept that Deer Creek in its emphasis on one-step-at-a-time in the investor

presentations meant to convey that the company was attempting to manage risk, and not that it could

eliminate it, and that there was no representation to investors that there would not be significant

dilution in the course of developing the project.

[573] The dissenting shareholders are not entitled to more than fair value for their shares in this

proceeding because they may have attributed, incorrectly, a certain value to the Deer Creek shares

fromthe investor presentations. As Deer Creek points out, this is not an action for misrepresentation,

and none of the dissentors is able at any rate to establish any damages for their alleged

misinterpretation of the investor presentations.

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[574] The dissenting shareholders cited no persuasive or directly applicable authority for the

proposition that estoppel should apply to prevent Deer Creek from adducing evidence of increased

costs or changes in the development plan in this case. I fail to see how estoppel could arise, given

the lack of any degree of detrimental reliance or injustice.

[575] Nor do I accept the submission that the Deer Creek witnesses disavowed the accuracy of the

board’s minutes. What they did was to explain references in those minutes in a credible manner,

including references to negotiating positions taken by the team in the course of meetings with Total.

[576] The dissenting shareholders also suggest that Deer Creek’s pre-litigation management

expectations should be more persuasive because they were untainted by this litigation. The problem

for the dissenting shareholders is that Deer Creek’s management did not regard an 8% discount rate

as capturing all project risks, nor did it regard the $3, $6 and $9 billion numbers as reflecting fair

value. I accept that the unanimous pre-litigation view of Deer Creek’s board and management was

that $25 per share represented a compelling value for Deer Creek’s shares.

[577] The dissenting shareholders in this argument attempt to use marketing documents presented

by a company at the first steps of its development inappropriately, relying on skewed interpretations

that fly in the face of evidence from the company and that lack credibility given the context of the

presentations. While certainly Deer Creek had a duty to make full, true and plain disclosure in its

marketing documents, the dissenting shareholders have not established that Deer Creek was in

breach of that duty nor that they, or any investor given the Total offer of a large premium to market

price, suffered any damages from these representations.

[578] The dissenting shareholders submit that this case involves value denigration by an acquiror

after the fact in fair value litigation. The evidence does not support this allegation, nor does it

support the allegation that the evaluators, either on their own or as instructed by Total, made “value

destroying changes” to Deer Creek’s model or plan. The valuation experts called by Deer Creek

were independent, impartial and professional, and articulated the changes they may have made to

the Deer Creek model persuasively and rationally.

[579] While the Deer Creek model was a sophisticated financial tool that aided the company in its

internal valuation, it contained a high-level overview of future development, qualified in its scope

by virtue of the fact that the company was years from any kind of intensive planning of most of its

mining and upgrading activities. The Deer Creek model was not a thorough planning document that

was jettisoned for a more advantageous post-litigation plan, and I find no evidence that the

evaluators were anything but independent and professional in the assumptions they made.

[580] The dissenting shareholders purported to illustrate what a reversal of what they allege were

“value-destroying” assumptions and decisions would do to Mr. Clark’s discounted cash flow based

value of $26 per share. I agree with Deer Creek that fair value cannot be determined so simplistically

as to take Mr. Clark’s opinion and add value by removing the aspects that the dissenting

shareholders disagree with. Mr. Clark incorporated Mr. Willmon’s evaluation in its entirety. As an

example, while Mr. Clark incorporated the SCO differential, he incorporated the higher SCO

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volumes that go along with hydrocracking upgrader technology. Had I decided that any of the

assumptions made by Mr. Willmon or Mr. Clark were incorrect or unreasonable, and I do not, Mr.

Clark’s discounted cash flow calculations would have had to be revised to take into account all of

the implications of the change of assumption.

[581] Deer Creek also points out that the calculations by the dissenting shareholders surfaced for

the first time in argument and not from the evidence and that therefore there could be no cross-

examination on how they were calculated and whether they take into account the various other

factors that may have to be changed in Mr. Clark’s opinion as a result. Even if I had rejected the

inputs and assumptions set out in the GLJ reports as set out by the dissenting shareholders in a table

in argument and had decided that a discounted cash flow based methodology was appropriate in this

case, the table calculations would be of no use to a proper assessment of value.

