An integrated nickel-mining public company (“Falconbridge”), entered into merger agreements with a more junior public company (“Diamond Fields”) which, through a 75%-owned subsidiary, held a valuable deposit at Voisey’s Bay in Newfoundland. The merger agreements provided for the immediate payment by Diamond Fields of a “Commitment Fee” of $28.2 million, and for the payment of a break fee of $73.3 million (calculated to bring the total of the two fees (the “Fees”) to 2.5% of the transaction value) on the completion by Diamond Fields of any competing offer. This occurred – the offer of another public company (“Inco” – the 25% minority shareholder) was accepted by the Diamond Fields shareholders, thereby triggering the payment by Diamond Fields of the break fee.
Woods JA rejected a submission that the break fee constituted proceeds of disposition of a Falconbridge capital property, namely it right to merge, on the grounds that it had no such right: its offer was directed to Diamond Fields shareholders, and Diamond Fields could not promise their acceptance of the offer; and Diamond Fields’ board of directors was not obligated to support Falconbridge’s bid if there was a competing bid that, by virtue of their fiduciary duties, they were required to support. The receipt of the break fee did not produce a capital gain.