Copyright 2010, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Corporate Governance, September 2010
On August 26, 2010, the Ontario Divisional Court upheld the decision of Justice Wilton-Siegel of the Ontario Superior Court of Justice (the Application Judge), approving Magna International Inc.'s (Magna) arrangement to eliminate its multiple voting share structure (the Arrangement). Under the Business Corporations Act (Ontario), court approval is required for an arrangement which means the court must find the arrangement is "fair and reasonable".
The Arrangement, under which the Stronach Trust is paid an estimated 1,800% premium in exchange for the elimination of the Class B multiple voting shares (Class B Shares) held by it, was met with considerable controversy when it was announced.
The Divisional Court released its decision (the Decision) on August 30, 2010. The Divisional Court rejected the arguments made by certain Magna shareholders – the Ontario Teachers' Pension Plan Board, the Canadian Pension Plan Board, and OMERS (the Opposing Shareholders) – that the Application Judge erred in arriving at the conclusion that the Arrangement was fair and reasonable. The Divisional Court found no error in the reasoning or findings of the Application Judge and agreed that the Arrangement was properly approved.
The Opposing Shareholders subsequently announced that they would not appeal the Divisional Court's Decision. The Arrangement was completed on August 31, 2010.
The precedential value of the Magna decisions may be limited given the unique circumstances. Plans of arrangement will likely continue to be widely used for different types of business transactions, and fairness opinions will likely continue to be obtained for a variety of purposes in such transactions.
The Magna multiple voting share structure was created in 1978 by a shareholder vote. The structure gave the Class A subordinate voting shareholders (Class A Shares) one vote per share, while the Class B shareholders received 300 votes per share. The Class B Shares contained no "coat-tail" or "sunset" protections for Class A Shareholders. (A "coat-tail" provision provides that, subject to certain exceptions, an offer on the same terms must be made for the non-multiple voting shares if an offer is made for the multiple voting shares.) The Stronach Trust, through its indirect ownership of the outstanding Class B Shares, held 66% of Magna's voting rights, while owning only 0.6% of Magna's total equity. Mr. Frank Stronach, the founder and Chairman of Magna, and certain members of his family, are the trustees and potential beneficiaries of the Stronach Trust.
Following discussions with a Special Committee of the Board of Magna, Mr. Stronach indicated he would be agreeable to selling the Stronach Trust's Class B shares to Magna for cancellation in exchange for:
- nine million newly issued Class A Shares and US$300-million in cash;
- a five-year fixed non-renewable consulting agreement with Magna entitling Mr. Stronach to 2.75% of Magna's pre-tax profits in 2011, declining thereafter; and
- a 26.67% equity interest in and 73.33% of the voting rights of an electric car partnership between Magna and the Stronach Trust valued at US$300- million, conditional upon the Stronach Trust contributing US$80‑million to the partnership.
On May 5, 2010, the Board, acting on the recommendations of its Special Committee, determined that it would:
- present the proposed transaction for consideration by disinterested shareholders, the required approval for which would be a simple majority of the votes cast by disinterested shareholders at a meeting;
- structure the proposed transaction as a plan of arrangement which would be subject to court approval; and
- make no recommendation to shareholders on how to vote.
The Board did not obtain a fairness opinion from its financial advisor, CIBC World Markets (CIBC), regarding the proposed transaction. CIBC indicated that it was unable to provide a fairness opinion because the dilution associated with the transaction was unprecedented and the potential benefit to shareholders depended on a future increase in the trading multiple of Magna's shares, which was not predictable.
The OSC Decision
The Ontario Securities Commission (the Commission) held a hearing on June 23 and June 24, 2010, to review the proposed transaction (the Hearing).
The Commission issued an expedited decision on June 24, 2010. The Commission ruled that the proposed transaction was neither abusive of the Magna shareholders nor the capital markets. The Commission found that the disclosure provided in the initial information circular prepared by Magna was inadequate and issued an order preventing the shareholders from voting on the proposed transaction until Magna delivered an amended information circular to the shareholders. Please see our July 2010 Blakes Bulletin: OSC Postpones Magna's Multiple Voting Share Elimination Vote Pending Additional Disclosure for a discussion of the Commission decision.
The Amended Circular and Shareholder Vote
On July 9, 2010, Magna mailed an amended information circular, including the additional disclosure mandated by the Commission, to its shareholders. At a special meeting on July 28, 2010, the Class A shareholders approved the Arrangement by a 3 to 1 margin.
Decision of the Application Judge
Magna sought an order from the Superior Court approving the Arrangement pursuant to the Business Corporations Act (Ontario).
The Application Judge, in his consideration of the Arrangement, applied the test established in the Supreme Court of Canada's (the SCC) decision in BCE Inc. v. 1976 Debentureholders (BCE). Please see our December 2008 Blakes Bulletin: Supreme Court of Canada Releases Reasons for Decision in BCE for a discussion of the SCC's comments regarding the plan of arrangement process.