[582] The dissenting shareholders submit that Total explicitly recognized the significant disparity

between the intrinsic value of Deer Creek and the public market price, and that Total’s discounted

cash flow analysis arrived at a value for Deer Creek substantially exceeding $100 per share.

[583] This submission is based on the theory that adding the acquisition price paid by Total to the

net present value analysis set out in the COMEX presentation under a discount rate of 7% represents

Total’s assessment of the value of Deer Creek.

[584] Mr. Guiziou’s evidence makes it clear that Total was not valuing Deer Creek on the basis

of a 7% discount rate. It used 7% and 9% as standard discount rates for presentation purposes to

COMEX on projects in certain countries so that they could be evaluated on common metrics. From

that, COMEX would make judgments on risk, value and proposed acquisition price. I accept the

testimony of Mr. Guiziou that the COMEX documents were simply “analysis documents” which

reflected the thinking of various divisions of Total and that the ultimate valuation of Deer Creek

would be determined by Total’s COMEX through the exercise of their business judgment. I also

accept his testimony that the COMEX presentation did not include, expressly or implicitly, any

conclusions as to the value of Deer Creek. It is clear that Total’s COMEX had had in fact valued

Deer Creek at $20.50 but had been pushed by Deer Creek into offering $25, which price Total

considered to put the premium “at the ceiling.” Total ultimately matched Shell’s competing bid of

$31 per share as a result of a number of factors that included non-economic reasons.

[585] The dissenting shareholders make a great deal of a statement in the COMEX presentation

that Deer Creek’s market valuation in mid-July 2005 “includes only a small part of the fully

developed project value”. Deer Creek’s stock price at the time was far below the $25 ultimately

offered by Total, let alone the $31 ultimately paid. At any rate, Mr. Guiziou explained that the “fully

developed project value” was that which would be achieved ten years down the road after the entire

project had been developed.

[586] The dissenting shareholders also place a great deal of weight on the risk assessment portion

of the COMEX presentation, which is not particularly material given that the risks are rated in

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relative terms with projects in other parts of the world, including countries that have less stable

political systems and economics.

F.

Additional Arguments of the Boivin and Gabai Dissenting Shareholders

[587] The Boivin and Gabai dissenting shareholders adopted the evidence and argument tendered

by the Paulson dissenting shareholders and the argument tendered by each other. I have addressed

many of their submissions earlier, but the following comments address arguments that are distinct

from those made by the Paulson dissenting shareholders.

1.

The Boivin Dissenting Shareholders

[588] The Boivin dissenting shareholders submit that the fair value of the Deer Creek shares on

the Valuation Date was not less than $110 per share.

[589] They submit that either Deer Creek had not changed its “plans as publicized” prior to the

Valuation Date, and therefore what they characterize as value-destroying changes in Mr. Clark’s

report should be disregarded, or if Deer Creek had in fact changed its plans, it is not entitled to rely

on such changes because:

a)

b)

to do so violates the basic principles underlying the assessment of fair value;

Deer Creek is estopped from now relying on the information when it failed to

disclose it in advance of the Valuation Date, contrary to its public disclosure

obligations; and

c)

the information constitutes “hindsight” in that it was never made available in

advance of the Valuation Date.

[590] The major problem with this submission is that Deer Creek did not change its plans, but

rather, those plans were refined, updated and costed by Mr. Willmon in his report and adopted by

Mr. Clark. The Boivin dissenting shareholders rely on an unrealistic and self-serving interpretation

of the investor presentations, characterizing them as full net present value calculations or firm plans

and projections. For instance, the cost estimate in the investor presentations for even Phase I of the

mine was based only on a preliminary feasibility study and would have to be updated with a

definitive cost estimate following the design basis memorandum, which was not scheduled to be

developed until 2006-2007. Even if plans had changed, some of the so-called “value-destroying”

information was not information unique to Deer Creek that would give rise to an obligation to

disclose. While Deer Creek’s plans were updated by Mr. Willmon, they were still, in the main, years

from execution at the Valuation Date. The choice of upgrader and the SCO differential that was the

result of the upgrading scenario assumed by Mr. Willmon arose because it was the first time Deer

