When is an Arrangement an “Arrangement”?

By Anita Anand

Recently, the Alberta Court of Queen’s Bench handed down a decision regarding the proposed merger of Alberta Oilsands Inc. (AOS) and Marquee Energy Ltd. (Marquee) via a plan of arrangement.1 The well-reasoned decision rightly suggests that it is within the court’s discretion to decide whether all affected parties are being treated fairly and reasonably in a proposed arrangement. It is not up to the corporation seeking to be arranged to make this determination for the court.

AOS is an Alberta VSX listed public company which has no business operations, but close to $35 million of cash on its balance sheet.  The board of AOS has spent several years in a strategic process to identify an acquisition that would be beneficial for the company.

Just before the mailing date for the annual meeting, AOS announced an arragement agreement with Marquee. The plan of arrangement contemplated that AOS would acquire all of the issued and outstanding common shares of Marquee in exchange for 1.67 AOS shares. AOS would issue enough new shares so that the number of outstanding shares would almost double – diluting shareholder value in the process. Immediately after the share exchange would occur, the parties would undertake a vertical amalgamation. The arrangement contemplates that only Marquee shareholders would approve the arrangement by special resolution with dissent rights. The same approval is not required by AOS shareholders.

After the announcement of the proposed plan of arrangement, Smoothwater Capital Corp., an activist investor that owns over 17 percent of AOS, sought an order that a special meeting of the AOS shareholders be held to allow the AOS shareholders to vote on the transaction. Smoothwater did not seek to prevent the merger from occurring. Both AOS and Marquee opposed the application, arguing that neither the Alberta Business Corporations Act (ABCA) nor any other Canadian corporate statute requires a shareholder vote by shareholders of the company that is not being arranged.2

Justice Macleod in the Alberta Court of Queen’s Bench granted Smoothwater’s application, finding that while the parties referred to the amalgamation as an “arrangement” (which could be permitted with board approval alone), the parties’ business purpose was not going to be achieved until the amalgamation occurred. 3 He concluded that the transaction was, in substance, an amalgamation, requiring approval from both AOS and Marquee shareholders. Marquee – though not AOS – has appealed the order.

Under the ABCA, an arm’s length amalgamation would require shareholder approval from both corporations. The parties, however, chose to structure the transaction as an arrangement under s. 193 of the ABCA to avoid an AOS shareholder vote. In BCE Inc. the Court held that “in seeking approval of an arrangement, the corporation bears the onus of satisfying the court that: the statutory procedures have been met; the application has been put forward in good faith; and the arrangement is fair and reasonable.”4

The Court reasoned that the arrangement did not satisfy the good faith requirement set forth in BCE and that, because it was structured to avoid an AOS shareholder vote necessary in an arm’s length amalgamation, the transaction (as proposed) was not fair and reasonable to affected shareholders.  “I am not at all satisfied that the arrangement as proposed by Marquee and AOS has a valid business purpose because its only purpose is to deprive AOS shareholders of what otherwise they would be entitled to under section 183, i.e. a shareholder vote on the amalgamation,” 5 stated Justice Macleod.

Some may argue that the decision creates uncertainty because no court has reached such a decision in the past.6 But the arrangement process set out in the ABCA requires the supervising court to review the substance of the proposed transaction and allows the judge presiding over the arrangement to discern what is fair and reasonable to all affected parties in a given transaction.

Stated differently, the court must look at the evidence and discretion rests with the court to determine whether the flexibility sought to be exercised by the parties is fair and reasonable. The statute states that, “If an arrangement can be effected under any other provisions of the Act, an application may not be made …unless it is impracticable to effect the arrangement under that other provision.” 7 This wording suggests that the arranging parties bear the burden of proving that it is impracticable to proceed under the amalgamation provision before turning to an arrangement.

Justice Macleod was well within the law relating to arrangements to have regard to Smoothwater’s position in this transaction. His holding prevents AOS and Marquee from circumventing provisions of the Act (which would require shareholder approval) by invoking an arrangement process. BCE further supports this position as the Supreme Court set forth a number of factors underpinning “fair and reasonable,” including security holders’ position before and after the arrangement, as well as the impact that the transaction will have on various security holders’ (i.e. Smoothwater’s) rights.8

AOS and Marquee argued that their respective decisions to undertake the arrangement are within the business judgement of their respective boards and therefore off limits to a court’s intervention. Let’s be clear: the business judgement rule is not a protective device to be used by boards ex ante. Rather,  it is a tool to be used by the court (and only the court) when evaluating a business decision ex post, as part of the determination regarding whether the board has met its fiduciary duty. That is why in BCE, the Supreme Court referred to instances when deference to board decisions should be granted. 9 The business judgment rule does not permit a board to claim that its decisions are, by definition, fair and reasonable or demand that a court simply rubber stamp board decisions when exercising judicial discretion.10

Simply because no precedent exists does not mean that the first instance decision was wrong, especially when sections of the corporate statute are invoked in order to avoid a shareholder vote. An accurate interpretation of the law dictates that this decision should be upheld on appeal.

 

Anita Anand is the J.R. Kimber Chair in Investor Protection and Corporate Governance at the Faculty of Law, University of Toronto anita.anand@utoronto.ca. Thanks to Krupa Kotecha and Tegan Valentine for valuable research assistance.

  

References

1 Marquee Energy Ltd (re), [2016] ABQB 563 (CanLII).

2 RSA 2000, c B-9

Marquee, supra note 1.

4 BCE Inc v 1976 Debentureholders, [2008] 3 SCR 560, 2008 SCC 69 (CanLII) at para 137.

Marquee, supra note 1.

6 David Tupper, Ross Bentley and Sean Boyle,A New Arrangement? Alberta Court Requires Shareholder Vote for Acquiring Company in a Plan of Arrangement”, online: Blakes LLP <http://www.blakesbusinessclass.com/a-new-arrangement-alberta-court-requires-shareholder-vote-for-acquiring-company-in-a-plan-of-arrangement/&gt;.

7 RSA, supra note 2.

8 Marquee, supra note 1

9 BCE, supra note 4.

10 Anita Anand, “Flexibility vs. Certainty: The Law Relating to Arrangements After BCE” (2009) 48:2 Canadian Business Law Journal 174.