Copyright 2011, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Litigation & Dispute Resolution/Securities Regulation, June 2011
On June 21, 2011, the Supreme Court of British Columbia (the Court) released a decision in Re Plutonic Power Corporation, rejecting the complaints of certain shareholders of Plutonic Power Corporation (Plutonic). Madam Justice Brown concluded that Plutonic had met the onus of satisfying the Court that the statutory procedures in approving a plan of arrangement had been met, the arrangement was fair and reasonable and served a valid business purpose, and that it adequately responded to the objections of affected parties. Plutonic applied for approval of a plan of arrangement pursuant to s. 291 of the Business Corporations Act, S.B.C. 2002 c. 57 (the BCA). The proposed arrangement was between Plutonic, its shareholders and Magma Energy Corp. (Magma), and involved the acquisition by Magma of all of the issued and outstanding common shares of Plutonic.
In reaching its decision that an order would be made approving the arrangement, the Court applied the principles set out by the Supreme Court of Canada in 2008 in B.C.E. Inc. v. 1976 Debenture Holders (B.C.E.). First, 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; second, in order to determine whether a plan of arrangement is fair and reasonable, the court must be satisfied that the plan serves a valid business purpose and that it adequately responds to the objections and conflicts between different affected parties; and third, whether a plan of arrangement is fair and reasonable is determined by taking into account a variety of relevant factors, including the necessity of the arrangement to the corporation's continued existence, the approval, if any, of a majority of shareholders and other security holders entitled to vote, and the proportionality of the impact on affected groups.
Plutonic develops and operates environmentally friendly power projects, and was incorporated pursuant to the laws of British Columbia. Magma is a power company that develops and operates geothermal energy projects, and was also incorporated pursuant to the laws of British Columbia. Plutonic was in need of financing, and had dealt with a number of investment bankers and employed a merger and acquisition specialist in an attempt to find merger or acquisition opportunities. In December 2010, Magma's chairman and CEO and Plutonic's vice-chair and CEO met to discuss their mutual opportunities and challenges for growth. They decided to consider a potential merger of Magma and Plutonic, and began to conduct technical due diligence. Senior management teams met to discuss legal, financial, technical, social, environmental and operational issues throughout February, and Plutonic's Board of Directors (the Board) established a special committee tasked with considering the proposed transaction with Magma. The special committee consisted of the members of the Board who were not members of management of Plutonic.
The special committee and its advisors met with management of Plutonic and advised that it had agreed with Magma, subject to receiving approval from the Board and Magma, on an exchange ratio of 2.38 Magma shares and C$0.0001, in cash, for each share of Plutonic. An independent Canadian investment dealer, Cormark Securities Inc. (Cormark), had concluded that the exchange ratio would be fair, from a financial point of view, to Plutonic's shareholders. The special committee also unanimously agreed that the arrangement was fair, from a financial point of view, to Plutonic's shareholders, and that the proposed arrangement was in the best interests of Plutonic. Immediately following the meeting of the special committee, the Board unanimously approved the arrangement and determined that the proposed arrangement was fair to Plutonic's shareholders and in the best interests of Plutonic. Plutonic and Magma signed the arrangement agreement and issued a joint press release announcing the arrangement on March 7, 2011.
POSITION OF THE PETITIONER
Plutonic submitted that the Court should approve the arrangement because the statutory procedures had been met, the application had been put forward in good faith, and the arrangement was fair and reasonable. Furthermore, the arrangement had a valid business purpose for several reasons, including that it had a positive value to Plutonic, there were no viable alternatives to the Magma offer, and no individual stakeholder was treated differently from any other. In establishing that the arrangement resolved, in a fair and balanced way, the objections of those whose rights were being arranged, Plutonic put forward several arguments including the result of the shareholder vote, the recommendation of the special committee and Cormark, and the provision of dissent rights.