Creek had commissioned the kind of detailed analysis of the economics of upgrading, and for a good

reason. Deer Creek was a long way from upgrading and had come to expect that it would require a

partner with financial capability and upgrading expertise to take that step. The Boivin dissenting

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shareholders have taken various references to a coking process sprinkled through Deer Creek

documentation and mischaracterized these as firm plans. The one element of Mr. Willmon’s

assumptions that can be characterized as a change is his assumption of a three-train rather than four-

train scenario for the mining portion of the project. While this was a valid and reasonable

assumption, given GLJ’s history of the use of the three-train scenario and the updated resources

numbers, it may have been preferable for the purpose of this valuation for Mr. Willmon to use the

four-train scenario that Deer Creek management seemed to be pursuing at the time of the Valuation

Date. However, I do not have a reasonable and dependable estimate of what difference that change

would have made to Mr. Clark’s opinion. Assuming that it would bump up Mr. Clark’s range of

values on his discounted cash flow back-up analysis, it also seems likely on the evidence that such

a change would not be so material as to change his market-based opinion of $31 as fair value.

[591] The Boivin dissenting shareholders in their “hindsight” argument confuse public disclosure

requirements with evidence that is relevant and necessary for a court to make a determination of fair

value in this type of hearing after the fact. The concept of adequate disclosure to shareholders who

must evaluate whether or not to dissent does not require disclosure of every element of an evaluation

by an expert valuator. There was no obligation on Deer Creek to disclose general trends that were

matters of public knowledge, or external political, economic and social developments such as

pressures on labour, increasing oversight of environmental concerns, or impending changes in

royalty rates. While there may be situations where a company has been so deficient in its public

disclosure that shareholders are misled into dissenting due to lack of information, this is not one of

them. The board of directors of Deer Creek recommended the $31 price and two fairness opinions

were provided by reputable financial advisors. The Boivin dissenting shareholders rely in essence

on Mr. Boivin’s insistence on what I have found to be an unreasonable interpretation of the investor

presentations. To suggest that they relied on disclosure by Deer Creek that would support a much

higher value than $31 is a mischaracterization of Deer Creek’s public disclosure documents, which

provided appropriate and adequate disclosure to allow a shareholder acting reasonably to come to

an informed decision.

[592] The Boivin dissenting shareholders submit that Deer Creek contravened the disclosure rules

of the Toronto Stock Exchange in failing to disclose the factors that they cite as value-destroying.

I am persuaded by the evidence that there was no such breach of disclosure requirements.

[593] As noted by the Boivin dissenting shareholders, Mr. Guiziou did admit in cross-examination

that the return that Total was seeking to keep for itself was the difference between $31 a share and

what the net present value of the project ultimately is. When read in context, however, stress must

be placed on the word “ultimately”. Mr. Guiziou was clear that at the time of the offer, Total saw

a value in Deer Creek of $25 a share and that they bid up to $31 for other reasons.

[594] I must agree with Deer Creek that Mr. Boivin and Dr. Gabai have in their argument (and in

testimony in the case of Mr. Boivin) put themselves forward as experts in valuation and, as such,

have put their level of sophistication in issue. Mr. Boivin is certainly entitled to a lay person’s view

of value, but he goes beyond that and suggests in argument that “at the end of the day valuation is

really an exercise in mathematics and anyone familiar with the right formula and possessed of the

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right inputs can engage in the exercise.” It must be noted that the case law cautions a court from

approaching a fair value assessment as if it was a mathematical or mechanical exercise, but the key

fallacy to Mr. Boivin’s submission is contained in his expression of it: a credible valuation requires

the correct inputs, as so vividly illustrated by the huge variability between Mr. Clark and Mr. Dovey.

Mr. Boivin does not possess the expertise or sophistication to determine the correct inputs.

[595] Mr. Boivin’s argument that Goldman Sachs and Peters & Co. adopted value-destroying

changes to Deer Creek’s net present value to permit a $25 offer to be validated presumes,

mistakenly, that the investors presentation $3, $6 and $9 billion numbers were fully-risked numbers

that Deer Creek thought represented real value. It also infers that the fairness opinions were not

credible and there is no evidence to sustain this.

