The petroleum industry, which is characterized by volatile commodity prices, provides a fertile environment for business acquisitions, combinations and reorganizations. Many of these transactions are implemented by means of a Plan of Arrangement rather than a consensual take-over bid or amalgamation. This article provides an overview of what a Plan of Arrangement is and why you would consider using it.
A Plan of Arrangement is a statutory process for effecting business acquisitions and reorganizations that is available to corporations governed by the Canada Business Corporations Act, the Alberta Business Corporations Act and the corporate statutes of other provinces. It is a process that is supervised by a Court. For this reason some management teams are reluctant to consider using this particular tool but it is important to understand that the Court's supervision is focussed on ensuring that the process for approving the transaction is fair and not that the transaction itself is fair. That job is left in the hands of the voting securityholders. The Court's concern is to ensure that securityholders get the information they need to make a reasoned decision, that they receive the information in a timely manner and that the process for determining their collective decision is a fair one. As a consequence, a Plan of Arrangement is no more involved or time consuming than a simple amalgamation or take-over bid.
The first step in a Plan of Arrangement is to apply to the Court for an Interim Order. The Interim Order deals with the mechanical and logistical details of holding a meeting of securityholders to approve a proposed transaction. A lot of preparatory work must be completed before the application is made.
Foremost, the commercial deal has to be finalized and recorded in an Arrangement Agreement that includes a Plan of Arrangement (as a schedule) that sets out, in order, all of the corporate events (like amendments to articles and bylaws, the issuance and cancellation of shares, modifications of agreements, replacement of options and employment agreements, etc.) that are to occur. The Arrangement Agreement, becomes a schedule to an Information Circular to be distributed to all of the securityholders who will approve the transaction at a meeting. This Circular must provide the voting securityholders with sufficient information to make a reasoned decision. It describes the transaction, the steps taken and considerations made by directors in recommending the deal, including the anticipated benefits and the potential risks. It also provides the securityholders with the information they need to participate in the vote, such as the time and place of the meeting, how and where to deposit proxies and the details of any dissent rights.
This Circular is provided to the Court and the Court is asked to issue the Interim Order to approve the holding of the meeting in the manner set out in the Circular. This is a relatively prefunctory hearing that typically lasts 15-30 minutes, if all is in order. Because plans of arrangement are used as often as they are, the process is well understood and there is little uncertainty as to outcome if the "homework" has been done.
When the Interim Order is granted, the Information Circular together with a notice of meeting and related materials are distributed to the voting securityholders.
The second step in the arrangement process is the holding of the meeting which can occur not less than 21 days or more than 50 days after mailing the Circular, unless the Court otherwise orders. A meeting to approve an arrangement is no different than a meeting to approve an amalgamation or other significant corporate action. Securityholders attend either in person or by proxy and cast their votes. The votes are tabulated, the results reported and the meeting is terminated. Typically this takes 15-30 minutes.
The third step in the process is applying to the Court for a Final Order. This usually happens on the day of the meeting or the next day. Unlike the application for the interim order which is done "ex parte" (i.e. only the Corporation is represented at the hearing), any interested party can appear at the hearing if they believe the approval process has been unfair or the information provided insufficient. They are advised of this right in the Circular. At the hearing, counsel for the Corporation will advise the Court of the results of the meeting and any new important information. Again, typically, this hearing takes 15-30 minutes. The Final Order, when issued, authorizes the Corporation to file its Articles of Arrangement and complete the transaction.
The fourth and final step is filing the Articles at the corporate registry. Only when this is done does the transaction take effect. Again, typically this is done as soon as possible after the Final Order is issued, but the filing can be delayed to accommodate required regulatory approvals, third party consents, financing requirements and other matters.
Effecting a transaction by Plan of Arrangement is not appreciably more complex or time consuming than a common amalgamation or a take-over bid. There can however be significant advantages in proceeding by Plan of Arrangement and that's what we'll consider next.
Under the corporate statutes that provide for Plans of Arrangement, judges are given significant latitude in the kinds of orders they can give. That is the principal advantage of the Plan of Arrangement - FLEXIBILITY. In appropriate circumstances, a judge can, among other things, adjust:
- the method of giving notice of the meeting,
- the time and place of the meeting,
- voting requirements and thresholds, and
- the terms of option agreements, and other agreements.
The other advantage of a Plan of Arrangement is comprehensiveness. In complex transactions that involve a number of interdependent steps (for example a combination of assets dispositions/acquisitions, changes to capital structure, share issuances and cancellations, amalgamations, dissolutions), they can all be accomplished in a single process in a pre-defined order. That can be particularly important for tax planning and regulatory purposes.
Finally, for companies that have US investors and transactions that involve new issuances of shares, Plans of Arrangement are eligible for exemptions from US securities law requirements that would otherwise be expensive to comply with.
Originally published in Explorer Magazine, Fall 2012/Winter 2013 Issue
The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.
© Copyright 2012 McMillan LLP