POSITION OF THE RESPONDENTS
The respondents were two shareholders holding 3.2% of the issued and outstanding shares of Plutonic. They argued that the statutory requirements had not been met because the holders of 6.4% of the issued and outstanding shares had exercised their dissent rights. Furthermore, in submitting that the arrangement was not fair or reasonable, the respondents challenged the fairness opinion provided by Cormark, the value of Magma and the exchange ratio, the necessity of the arrangement, and the result of the shareholders' vote. In support of these allegations, the respondents argued that the opinion of Cormark did not remain valid given a subsequent fall in Magma's share price, and that there were a range of financing and strategic options available to Plutonic that were not tested before Plutonic committed to the arrangement.
The Court was satisfied that the statutory procedures had been met. Plutonic had convened a shareholders' meeting, delivered the meeting materials, and received approval of the arrangement resolution by 73.47% of the shareholders. Plutonic had also received approval for the arrangement from the Toronto Stock Exchange and Magma's shareholders.
The Court rejected the respondents' submission that the statutory requirements had not been met because the holders of 6.4% of the issued and outstanding shares exercised dissent rights. Three notices of dissent, representing 1.5% of the issued and outstanding shares, appeared to be invalid, and one other notice of dissent, representing 0.6% of the issued and outstanding shares, was being reviewed for validity. There was no evidence that these notices of dissent were rejected on an improper basis.
The Court then turned to the issue of whether the plan of arrangement was fair and reasonable, following the test that it must serve a valid business purpose and adequately respond to the objections of different affected parties in a fair and balanced way. The Court was satisfied that the arrangement served a valid business purpose, accepting the evidence of Plutonic that the arrangement had a positive value to the company, and was necessary for its ongoing operation. The Court further noted that the market reaction to the announcement of the arrangement was positive, and that no individual stakeholder or group of stakeholders was treated differently from any other.
The Court was also satisfied that the arrangement resolved in a fair and balanced way the objections of those whose rights were being affected, accepting Plutonic's submissions on the matter and citing the following reasons:
a) the shareholders approved the arrangement by 73.47%;
b) intelligent and honest business people as members of the voting class acting reasonably in their own interests approved the arrangement;
c) the arrangement was the result of arm's-length negotiation between two companies to their mutual benefit;
d) there were no conflicting interests between different groups of affected rights holders;
e) the Plutonic directors who endorsed the arrangement and its terms had extensive experience;
f) a special committee of independent directors was formed to consider the arrangement;
g) the fairness opinion was obtained from Cormark, an expert of high repute;
h) the arrangement was fair to the Plutonic shareholders from a financial point of view;
i) the Plutonic shareholders were given dissent and appraisal rights; and
j) no individual stakeholder or group of stakeholders was being treated differently.
The Court did not accept the respondents' submission that Cormark's fairness opinion should be rejected. There existed no expert opinion to suggest that the assessment and analysis conducted by Cormark was not standard in the industry or appropriate in the circumstances. The Court also endorsed Plutonic's argument that an opinion is necessarily given as of a point in time, and it would be impractical or prohibitively expensive to obtain an updated opinion as of the date of court approval or as of the date of conclusion of the transaction.
The Court further rejected the respondents' submissions that their dissent rights were not sufficient because the valuation mechanism was inherently flawed due to the fact that the value is to be determined immediately prior to the shareholder vote. The Court noted that the arrangement agreement provided that the obligations of Plutonic to complete the transaction were subject to the condition that "there shall not have occurred a Material Adverse Change to or a Material Adverse Effect on Magma". These terms were defined to include any change in the market prices of the securities of Magma.
In concluding that an order would be made approving the plan of arrangement pursuant to s. 291 of the BCA, the Court held that Plutonic had met the onus of satisfying the Court that the statutory procedures had been met, the application had been put forward in good faith, and the arrangement was fair and reasonable. The Court was satisfied that the arrangement served a valid business purpose and that it adequately responded to the objections of affected parties.
The Plutonic decision provides guidance to corporations as to the steps necessary to satisfy the Court that an arrangement is fair and reasonable and is instructive as to the high evidentiary threshold that must be met in objecting to an arrangement. The Court not only confirms the principles set out in B.C.E. as the test to satisfy when seeking court approval of a plan of arrangement but also makes it clear that shareholders seeking to challenge an arrangement will be unlikely to succeed without substantial evidence in support of their position.
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