[596] Mr. Boivin submits that Mr. Guiziou testified that Total would never offer a price for Deer

Creek that was equal to value, that Total was contemplating prices up to $45 a share and that Mr.

Jackson set the level of offer Deer Creek was seeking at $24. These are mischaracterizations of the

evidence and cannot support the Boivin theory that Total made a distinction between price and value

and actually knew that value was higher. While it is trite to say that price is not equal to value, it is

also trite to say that fair market value is the price that a fully-informed notional buyer and seller will

agree upon, and fair market value is one of the factors that can be used in determining fair value. Mr.

Boivin also submits that Deer Creek had the ability, financing and personnel necessary to continue

its plan. This is contrary to the evidence.

[597] Mr. Boivin also makes the interesting submission that only he and Dr. Gabai are “truly

independent”. Given their obvious personal financial interest in the litigation, this is without merit.

It is certainly true that the Deer Creek board, management and financial advisor witnesses had an

interest in defending the process they followed with respect to the Total takeover bid, but that

without more does not make them less credible if their evidence, as it did, made sense, was

supported by documentation and was unaffected by rigorous cross-examination.

[598] The argument made by the Boivin dissenting shareholders that the personal gain made by

Deer Creek directors and officers renders their judgment suspect fails on the common sense

conclusion that these insiders would have even less reason to accept or recommend the Deer Creek

offer if they thought their options actually were worth more. Further, there was not a shred of

evidence to support this argument.

[599] Mr. Boivin submits that the Deer Creek board should have struck an independent committee,

given that its counsel advised it that while there was no legal requirement to do so, this was the

preferred technique. It is clear that the board was alive to the issue and that Mr. Kerr excluded

himself from the board meeting when it became apparent that he might have a conflict. The decision

of the board to continue as a whole in the context of this takeover bid cannot be faulted.

[600] Although the Boivin dissenting shareholders submit otherwise, the $3, $6 and $9 billion

numbers in the investor presentations do not take into account dilution.

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[601] The Boivin dissenting shareholders attempt to suggest that Total in its January 2006 offer

to them adopted a $12 million figure for upgrading costs. This is based on a misinterpretation of the

documents. Mr. Boivin submits that Lime Rock was motivated to sell its shares to Total in order to

instantly capture the entirety of a gain in value that Lime Rock would otherwise have found difficult

to obtain through sales into the market. This is contrary to Mr. Farber’s evidence of Lime Rock’s

position, which I accept as credible. It is also speculative and unsupported by evidence with respect

to the assertion that Lime Rock would not be able to capture value through private sales in the

market.

[602] Mr. Boivin asserts that the subsequent formation of Laracina in November 2005 by Mr.

Schmidt, with largely the same board of directors as Deer Creek and an investment by Lime Rock

somehow shows that the value of Deer Creek was higher than the price offered by Total. This

argument is speculative, it was not put to any of the Laracina principals or to Mr. Farber on cross-

examination and fails even on the little evidence there is in the record.

[603] Mr. Boivin asserts that Mr. Willmon’s assumptionshave no basisin operativerealitybecause

Enerplus notes in its public disclosure that, with respect to the costs Total has supplied it for the

Joslyn Project, GLJ’s estimates may vary from those of Total. What this may mean, other than

prudent public disclosure, is not clear and the dissenting shareholders did not call any evidence from

Enerplus.

[604] The Boivin dissenting shareholders attempt to suggest that Mr. Guiziou admitted that Deer

Creek was more advanced than UTS. This is incorrect, as what Mr. Guiziou actually said is that

Deer Creek was closer to having some production than was UTS and other evidence establishes that

UTS was more advanced along the path to obtaining regulatory approvals and had a strategic partner

that Deer Creek lacked.

[605] The Boivin dissenting shareholders submit without any evidence that the identity of Total

as a large and powerful global energy company discouraged other bidders. That this is not so is

patently obvious from the Shell bid.

2.

