Plan of Arrangement: A Vote for All? Not So, Says Court of Appeal
November 30, 2016
In Smoothwater Capital Corporation v. Marquee Energy Ltd. (Smoothwater), the Alberta Court of Appeal (Court) overturned the Alberta Court of Queen’s Bench controversial decision granting shareholders of an acquiring company a vote in a plan of arrangement. For further information, please see our October 2016 Blakes Bulletin: A New Arrangement? Alberta Court Requires Shareholder Vote for Acquiring Company in a Plan of Arrangement.
In granting the appeal, the Court confirmed the law only requires a shareholder vote of the company being arranged (the target). The Court also stated that the consideration as to whether an arrangement is fair and reasonable should focus only on the company being arranged. Smoothwater is consistent with other decisions about arrangements and restores certainty to the law.
Marquee Energy Ltd. (Marquee) entered into an arrangement agreement with Alberta Oilsands Inc. (AOS) whereby AOS would acquire Marquee shares in exchange for AOS shares. AOS would then vertically amalgamate with its new subsidiary, Marquee. Pursuant to section 183 of the Alberta Business Corporations Act (ABCA), shareholder approval of each corporation participating in an amalgamation is required. However, in any arrangement under section 193, only shareholder approval by the company that is to be “arranged” is required.
Smoothwater Capital Corporation (Smoothwater), an activist shareholder of AOS, applied to the Court of Queen’s Bench for a special order to require shareholders of AOS to vote on the arrangement. In a surprising decision that broke with precedent, the lower court granted Smoothwater’s application. Justice Macleod held that the arrangement would not be fair and reasonable unless AOS shareholders were given a right to vote, including a right to dissent.
The issue in the appeal was whether AOS shareholders, like Smoothwater, should have been given a vote on the proposed arrangement.
The Court confirmed two important principles about arrangement law in Alberta:
- Only the shareholders of the company being arranged have the right to vote. There is no requirement for a shareholder vote of the company that is not the subject of arrangement.
- Whether an arrangement is “fair and reasonable” must be determined from the perspective of the company being arranged.
The Court primarily relied on the Supreme Court of Canada’s decision in BCE Inc. v. 1976 Debentureholders (BCE) and the decision of the Ontario Superior Court of Justice in McEwen v. Goldcorp Inc. (Goldcorp). The Court held that section 193 of the ABCA only requires approval of an arrangement by the stakeholders of the company being arranged. In the case at bar, only Marquee was fundamentally altered by the transaction, and therefore only Marquee shareholders were required to vote. The Court rejected Smoothwater’s argument that AOS shareholders should also have a vote and noted there is nothing in the ABCA requiring such treatment. The Court found that the ABCA does not give a right to shareholders of a corporation who are merely affected by an arrangement.
The Court further commented that the ABCA only grants shareholder dissent rights in narrow circumstances and intentionally does not provide such statutory rights in section 193 arrangements, “especially arrangements of other corporations”. The definition of “arrangement” includes an “amalgamation”, but section 193 only requires a vote from the arranged company, and even then dissent rights are not automatic. Finally, even if Marquee and AOS did structure the deal to intentionally avoid a Smoothwater vote, the Court cited BCE for the determination that this did not deprive the shareholders of a pre-existing right as the AOS shareholders had no such right.
In addition, the Court rejected Smoothwater’s argument that the arrangement was unfair. Pursuant to the test in BCE, court approval of an arrangement requires that the statutory procedures are complied with, the application is brought in good faith, and the arrangement is “fair and reasonable”. In order to satisfy the third requirement, the arrangement must have a valid business purpose and the objections of those whose legal rights are being arranged must be resolved in a fair and balanced manner. The Court recognized that while the third step involves balancing the interests of various stakeholders, what is fair and reasonable is to be considered only from the perspective of the company being arranged. The Court relied on BCE for the principle that the legal and economic interests of the company to be arranged are to be considered. That determination “severely limits the ability of third parties to assert general equitable arguments about fairness”. Since AOS was not being arranged, fairness from Smoothwater’s perspective (in its capacity as a shareholder of AOS) was not relevant to the final approval.
In its evaluation of the transaction, the Court recognized a legitimate business purpose in structuring the deal as an arrangement. If the transaction had been structured as an amalgamation, it was likely Smoothwater would dissent and AOS would be required to pay for the dissenting shares. This would diminish the funds available for the original business plan and the development of Marquee’s assets. The Court found that the choice to pursue a transaction that did not require an AOS shareholder vote or provide a dissent right to AOS shareholders did not suggest “bad faith”. Finally, the Court also recognized the business importance of avoiding the uncertainty of an AOS shareholder vote, and the time and expense that would otherwise result.
Smoothwater returns certainty to the law surrounding arrangements. In a statement that is undoubtedly reassuring to both lawyers and members of the business community, the Court recognized the need for predictability and judicial consistency in commercial law. The Court restored the long-established approach to arrangements, which recognizes the importance of practicality and flexibility. Smoothwater confirms that the law only requires a shareholder vote of the company being arranged and that it is not improper or a mark of bad faith to structure a transaction to avoid a shareholder vote of the acquiring company.
The authors acknowledge the contribution of Amanda Manasterski (Student-at-Law).
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