Alberta's Court of Appeal recently overturned a controversial interlocutory decision involving a proposed acquisition by Alberta Oil Sands Inc. ("AOS") of Marquee Energy Ltd. ("Marquee") pursuant to a plan of arrangement under s. 193 of Alberta's Business Corporations Act ("ABCA"). Even though only Marquee was being arranged, thus necessitating a vote by its shareholders, the underlying decision of the Court of Queen's Bench required that AOS also seek the approval of its shareholders to implement the transaction. The Court of Appeal set aside the lower Court's order requiring AOS shareholders to vote on the Marquee arrangement.
Background
The directors of each of AOS and Marquee resolved to combine together so that AOS' cash could be used to develop Marquee's assets. This plan was opposed by Smoothwater Capital ("Smoothwater"), who held approximately 14% of the AOS common shares. Smoothwater desired the liquidation of AOS, estimating that each AOS shareholder would receive $0.15 per share — Smoothwater had acquired AOS shares at prices between $0.10 and $0.11 per share.
AOS and Marquee agreed to proceed pursuant to a court-approved plan of arrangement under s. 193 of the ABCA. The transaction only "arranged" Marquee because Marquee shareholders would receive AOS shares in exchange for their Marquee shares upon completion of the transaction. AOS was not being arranged but its shareholders would be diluted by approximately 49% when the new AOS shares were issued to Marquee shareholders. Since only Marquee was being "arranged", and AOS was listed on the TSX-V (and not the TSX which would have required a shareholder vote of AOS), only Marquee shareholders were entitled to vote on the transaction. In addition to the approval of ⅔ of the votes cast at a meeting of Marquee shareholders, the fairness of the transaction would also have to be passed on by the Court.
After Marquee obtained an ex parte interim Order from the Court in the usual course, setting out customary procedural matters relating to the arrangement, Smoothwater brought an application to amend that Order to provide that AOS shareholders would also have a right to vote (and potentially to dissent) on the transaction on the same basis as the Marquee shareholders.
Court of Queen's Bench Decision
The Court of Queen's Bench ordered that the interim Order be amended to provide AOS shareholders with a right to vote on the arrangement. It held that the arrangement lacked a valid business purpose because AOS and Marquee had structured the transaction as a s. 193 arrangement to "deprive" AOS shareholders of voting rights that they were otherwise entitled to, had the transaction proceeded as an "amalgamation" under s. 183 of the ABCA.1 The Court also held that because they were being diluted, AOS shareholders' legal rights were impacted and they were "entitled to expect that they would have the right to dissent and the right to vote". 2 Marquee appealed.
Court of Appeal Decision
The Court of Appeal made the following observations in overturning the Court of Queen's Bench decision:
1. Smoothwater had "limited" status to challenge Marquee's plan of arrangement. Although it held some Marquee shares, Smoothwater's application was commenced qua AOS shareholder:
[T]he approval of the court ... is done from the perspective of the arranged corporation, here Marquee. ... the ABCA does not contemplate or require court approval of the transaction from the perspective of any person other than the stakeholders of Marquee. Fundamental changes of Alberta Oilsands are not in contemplation in the Marquee arrangement, and the BCE reasonableness and fairness test is not applied to them.3
What is fair is primarily up to the shareholders of Marquee, and must be measured from their perspective. Fairness for Marquee stakeholders does not depend on fairness for Alberta Oilsands stakeholders. 4
2. The directors of AOS are prima facie entitled to execute fundamental changes of AOS in accordance with the ABCA, and "need only have shareholder votes when required by the statute." 5
3. Smoothwater was unable to demonstrate that a vote by AOS shareholders was required by the ABCA.6 "[T]here is no provision in the ABCA holding that the treatment of shareholders of two corporations must be equal, even if they are entering into a transaction."7 The Court of Appeal determined that corporate democracy cannot trump directors exercising legitimate powers for a valid business purpose.