The Gabai Dissenting Shareholders

[606] The Gabai dissenting shareholders submit that fair market value of Deer Creek on the

Valuation Date is in excess of $200 a share. Further, they submit that as Total forcibly squeezed out

the minority shareholders and deprived them of participation in the upside value of the company

expected from technological advances and higher recovery rates, higher future oil prices and “many

geological and/or political scenarios”, the Court should include an expropriation premium as a

component of fair value.

[607] The Gabai dissenting shareholders rely on Domglas to support their submission that there

should be a premium for “forcible taking”, which they suggest should be in the range of 20-25%.

Domglas has been rejected in subsequent cases. In Manning, the Court relied at p. 61 on the

Supreme Court of Canada’s decision in LoCicero v. B.A.C.M. Industries Limited, [1988] 1 S.C.R.

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399 as “authority for the proposition that there is no entitlement to a premium for the forcible

taking.”. Further, in Brant Investments, the Ontario Court of Appeal commented at para. 99 that

cases granting expropriation premiums were“wronglydecided” andthat there was nostatutorybasis

for such a premium. In Ford Motor Co. of Canada v. Ontario Municipal Employees Retirement

Board (2006), 12 B.L.R. (4^th) 1989 (Ont. C.A.), the Court again held that there was no entitlement

to an expropriation premium, except to the limited extent that the dissenting shareholder incurred

costs in assessing alternative investments.

[608] On the fairness issue of whether the Gabai dissenting shareholders should be entitled to a

premium, either with respect to forcible taking or for some kind of disturbance costs, the facts of this

case are quite distinguishable from Domglas, where a parent company amalgamated with one of its

subsidiaries at a time when the prospects for the subsidiary were beginning to improve. The

dissenting shareholders had forgone past benefits during a period of time when dividends had been

suspended and the squeeze-out occurred just as sales and earnings began to increase. None of those

factors is present in this case and Dr. Gabai has led no evidence of past foregone benefits or

disturbance costs.

[609] In a written opinion co-authored by himself and his counsel, Dr. Gabai puts forward

sweeping opinions on the future price of oil, on the risks of development of an oil sands project, on

appropriate discount rates in a valuation of this kind and even on whether net present value should

be calculated without dilution in this kind of valuation. His counsel concedes that I am free to

accept or reject his opinions, but submits that Dr. Gabai’s opinion is entitled to “at least as much

respect and perhaps more respect than submissions that are made with a whole lot more spin”. The

difference, however, is that Dr. Gabai was not presented or qualified as an expert on these issues and

gave no evidence at trial on many of those opinions, even if he could have been qualified as an

expert. Those witnesses he accuses of “spin” are in fact independent experts with the necessary

qualifications to give the opinions they did. Dr. Gabai is undoubtedly a highly qualified

mathematician and I accept that he may indeed follow the market quite carefully and analyze his

investment opportunities thoroughly, but he is in the end a lay witness with a direct financial interest

in this litigation.

[610] Dr. Gabai suggests that there is not much difference between a long-term majority

shareholder squeezing out a long-term minority shareholder and a new party like Total squeezing

out a long-termminority shareholder. The difference, as Deer Creek points out, is that Dr. Gabai was

not squeezed out when the share price of Deer Creek was $9 at the behest of a majority shareholder

seeking to profit from a new and favourable development in the company, but at a time when he was

offered a substantial premiumto the existing marketprice and the upsurge in the company’s fortunes

was still years, and risks, away.

[611] The Gabai dissenting shareholders also submit the following arguments:

1.

that the investment and participation by the former Deer Creek directors and Mr.

Schmidt in Laracina following the Total takeover of Deer Creek supports their

contention that the value of Deer Creek is in excess of $200. I have noted already

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under the Boivin submissions that the theories put forward by Mr. Boivin and Dr.

Gabai were never put to Mr. Jackson nor Mr. Schmidt in cross-examination, and that

they suffer from the following defects:

(a)

the Laricina flow-through share offering that is important to Dr. Gabai’s

theory took place in September 2006, and the evidence is thus inadmissible

hindsight evidence;

(b)

(c)

the shares that were issued were either founders’ shares or flow-through

shares and thus there are differences in comparison; and

the theories assume without confirming evidence that the Joslyn Project is

Laracina’s only asset.

