Canada: Marquee Energy Ltd.'s Successful Appeal: Shareholder Vote From Alberta Oilsands Inc. Not Required

We previously reported on the Marquee Energy Ltd (Re), 2016 ABQB 563 [Re Marquee] judgement in our prior post, " Future Uncertainty in Plans of Arrangement" and noted that Marquee Energy Ltd. ("Marquee") intended to appeal the decision of the Alberta Court of Queen's Bench. On November 15, 2016, the Alberta Court of Appeal allowed Marquee's appeal and set aside the Court of Queen's Bench decision.

The Court of Queen's Bench decision required Alberta Oilsands Inc. ("AOS") to obtain shareholder approval of its proposed merger with Marquee, which was structured as a plan of arrangement under Section 193 of the Business Corporations Act (Alberta) ("ABCA"), before the court would grant a final order to approve the arrangement. In its written decision, the Court of Appeal set aside the Court of Queen's Bench decision and confirmed that, "on balance, having regard to the deference owed to the directors, the need for certainty, and the absence of any statutory right to vote, a shareholders meeting of AOS should not be required." The decision has helped to restore certainty to this area of law, with the Court of Appeal finding that shareholder democracy does not "undermine the legitimate powers of the directors of AOS to operate the corporation without having to check with the shareholders, except where specifically required to do so by statute".

Background of the Action

The Court of Queen's Bench decision is summarized in our previous post, located here. AOS had a significant amount of cash from compensation received from the cancellation of oil sands leases and Marquee had oil and gas assets with significant development potential, but lacked development capital; accordingly, an AOS Marquee strategic merger made sense for both parties. After AOS received the cash compensation, Smoothwater Capital Corporation ("Smoothwater") an activist hedge fund, began acquiring shares of AOS, ultimately owning 15% of AOS' outstanding shares. Smoothwater opposed the merger with Marquee, and instead requested that AOS distribute its cash to its shareholders. Although the parties did contemplate carrying out the merger by way of an amalgamation under Section 183 of the ABCA which would have required a shareholder vote from each company, AOS and Marquee ultimately decided to proceed by way of a plan of arrangement under Section 193 of the ABCA (the "Arrangement"). In accordance with the ABCA, the Arrangement did not require AOS shareholder approval, and also did not provide dissent rights to AOS shareholders who voted against the transaction. Among other reasons, the use of a plan of arrangement avoided the risk AOS' cash would be used to pay dissenting shareholders fair value for their shares — a right which dissenting shareholders would have been entitled to had an amalgamation been pursued.

The Arrangement contemplated that each Marquee share would be exchanged for 1.67 shares of AOS, resulting in Marquee becoming a wholly-owned subsidiary of AOS, and the former shareholders of Marquee becoming shareholders of AOS. Consistent with past industry practice, Marquee and AOS treated only the Marquee shares as being "arranged" and accordingly sought Marquee shareholders' approval, and not AOS shareholders' approval in respect of the Arrangement. The AOS shareholders securities were not being altered as a result of the Arrangement. Following completion of the Arrangement, it was proposed that AOS would then "vertically amalgamate" with Marquee, which also did not require AOS shareholder approval.

The Arrangement would result in AOS issuing approximately 206 million shares to the Marquee shareholders, resulting in dilution of the existing AOS shareholders of approximately 49%.

The Decision of the Court of Queen's Bench

MacLeod J. applied the test for approval of plans of arrangement set out by the Supreme Court of Canada in BCE Inc. v 1976 Debentureholders, 2008 SCC 69 ["BCE"]. BCE requires that the court must be satisfied that: (1) the statutory procedures have been met; (2) the application has been put forward in good faith; and (3) the arrangement is fair and reasonable. MacLeod J. found that the Arrangement was not put forward in good faith and would not be fair and reasonable unless the AOS shareholders were also permitted to vote on the Arrangement and were granted the right to dissent. In reaching this conclusion, the chambers judge found that the essence of the transaction between Marquee and AOS was a merger and that the primary reason for structuring the transaction as an arrangement as opposed to an ordinary amalgamation was to avoid having to obtain AOS shareholder approval. Further, the Court of Queen's Bench found that although the AOS shares were not being arranged, they were affected as a result of the dilution to their shareholding. Therefore, the Court of Queen's Bench found that while the combination of the two companies had a valid business purpose, as the business purpose could not be achieved until the vertical amalgamation of the companies, the method chosen by the parties was not in good faith as its primary purpose was to avoid the shareholder vote.