... When shareholders elect directors, they know that the directors can enter into many transactions, even fundamental transactions, without consulting the shareholders. The shareholders do not have a veto right over those transactions, and they cannot come to court to ask the Court to review or veto transactions on their behalf. 8
The siren song of shareholder democracy does not undermine the legitimate powers of the directors of Alberta Oilsands to operate the corporation without having to check with the shareholders, except where specifically required to do so by statute.9
4. The Marquee plan of arrangement had to be reviewed from the perspective of Marquee stakeholders. 10 The Court below erred by re-characterizing the transaction from the perspective of AOS.
5. The ABCA, unlike Ontario's Business Corporations Act and the Canada Business Corporations Act, does not explicitly reference a dissent right for shareholders being arranged by a plan of arrangement under s. 193 of the ABCA.11 This was a deliberate decision that should not be read into s. 193 for the benefit of AOS's shareholders whose interests were not even being arranged.
6. At a hearing to determine the fairness of an arrangement, the arrangement itself should be assessed, not the process by which it was developed.12 It was uncontested that AOS and Marquee initially considered proceeding by way of a s. 183 amalgamation, which would have granted AOS shareholders voting and dissent rights.
[T]he fact that the Marquee transaction was originally contemplated as a simple amalgamation is not decisive.13
It is thus not bad faith for the directors to structure transactions to avoid dissent rights.... If a minority of shareholders opposing the business plan dissent and cash out, that affects the liquidity of the corporation. In this case, the business plan was to use the Alberta Oilsands's cash to develop the Marquee assets. If the transaction was structured in a way that required a vote with dissent rights that might result in the diversion of some of Alberta Oilsands's cash to pay out dissenting shareholders. That would mean there would be less cash available to implement the original business plan of developing Marquee's assets. There was therefore a legitimate business reason for structuring the transaction as an "arrangement". As noted, there is no provision of the statute authorizing the Court to review the business decisions of the directors.14
7. It was not premature for the Court below to apply the Supreme Court's decision in Re BCE15 to consider Smoothwater's application. The BCE framework is typically applied at the hearing to approve a final Order approving the arrangement, not the interim Order at an interlocutory stage. Nevertheless, the Court of Appeal held that Smoothwater's application "was essentially an application to decide one component of the [BCE] 'fair and reasonable' test in advance .. It is properly viewed as an accelerated component of the final approval stage, not a part of the preliminary stage."16
Takeaways
The Court of Appeal's decision makes it clear that the "fair and reasonable" test from BCE to approve an arrangement is to be examined from the perspective of the stakeholders of the corporation that is being arranged and not third parties whose interests may be affected by the arrangement but who are not being arranged.
The Court of Appeal's decision also confirms that directors can — for a valid business purpose — organize transactions to proceed without submitting them to shareholders for approval, or granting dissent rights to shareholders if not required by the governing corporate statute.
The Court of Appeal's decision also restores the procedural status quo to the plan of arrangement approval process. The Queen's Bench decision, if it had been upheld, may have encouraged more interlocutory litigation and created uncertainty for companies effecting corporate changes through plans of arrangement.
Footnotes
1 Marquee Energy Ltd (Re), 2016 ABQB 563 at paras. 21-2, 28.
2 Ibid. at para. 30.
3 Smoothwater Capital Corporation v Marquee Energy Ltd., 2016 ABCA 360 at paras. 20-1. (emphasis added)
4 Ibid at para 23.
5 Ibid. at para. 21.
6 Ibid. at para. 32.
7 Ibid. at para. 22.
8 Ibid. at para. 37.
9 Ibid. at para. 40. (emphasis added)
10 Ibid. at para. 35.
11 Ibid. at paras. 38-9.
12 Ibid. at para. 44.
13 Ibid.
14 Ibid. at para. 46. (emphasis added)
15 BCE Inc. v 1976 Debentureholders, 2008 SCC 69.
16 Supra note 4 at para. 26.
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