Dr. Gabai appears to submit in argument that Mr. Jackson and Mr. Schmidt lied or

misled the Court in their evidence about Laracina, even though they were not cross-

examined or impeached in any way in their testimony. Dr. Gabai also includes as

part of his Laracina theory facts that are not found in the evidence.

2.

3.

that Enerplus places a higher value than $31 per share on it option to convert to

convert to Deer Creek shares, based on a response from an Enerplus officer to a

question posed at an investor conference. As indicated before, this is not only

inadmissible hearsay but potentially unqualified opinion evidence. The rest of the

transcript, had it been admissible, served to confirm the inference that Enerplus did

not convert and tender to the Total bid because of its particular characteristics.

that it is not accurate to suggest, as Mr. Jackson did, that virtually 100% of Deer

Creek shareholders prior to the announcement of the bid tendered to the bid. First,

Dr. Gabai submits that dissenting is a difficult and arduous process and that therefore

shareholders who made the decision to tender to the bid or sell their shares after

Total had accepted 78% of the shares tendered to the bid on September 13, 2005

were not indicating true support for the offer. Second, he opines, again without

evidence or support, that “because of market dynamics”, other reasons such as tax

considerations and “other misunderstandings”, many shareholders would have felt

compelled to tender. He then excluded from his calculations, for no apparent good

reason, the locked up insiders, including Lime Rock, added in Enerplus as if it had

exercised its put option and not tendered its shares, and concluded that “less than

54% of the possible non-insider shares” tendered to the bid. While probably correct

mathematically, this exercise is meaningless, and does not affect the accuracy of Mr.

Jackson’s statement, which was to the effect that all shareholders other than the

Boivin and Gabai groups sold their shares after the bid was announced and the

market price rose or tendered to the bid. I accept that this was indeed strong market

support. It is not necessary to speculate about the motivation of shareholders who

sold in the market or tendered to the bid to note this factor.

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4.

that significant dilution is not applicable to this proceeding. Firstly, they suggest that

Total would not finance the Joslyn Project through the issuance of shares of Deer

Creek. This may be true, but it is clear that this is on the basis of Total owning 100%

of the company, not as an 82.4% shareholder.

If dilution remains a factor, then the Gabai dissenting shareholders submit that

dilution for Deer Creek would likely be modest, relying on a skewed and

misrepresented interpretation of the May 2005 scenario Mapping and Valuation

Analysis and Mr. Schmidt’s evidence about the investor presentations. These

arguments about dilution do not bear close scrutiny.

5.

that a review of the 2005 Enerplus Annual Information Form filed on March 17,

2006 confirms from information reported to be received from Total Mr. Dovey’s

estimate of capital costs for the mining portion of the Lease. Mr. Guiziou was not

cross-examined on this theory, and I am satisfied that documents that were tendered

in evidence establish the opposite, that it can be inferred that Total’s cost estimates

are actually higher than those assumed by Mr. Willmon and used by Mr. Clark.

VI.

CONCLUSION

[612] I find that the fair value of the Deer Creek shares as of the Valuation Date was $31 per share.

In this case, the appropriate valuation technique was the market value approach as suggested by Mr.

Clark. That value was confirmed by the net asset value approach as calculated by Mr. Clark, whose

opinion I preferred over the discounted cash flow approach taken by Mr. Dovey.

[613] In the absence of agreement, the parties may speak to costs and interest payable on the

balance of the purchase price.

Dated at the City of Calgary, Alberta this 13th day of June, 2008.

B.E. Romaine

J.C.Q.B.A.

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Appearances:

W. Clarke Hunter, Q.C., Glen H. Poelman, Steven H. Leitl, Lori M. Bevan of Macleod Dixon LLP

for Deer Creek

Frank Foran, Q.C. and Randall Block , Q.C. of Borden Ladner Gervais

for the Paulson dissenting shareholders

Michael D. Briggs of McCarthy Tetrault LLP

for the Boivin dissenting shareholders

Lorenz Berner of Peacock Linder & Halt LLP

for the Gabai dissenting shareholders