In iAnthus Capital Holdings, Inc.(Re)1, Gomery J. of the Supreme Court of British Columbia, approved an amended plan of arrangement (the Amended Plan) after he invited the petitioners to narrow the release and injunction clauses of the first plan the petitioners had applied for (the First Plan).2
The initial release clause was broad enough to make Gomery J. declare that he did not have the power to make it an ancillary order under British Columbia's Business Corporations Act (BCA), and that it rendered the otherwise acceptable plan unfair and unreasonable. The clause had the effect of barring claims from historical shareholders, notwithstanding the fact that they preceded the proposal of the plan of arrangement. As for the injunction clause, Gomery J. declared that it had essentially the effect of converting an unsuccessful challenge of the validity of the clause to a contempt of the Court.
In the Amended Plan, the injunction clause was removed and the release clause was narrowed to the court's satisfaction. Gomery J. decided that the narrowed release respected the purpose of the BCA by protecting the arrangement procedure and that such an ancillary order was justifiable.
iAnthus (the Corporation), a public company incorporated under the BCA, came to an agreement with its noteholders that would relieve it from financial stress and that would transfer to them 97.25% of its equity. Existing shareholders would be entitled to the remaining equity. The arrangement had to be approved by the court, pursuant to the powers conferred to it by s. 291 of the BCA.
The First Plan included a release clause that barred, notably but not exclusively, claims arising on or prior to the arrangement for "a monetary loss resulting from the ownership, purchase or sale of an equity interest" against the corporation and a vast pool of stakeholders and agents. It also included a clause that had the effect of a permanent injunction, which, according to the petitioners, was necessary to address the issue of the applicability of the release early in litigation proceedings.
Limit on the power conferred by s. 291(4) BCA and rejection of analogies with CCAA proceedings
The Corporation argued about the First Plan that the release was justified because of the benefits incurred by the shareholders under the proposition. Essentially, it contended that the alternative to this plan was a Companies' Creditors Arrangement Act (CCAA) filing, under which neither present, nor former shareholders would receive anything from the company.
Noteholders added that a practice developed by which arrangements under company statutes were used to reorganize insolvent (or nearly insolvent) companies, and that this practice presented advantages such as rapidity, low costs, and the possibility of value for the existing shareholders. They argued that without third party releases similar to the ones enacted under CCAA procedures, there was a risk that lenders would refuse to continue to pursue arrangements under company statutes.
Gomery J. wrote that he was not "unsympathetic" to the argument of the noteholders, but that the question which had to be answered was legal in nature. He was concerned by the fact that the clause would extinguish the claims of historical shareholders, even when they preceded the arrangement.
Third party releases in the context of BCA applications are authorized pursuant to the court's limited power conferred by section 291(4)(c), by which "the court may make any incidental [.] orders necessary to ensure that the arrangement is fully and effectively carried out."
Gomery J. recognized that the Court of Appeal for British Columbia had ruled that third party rights could not have the effect of a veto on an arrangement, and that he could adjust some contractual rights.3 However, he refused to rely on a decision from the Superior Court of Ontario (Re Concordia International Corp.)4 that applied, in approving a plan of arrangement under the Canada Business Corporations Act, principles developed under the CCAA to conclude that third party releases were appropriate.
Distinguishing CCAA and BCA arrangements, Gomery J. indicated that it was "central" to CCAA arrangements that substantive rights would be compromised, contrary to arrangements under the BCA. He added that a third party release, such as the one before him, could affect the rights of persons that were not "given a say" during the negotiations leading to the arrangement, contrary to the situation of creditors in CCAA proceedings.
Therefore, he rejected the analogy and rather emphasized that orders rendered under the BCA and interfering with the rights of third parties could only be justified "where it is truly ancillary and the substantive positions of third parties [were] protected."
He reasoned that s. 291(4) did not give to courts the authority to bar claims of third parties existing before the arrangement was proposed. Essentially, he held that such a clause did not respect the purpose of the arrangement procedure under the BCA.
Fairness and reasonableness of release clauses
About the First Plan, Gomery J. added that even if he was mistaken as to the extent of power conferred by section 291(4)(c), the release was not a fair and reasonable balancing of the interests of the historical shareholders. Since they would have received nothing under the arrangement and might even be unaware of the proceeding, he ruled that the presence of the release clause made the arrangement, as a whole, unfair and unreasonable.
On the second application (on the Amended Plan), part of the narrowed release clause targeted claims having a connection with the plan.5 Gomery J. emphasized that this part of the narrowed clause was an example of one that affected third party rights, but that was "clearly justified" as an ancillary order, as it respected the purpose of the BCA in preventing claims that could be considered as "attacks" on a process that took place under the court's supervision.
As for other parts of the release, he noted that it limited the exposure of the corporation and of persons associated with it, but that parties bound by the release all benefitted from the plan to be approved (such as the Corporation, its directors and officers, agents and shareholders).
This time, he concluded that an order approving the release was one that would uphold proper objectives of an arrangement under the BCA. Therefore, it was legally justifiable under s. 291(4)(c) of the statute.
He then turned to the examination of the plan and explained that the question he now had to answer was whether the Amended Plan, as a whole, was fair and reasonable. He concluded that it was, as its purpose was to effect a capital restructuring that would allow the corporation to move towards profitability and that the narrowed release contributed to the accomplishment of that purpose.6
- The decision underlines the necessity to limit the claims barred by release clauses, as drafting a clause bearing no relation with the legitimate purpose of a plan of arrangement could lead the court to consider that its approbation is illegal for cause of absence of power.
- Third party release clauses in plans of arrangement under company statutes are acceptable, as long as theirs effects are in accordance with the purposes of the company statutes.
- Release clauses barring claims of third parties who do not receive any benefit under the plan of arrangement could render an otherwise acceptable plan, unfair and unreasonable.
- The applicability of a release clause is a matter to be decided by the court in which a given proceeding takes place. As such, injunction clauses in plans of arrangement that are, in fact, "anti-suit" clauses, have few chances of being approved under section 291 of the BCA.
1. 2020 BCSC 1484.
2. Re iAnthus Capital Holdings, Inc., 2020 BCSC 1442.
3. Protiva Biotherapeutics Inc. v. Inex Pharmaceuticals Co., 2007 BCCA 161.
4. 2018 ONSC 4165.
5. This part of the clause was: [.] each of the Released Parties shall be released and discharged from all present and future actions [.] which: any Person now has, or may have against any of the Released Parties, arising on or prior to the Effective Date in connection with the Support Agreement, this Plan, the BCBCA Proceedings, the transactions contemplated hereunder and any proceedings commenced with respect to or in connection with this Plan [.].
6. Note that the release clause, in both applications, excluded liabilities or claims attributable to the released party's gross negligence, fraud or wilful misconduct.
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