Marquee appealed the decision, arguing that it was not open for the chambers judge to apply the BCE test, and in the alternative, that he erred in not following BCE and the Ontario case of McEwen v. Goldcorp Inc. (2006), 21 BLR (4th) 306 (Ont. S.C.J. (Div. Ct.)); aff'd (2006) 21 B.L.R. (4th) 306 (Ont. Div. Ct.)) ["Goldcorp"], where a similar transaction was approved without requiring a shareholder vote from the non-arranging company.

The Court of Appeal Decision

The Court of Appeal held that Smoothwater, which was not a shareholder of Marquee, had limited standing to challenge the fairness of the Arrangement, relying on the Goldcorp decision and confirming that the fairness and reasonableness of an arrangement must be considered from the perspective of the corporation being arranged, which in this case, is Marquee and not the corporation which is issuing shares, in this case, AOS.

The Court of Appeal found that the Court of Queen's Bench had erred in principle because: (1) the decision was based on the assumption that "Marquee and AOS should be treated equally, something not found in statute;" (2) it "examined fairness from the perspective of AOS, not Marquee"; and (3) it "assumed that it was bad faith for the directors to structure a transaction in a way that will not require a shareholder vote, where there are other structures that would require such a vote." The Court of Appeal noted that there was a legitimate business reason for structuring the merger as an arrangement quite apart from solely avoiding an AOS shareholder vote: had there been a vote and a large number of shareholders had dissented, there would be less cash available to implement the business plan to develop Marquee's assets. It also acknowledged that there was "circularity" in the bad faith argument relied on by the Court of Queen's Bench in its decision, as it "assumes that the shareholders had a right to vote, that right was taken away from them, and therefore they should be given back that right to vote". Under the ABCA, shareholders of AOS are not provided with the right to vote on an arrangement.

The Court of Appeal's findings were underpinned by certain Canadian corporate law principles which were decisive in the Court of Appeal's conclusions:

  • Looking to the specific words of the statute: the Court of Queen's Bench decision was heavily influenced by principles of "corporate democracy" or a "balance of shareholder choice and the board's ability to manage the corporation". The Court of Appeal acknowledged that "intuitively, it seems that shareholders should have a say in fundamental changes, and the ABCA does give them such rights in specific situations." However, it pointed out that "an arrangement by another corporation that will affect Alberta Oilsands is not one of them". It also noted that when shareholders elect directors, they know the directors can enter into transactions, including fundamental ones, without being required to consult the shareholders and that shareholders "do not have a right or veto over those transactions, and they cannot come to court to ask the Court to review or veto transactions on their behalf ". The Court of Appeal also considered the fact that dissent rights are specifically excluded from the arrangement provisions in the ABCA. It follows that the "intuitive attractiveness of equality of treatment between the shareholders of Marquee and AOS finds no support in the statute". Shareholder democracy does not "undermine the legitimate powers of the directors of AOS to operate the corporation without having to check with the shareholders, except where specifically required to do so by statute". The Court of Appeal was not prepared to read in additional shareholder rights into the ABCA to address any perceived unfairness; instead it held to the divisions or rights and responsibilities set out therein.
  • Certainty in law: Directors of public companies need certainty and predictability in the law. Under both BCE and Goldcorp, similar transactions were allowed to proceed without requiring a shareholder vote from the company not being arranged. The Court of Appeal noted that "there is merit to the position that the choice of the structure should not be taken from directors without an express statutory provision to that effect".

For additional analysis on the decision, please see Borden Ladner Gervais LLP's post entitled "Alberta Court of Appeal Clarifies Fair and Reasonable Test on Plans of Arrangement".

Updates and Next Steps

On November 14, 2016, the Arrangement was approved by Marquee shareholders at a special meeting. In its press release dated November 14, 2016, Marquee confirmed that it intends to seek a final order from the court approving the Arrangement as soon as possible, subject to receipt of approval from the TSX Venture Exchange. The Court of Appeal decision specifically set aside MacLeod J.'s order that the final order be heard in front of him.

This successful appeal was a welcome decision, as it confirms the validity of the use of, and process involved in, plans of arrangement widely used in corporate restructurings. It remains to be seen whether or not Smoothwater will appeal the decision to the Supreme Court of Canada, and if so, if the Supreme Court of Canada would hear such appeal. Smoothwater has publicly indicated that it intends to appear at the hearing for the final order and to object to the implementation of the plan.

About BLG

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.