Originally posted by Osler, Hoskin & Harcourt LLP
By Tristram Mallett, Colin Feasby and Olivia Dixon
Corporations seeking the court’s approval of a proposed arrangement transaction under s. 193 of the Business Corporations Act (Alberta) (the ABCA) typically import into the transaction dissent and fair value payment rights consistent with those created under s. 191 of the ABCA. In Brookdale International Partners, L.P., v Crescent Point Energy Corp, the Alberta Court of Appeal reversed a decision of the Honourable Justice D. B. Nixon, which declined to order an interim payment where shareholders had exercised dissent rights granted to them under the transaction terms. The Court of Appeal’s decision affirms that dissenting shareholders should, in most cases, be entitled to an interim payment in the approximate amount of the statutory offer made under the ABCA.
In April and May 2015, Brookdale International Partners, L.P. and Brookdale Global Opportunity Fund (collectively, Brookdale) purchased common shares in Legacy Oil & Gas Inc. (Legacy). Shortly afterwards, another company, Crescent Point Energy Inc. (Crescent Point) entered into a plan of arrangement with Legacy, pursuant to which Crescent Point would acquire all of Legacy’s shares. Although a right of dissent was not required under the arrangement provisions of the ABCA, such rights were included in the arrangement and confirmed in an interim order.
Brookdale exercised its right of dissent in respect of the arrangement and commenced an action for determination of the fair value of the Legacy shares under s. 191(6) of the ABCA. Legacy sent Brookdale a statutory offer of $2.415 per share, representing an amount considered to be fair by the directors (the Statutory Offer). Brookdale rejected the Statutory Offer.
On August 6, 2015, Brookdale requested an interim payment in an amount equal to the Statutory Offer (with an undertaking to repay overpayments). Legacy rejected this request. Brookdale then filed an application seeking an order that Crescent Point make the interim payment pursuant to s. 191(12)(c) of the ABCA.
The Chambers decision
Nixon J. exercised his discretion to dismiss Brookdale’s application for an interim payment.
He concluded that: (i) minimum fairness did not require an advance payment because the dissenting rights had been volunteered by Legacy; (ii) Crescent Point had acted fairly by making the Statutory Offer and Brookdale was obliged to follow the statutory process to determine fair value; (iii) an interim payment should not be made where there is a risk of overpayment and/or non-recovery (including where, as here, the dissenting shareholder had no presence in Canada and offered no security); (iv) the authority of Brookdale’s investment manager to give an undertaking was questionable, and there was inadequate financial information about Brookdale; (v) the Statutory Offer was within a reasonable range of value; (vi) there was no risk that Brookdale would be unable to recover the fair value of its shares from Crescent Point; (vii) any lost ability to invest the fair value of the shares could be remedied at trial under s. 191(17) of the ABCA; and, (viii) the interim payment provision should not be allowed to “evolve into a provision that automatically permits execution on a debt prior to judgment.”
The Court of Appeal decision
The Alberta Court of Appeal (Martin, Slatter and Khullar JJ.A.) unanimously allowed Brookdale’s appeal in a strongly worded judgment. The Court affirmed that a dissenting shareholder’s right to be paid fair value for its shares is an existing vested right. In other words, liability is not in dispute, only quantum. Accordingly, the Court concluded that Nixon J. placed too heavy an onus on Brookdale to justify its entitlement to an interim payment. Furthermore, an interim payment was strongly indicated in this case due to inherent court delays, which resulted in the parties being given “early” trial dates in October 2020.
The Court held that it was an error to treat the application for an interim payment on a different basis because the right to dissent was voluntary. The Court noted that the respondents needed an order under s. 193(9)(a) of the ABCA approving the arrangement, and without a right to dissent, the plan of arrangement might have been resisted or not approved. In any event, the right to dissent was no longer voluntary, because it became a binding part of the arrangement and interim order.
In addition, the Court held that it was an error to treat the appellants differently either because they: (i) bought shares immediately before the plan of arrangement was announced; or, (ii) were foreign investors. Rather, the Court confirmed that the ABCA does not distinguish between types of investors, or between foreign and domestic investors. As such, there was no principled basis for refusing an interim payment.
The Court noted that the statutory offer should be the starting point when assessing the appropriate quantum of the interim payment. The Court rejected the “overpayment” argument because the Statutory Offer was the respondents’ own valuation of the shares. Moreover, the Court noted that the respondents had provided no evidence of overvaluation, or a risk of overpayment. Finally, the Court noted that under the ABCA, dissenting shareholders are entitled not only to fair value, but also a reasonable rate of interest on that sum from the valuation date. The accrued interest further reduced the prospect of a net overpayment. As such, the Court held that the presumptive interim payment should be in the range of $2.415 per share.
With respect to the argument regarding security and undertakings to repay any overpayment, the Court held that security may be appropriate if there is a risk of overpayment to an offshore investor, and a real risk of barriers to recovery. As the respondents had not produced any evidence of a risk of overpayment, the Court noted that the need for an undertaking backed by security might not arise. However, the Court was unable to decide that issue on the record before it. Accordingly, it referred the matter back to the case management judge.
The Court ordered that: (i) the respondents must pay $2.415 per share (i.e., the amount of the Statutory Offer) into trust; (ii) Brookdale must execute an undertaking in the form previously provided; (iii) upon providing the undertaking, the amount of $2.00 per share could be released from trust to Brookdale; and, (iv) the balance of $0.415 per share could be released by Brookdale’s counsel on agreement of the parties, or upon further court order.
Brookdale affirms the presumptive entitlement of dissenting shareholders to interim payments. Accordingly, corporations can expect that interim payments will typically be ordered, unless the payment will jeopardize the solvency of the corporation (which was not an issue in Brookdale). While the court can – upon receiving evidence of a risk of overpayment – order further security or undertakings, this will likely not change a corporation’s obligation to make interim payments in the approximate amount of its statutory offer to dissenting shareholders.