Article by David Toswell, Jacqueline Moore & Peter O’Callaghan, ©2006 Blake, Cassels & Graydon LLP
This article was originally published in Blakes Bulletin on Securities - M&A - February 2006
The frenetic M&A pace in Canada through 2005 saw a number of public companies combine their businesses by way of plans of arrangement under the Canada Business Corporations Act (CBCA) or provincial corporate statutes.
Arrangements are often the preferred acquisition structure in any friendly merger, as the structure allows the acquirer to complete the transaction in one step, unlike a take-over bid which will always require a second step to acquire 100% of the outstanding shares, either through a compulsory squeeze-out of the untendered shares under the applicable corporate statute or by way of a second stage amalgamation transaction. A court-approved plan of arrangement can be completed in a similar time frame as that of a take-over bid and allows companies to merge or combine in a single step, subject to obtaining approval from the target company’s shareholders and meeting any other conditions imposed by the Court.
In 2005, a number of public company acquisitions in Canada were completed by a plan of arrangement, including: Kinder Morgan’s acquisition of Terasen (British Columbia), China National Petroleum’s purchase of PetroKazakhstan (Alberta), Harris Corporation’s acquisition of Leitch Technology (Ontario) and GlaxoSmithKline’s merger with ID Biomedical (British Columbia).
Set out below are three recent developments that will have an impact on the use of arrangements as a merger structure in 2006 and beyond.
Optionholder Voting on Arrangements
On October 24, 2005, the Toronto Stock Exchange (the TSX) issued a notice indicating that the TSX will require, as a condition of the Exchange’s approval of an arrangement, that shareholders of the listed issuer have approved the arrangement, without taking into account any votes cast by optionholders.
M&A practitioners have debated whether optionholders should be provided a vote on a plan of arrangement. This issue attracted attention in the 2004 Molson-Coors merger, when certain institutional shareholders of Molson objected to the proposal that Molson optionholders be provided a vote on the proposed merger. Indeed, the 2001 British Columbia Supreme Court had observed, in the Court’s Pacifica Papers decision, that it was a "remarkable suggestion" that optionholders should have a separate class vote on a plan of arrangement.
The TSX notice provides that while the TSX will not preclude optionholders from voting, the Exchange will not permit the votes of optionholders from being taken into account in determining shareholder approval. In the Exchange’s opinion, it is unfair to common shareholders (who have paid full value for their ownership interest) to have their voting rights diluted through the voluntary grant of voting rights to optionees by the listed issuer.
Alberta Court Reaffirms the Test for Court Approval of an Arrangement
In late October 2005, the Alberta Court of Queen’s Bench reaffirmed the applicable law relating to arrangements in the Court’s decision in the PetroKazakhstan/CNPC merger. Based on previous case law, the parties agreed that the Court must consider three questions on an application to approve a plan of arrangement under the Business Corporations Act (Alberta) (ABCA), as follows: (i) have the statutory requirements to approve the arrangement been fulfilled? (including consideration of whether it is impracticable for the applicant to effect a fundamental change in the nature of the arrangement under any other provision of the ABCA); (ii) is the arrangement put forward in good faith?; and (iii) is the arrangement fair and reasonable?
On the first part of the test, the Court concluded that "the threshold for establishing impracticability is low" and only requires the applicant to establish that it would be difficult to put other provisions of the ABCA into practice to achieve the same result. In addition, the Court noted impracticability could also be found if "reasonable business objectives could not otherwise be achieved without onerous temporal and financial constraints". As such, the decision reaffirms recent practice that arrangements should continue to be an acceptable method to complete acquisitions, unlike the higher standard proposed by the Ontario Court of Justice in the 1994 Deprenyl decision which suggested it may be inappropriate to use the arrangement structure when the amalgamation procedure was otherwise available under the CBCA.
On the third part of the test, the Alberta Court affirmed that determining whether an arrangement is fair and reasonable requires the Court to conclude that "an intelligent and honest business person, as a member of the class concerned and acting in his/her own interest, might reasonably approve the plan". The existence of a fairness opinion to shareholders from an investment bank, the quantum of the premium over the market price and the grant of a right of dissent were all factors noted by the Court to support the conclusion that the arrangement was fair and reasonable. In addition, the Court also took note of the fact that PetroKazakhstan shareholders approved the arrangement resolution by over 99% of the votes cast at the shareholders meeting as further "litmus test" evidence that the arrangement was fair to shareholders.
B.C. Court Decision on Treatment of Warrantholders
The December 6, 2005 decision of the B.C. Supreme Court in the GlaxoSmithKline/ID Biomedical arrangement has, potentially, created a further concern as to the extension of voting rights to securityholders other than common shareholders. In the Court’s decision, certain warrantholders of ID Biomedical were entitled to a separate class vote on the arrangement. The effect of the decision was to give such warrantholders a veto right on the merger, notwithstanding the fact that, like optionholders, warrantholders are not equity holders and, based on prior court decisions like the Pacifica Papers case discussed above, should not be given a separate class vote in the same fashion as common shareholders who have paid full value for their ownership interests.
Under the terms of the arrangement, holders of the warrants in question were to receive the difference between the offer price and the conversion or strike price of such warrants. These warrants were publicly traded and, on the day prior to announcement of the transaction, were trading at a premium to their strike price. As part of the arrangement, the warrantholders were entitled to vote as part of the common share class.
On application to the Court for the final order approving the arrangement (a preliminary order having already been obtained from the Court), the Court concluded that the legal rights of the common shares and this class of warrants were sufficiently different that there was no commonality of interest between them in respect of voting on the arrangement. The shareholders would receive a premium over the trading price of the shares while the warrantholders would receive a discount to the trading price of the listed warrants. As a result, each would view the plan of arrangement differently and, in the Court’s view, it was inappropriate to have them in the same class.
The Court was also concerned that the holders of the warrants in question were having their right to exercise their warrants for the remainder of their term effectively confiscated without compensation, and that the differences between the common shares and these warrants was accentuated by the fact that, unlike the holders of common shares, the holders of warrants did not have a dissent right to apply to court for payment of the fair value of their securities.
This recent B.C. decision is troubling to M&A practitioners given the additional rights that the Court was prepared to extend to warrantholders. While the case may well be distinguishable on its facts and despite the Court’s comment to the effect that its intention was not to create a precedent suggesting that warrantholders are always to be entitled to a separate class vote, the decision nonetheless raises the question of whether, on future plans of arrangement, another court will require (on either an interim or final order) that holders of publicly traded warrants receive a separate right to vote and dissent rights as a condition of court approval.
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.