On September 14, 2016, Mr. Justice Macleod of the Court of Queen's Bench of Alberta gave oral reasons for judgment in Re Marquee Energy Ltd. and The Alberta Oilsands Inc. (unreported, Action No. 1601-11071, Judicial Centre of Calgary). In doing so, he ordered that The Alberta Oilsands Inc.'s ("AOI") shareholders be required to vote to approve that arrangement in advance of it proceeding for final court approval. He made this order notwithstanding the fact that the relationship between AOI and its shareholders was not proposed to be "arranged" by the Plan of Arrangement.
An arrangement had been proposed whereby shareholders of Marquee Energy Ltd. ("Marquee") would be receive shares in AOI in exchange for their Marquee shares and, once the shares were exchanged and Marquee was a wholly owned subsidiary, a vertical amalgamation would occur between Marquee and AOI. A vertical amalgamation does not require a shareholder vote and no dissent rights are granted. AOI argued that since nothing changes in the relationship between it and its shareholders that AOI's shareholders were not entitled to vote as they were not being "arranged". The interim order, granted ex parte (without notice to any other party), only required a vote of Marquee's shareholders on the proposed arrangement.
Smoothwater Capital Corporation ("Smoothwater"), which markets itself as "Canada's Leading Activist Investor", was a significant shareholder of AOI and had been actively suggesting to AOI that it distribute the significant cash it had on hand to its shareholders. Smoothwater brought an application asking the court to require AOI to hold a vote of its shareholders and to only allow the application for final approval of the Plan of Arrangement to proceed if AOI obtained approval by way of special resolution (66 2/3% approval). After the hearing, the Court granted what it termed Smoothwater's "unusual" application.
The decision is striking from a number of perspectives. First, the Court reviewed the application on the basis of the Supreme Court of Canada's decision in Re BCE Inc. (2008 SCC 69). Of course, BCE is a decision which sets out the test for the final approval of a Plan of Arrangement as opposed to an interim application seeking the court to order a vote as a condition for proceeding with the application for final approval. Other than BCE, the Court cited no authority in support of the application before it or the order it made.
The Court then proceeded to measure the proposed Plan Arrangement against the test for final approval of the Plan of Arrangement – a pre-vetting of the Plan of Arrangement to determine if it could move forward without a vote of AOI's shareholders. The Court first concluded that the only business purpose of the Plan of Arrangement was the merger of AOI and Marquee but that this purpose was not being accomplished by the Plan of Arrangement, which only made Marquee a wholly owned subsidiary. The business purpose was not accomplished until the vertical amalgamation was finalized. The Court was satisfied that the only reason the Plan of Arrangement was proposed was as an attempt to complete this transaction without an AOI shareholder vote and without providing dissent rights, both of which would be required if this was an amalgamation between arm's length corporations.
As a result of this finding, the Court found that AOI should not be allowed to use the Plan of Arrangement to avoid safeguards that would otherwise be provided by other provisions of the Alberta Business Corporations Act ("ABCA").
Surprisingly, the Court went further and found that the Plan of Arrangement was not put forward in "good faith" because it was done to avoid a vote of AOI's shareholders and dissent rights. He found that the "good faith" aspect of the Plan of Arrangement final order approval test would only be met if AOI's shareholders were given the right to vote and were provided with dissent rights as if this were an amalgamation under the ABCA.
Finally, the Court ruled that approval would not be "fair and reasonable" unless AOI's shareholders had the right to vote and were granted dissent rights. He rejected the argument that AOI's shareholders were not being "arranged". He found that they were to be diluted as a result of the shares issued to Marquee's shareholders as a result of the share exchange included in the Plan of Arrangement and that this was sufficient to require the shareholder vote.
This decision falls outside current Canadian jurisprudence as well as current TSX Venture Exchange policies that apply to this transaction. This appears to be the first time in Canada that a court has ordered a vote in these circumstances and a number of the findings of the Judge run counter to other Canadian decisions.
I understand an appeal has been set for November, 2016. If it goes ahead, this is the type of case that may ultimately find its way to the Supreme Court of Canada.
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