A New Arrangement? Alberta Court Requires Shareholder Vote for Acquiring Company in a Plan of Arrangement
October 11, 2016
In a recent Court of Queen’s Bench of Alberta case, Alberta Oilsands Inc. (Re) (Alberta Oilsands), Justice A. D. Macleod made a surprising decision in the context of a plan of arrangement under the Business Corporations Act of Alberta (ABCA). Justice Macleod held in Alberta Oilsands that shareholders of an acquiring company in a plan of arrangement, at least on the facts of that case, have the right to vote on the proposed arrangement. No previous decision had given shareholders of an acquiring company such a right. Justice Macleod has created uncertainty in a previously predictable process. The decision is under appeal.
Mergers and amalgamations of companies incorporated in Alberta are governed by the ABCA. Section 193 of the ABCA governs court approved arrangements. Section 193(3) is clear that court approved arrangements may only be resorted to if it is impracticable to effect the plan of arrangement under any other applicable provision of the ABCA.
Section 183 of the ABCA governs amalgamations not done as an arrangement and requires shareholder approval of each corporation participating in the amalgamation. Conversely, under the powers given to the court by section 193, the courts have only ordered shareholders and holders of other securities being “arranged” of the company applying for the arrangement (the company being acquired) to vote on a proposed plan of arrangement.
Alberta Oilsands Inc. (AOS) intended to acquire Marquee Energy Ltd. (Marquee) by way of plan of arrangement. AOS planned to acquire Marquee shares as part of the arrangement, in exchange for AOS shares. Marquee was ordered by the court to seek shareholder approval as the company being acquired.
Smoothwater Capital Corporation (Smoothwater) is a 14 per cent activist shareholder of AOS and expressed concerns about the acquisition.
Smoothwater applied to the court and sought an order that a special meeting of the shareholders of AOS must be held to consider and vote on the proposed arrangement. This would give the shareholders of AOS, the acquirer, the same rights as the shareholders of Marquee to vote on the arrangement.
Both AOS and Marquee opposed the application and argued that the proposed arrangement did not affect the rights of AOS shareholders. A vote of AOS shareholders was not required under section 193 of the ABCA.
In a surprising judgment and in a departure from the requirements of section 193 of the ABCA as interpreted by the courts, and the relevant TSX Venture Exchange rules, Justice Macleod granted Smoothwater’s application. The interim order that was earlier granted to govern the arrangement process was amended to require a vote for AOS shareholders on the proposed amendment. AOS shareholders were also given dissent rights.
In his decision, Justice Macleod relied on the test established by the Supreme Court of Canada (SCC) in BCE Inc. v. 1976 Debentureholders (BCE). In BCE, the SCC considered an arrangement under the Canada Business Corporations Act (CBCA), which has substantially similar provisions to the ABCA for arrangements. The SCC stated in BCE that in order to approve a plan of arrangement, a court must be satisfied that: the statutory procedures have been met, the application has been put forward in good faith, and the arrangement is fair and reasonable. In order to satisfy the third factor, the arrangement must have a valid business purpose and the objections of those whose legal rights are being altered are resolved in a fair and balanced manner. Justice Macleod did not rely on other authorities in his decision.
In considering BCE, Justice Macleod analysed the transaction between AOS and Marquee as a whole. Despite the fact that Marquee had applied for an approval of an arrangement under section 193, he found that the transaction was actually an amalgamation. Justice Macleod explained that while it was “clear that the combining of AOS and Marquee constitute[d] a valid business purpose”, the arrangement itself did not meet this requirement. In his opinion, the true purpose of the arrangement was to acquire Marquee shares and effect the amalgamation without triggering the AOS shareholder vote that would be required under section 183 of the ABCA. Justice Macleod found that this was an attempt to avoid any risk that the special resolution might fail if it was put to AOS shareholders. As a result, Justice Macleod held that the arrangement did not satisfy the BCE “good faith” requirement, and it was not fair and reasonable.
In considering whether the statutory procedures were met, Justice Macleod said section 193(3) required that the “safeguards that are provided by the other provisions of the ABCA” be respected, even when a process does not provide for the same kinds of safeguards. In this case, Justice Macleod found it was necessary to give AOS shareholders the same rights as were given to Marquee shareholders, just as they would have if the transaction had been done under section 183 and not section 193. In his opinion, this was not only appropriate, but the only way to make the arrangement fair and reasonable in the circumstances.
The Alberta Oilsands decision has concerning implications for arrangements going forward. It may significantly increase the cost, timing, and uncertainty of effecting corporate arrangements, notwithstanding that the purpose of the statute is to provide an efficient and effective way to achieve corporate change.
This decision diverges from other cases that have dealt with plans of arrangement. Past cases, such as the 1988 Court of Appeal of Alberta decision in Savage v. Amoco Acquisition Company Ltd. (leave to appeal to SCC refused) and the 1993 decision of the Ontario Court (General Division) in Re Teddy Bear Valley Mines Ltd., among others, recognized that arrangement provisions are designed to be flexible and should be interpreted broadly. Strict adherence to legislative provisions is not required. This was further reinforced by the decision in Enbridge Income Fund Holdings Inc. Courts have approved plans of arrangements without requiring they address other related provisions of the ABCA. In contrast, this decision firmly links the arrangement provisions of the ABCA to other related provisions in the statute.
In a further departure from earlier cases, Justice Macleod applied the test in BCE, which applies to the approval of a final plan of arrangement, to an earlier step in the process. In this case, it was applied to an interim application requesting a vote of the shareholders prior to the final approval. Justice D. M. Brown in Re InnVest REIT at para 15 recognized the importance of judicial consistency in corporate arrangements, stating that “[i]t is important for the health of our economy that participants can expect a reasonably consistent application by the courts of processes involving financial and commercial transactions”. This decision injects uncertainty to an area of law that was previously relatively consistent.
The effect of the decision is unclear in jurisdictions that do not have the section 193 “impracticability” requirement, such as British Columbia. As a result, subject to the outcome of the pending appeal, this may affect corporations’ future decision as to where they will incorporate or how they will structure their acquisitions.
The authors acknowledge the contribution of Amanda Manasterski, Articling Student.
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