In his decision, the Application Judge focused on whether the costs and benefits of the Arrangement to the Class A shareholders were fairly balanced. He rejected the Opposing Shareholders' submission that a Morgan Stanley opinion provided by the Opposing Shareholders conclusively demonstrated that the Arrangement was objectively unfair because of the unprecedented size of the premium paid to the Stronach Trust. The Application Judge held that each transaction is unique and that the correct approach is a balanced approach that considers the totality of the costs and the benefits borne by the parties.
The Application Judge considered the significance to attach to the absence of a fairness opinion, a Board recommendation, and rights of dissent and appraisal for the purposes of the "fair and balanced" analysis, factors recognized as traditional indicia of fairness and reasonableness. However, the Application Judge held that, in these circumstances, the absence of these indicia was not fatal because:
- the Opposing Shareholders did not challenge CIBC's position that its practice regarding fairness opinions reflected general practice in Canada;
- the Board could not responsibly make a recommendation to the Class A shareholders in the absence of a fairness opinion and it was not legally required to provide one; and
- the absence of rights of dissent and appraisal was not a
negative factor because:
- the Class A Shares were not being acquired on a compulsory basis and
- the Class A shareholders had the option of selling their shares in the market at an increased price.
The Application Judge concluded that it could rely on three indicia of fairness:
- the outcome of the Class A shareholder vote, upon which it placed considerable reliance;
- the market reaction to the announcement, which provided evidence that the Class A shareholders had a reasonable possibility of realizing a potential gain from the Arrangement; and
- the presence of a liquid trading market into which the Class A shareholders could sell their shares at prices equal to or greater than the pre-announcement price.
As a result, notwithstanding the fact that the Application Judge was unable to make a factual determination regarding the financial costs and benefits of the Arrangement, he ruled Magna satisfied the BCE test based on the three indicia set out above and accordingly approved the Arrangement.
Please see our August 2010 Blakes Bulletin: Ontario Court Approves Magna's Plan of Arrangement for a discussion of the arguments made by the Opposing Shareholders and Magna to the Superior Court and the Application Judge's decision.
The Divisional Court's Decision
The Opposing Shareholders appealed the Application Judge's order approving the proposed arrangement. The appeal was heard on an expedited basis as the Stronach Trust had the right to terminate the proposed transaction if the necessary approvals were not secured by August 31, 2010.
The Divisional Court dismissed the Opposing Shareholders' appeal, ruling that there were no errors in the Application Judge's reasoning or findings and found that the Arrangement was properly approved.
The Divisional Court focused its attention on the Application Judge's determination of whether the Arrangement was fair and reasonable.
In determining whether the Arrangement was fair and reasonable, the Divisional Court applied the two-pronged BCE test. The first branch of the two-pronged test requires the court to be satisfied that the burden imposed by the arrangement on security holders is justified by the corporation's interests. The Divisional Court ruled that the Application Judge correctly applied the test and agreed that the "valid business purpose" inquiry requires only the demonstration of the prospect of clearly identified benefits to the corporation that have a reasonable prospect of being realized.
In addressing the second branch of the two-pronged test, namely, whether the objections of the security holders whose legal rights were affected through the Arrangement were being resolved in a fair and balanced way, the Divisional Court held that a court could properly find that the Arrangement was fair and reasonable, notwithstanding the court's inability to make an exact determination as to the relative financial costs and benefits. The Divisional Court ruled that it is sufficient that there be credible evidence that shareholders could reasonably conclude that the perceived benefits equal or outweigh the costs of the arrangement and that the Application Judge properly determined there was such credible evidence presented to the shareholders before the vote.
The Divisional Court also held that the Application Judge appropriately gave the vote considerable weight and that he conducted a sufficiently detailed examination of additional factors to determine that the Arrangement was not inherently unfair or unreasonable, including:
- the absence of the indicia of fairness mentioned in BCE, and reasons why their absence did not impact the fairness of the Arrangement;
- the market reaction to the Arrangement; and
- the recommendations of market participants.
Accordingly, the Divisional Court found that the Arrangement had been properly approved by the Application Judge.
The Opposing Shareholders announced they would not appeal the Divisional Court's decision. The Arrangement was completed on August 31, 2010.
Implications of Magna Decisions
The direct precedential value of the decisions of the OSC, the Application Judge and the Divisional Court in respect of Magna's proposed arrangement may be limited, given the unique circumstances. There are a relatively small number of Canadian public companies with dual class structures that do not also have a "coat-tail" provision. (Dual class structures without a "coat-tail" provision have not been permitted under TSX rules for sometime, leaving only a small number of "grand-fathered" companies such as Magna with dual class structures without a "coat-tail" provision.) The use of plans of arrangement to effect different types of business transactions, which was already widespread given the flexibility of structuring which is permitted under plans of arrangement, will likely continue to be common given the Application Judge's and Divisional Court's reasoning in finding the Arrangement to be fair and reasonable. Although no fairness opinion was provided in this case given the unique circumstances, it can be expected that fairness opinions will continue to be obtained by issuers in appropriate circumstances, both as part of the exercise of due care by directors in approving transactions and, as recognized in this case, as such opinions are an indicia of fairness in connection with plans of arrangement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.