A recent controversial decision of the Alberta Court of Queen's Bench has potentially introduced significant uncertainty with respect to the use of court-approved arrangements in Canada to effect complex M&A transactions. On September 14, 2016, Justice A.D. Macleod delivered his oral reasons for judgment in Marquee Energy Ltd. (Re)1. In Marquee, a shareholder of Alberta-incorporated Alberta Oilsands Inc. ("AOI") was granted an order providing AOI's shareholders with the right to vote in respect of AOI's proposed acquisition of Alberta-incorporated Marquee Energy Ltd. ("MEL") by way of an arrangement under the Business Corporations Act (Alberta) (the "ABCA"). Typically, courts only grant a right to vote to the shareholders of the target company (in this case, MEL), and not the acquiror, on a proposed arrangement of the target company. MEL has appealed the decision, and the appeal is to be heard on November 9, 2016.
Gowling WLG Focus
The Marquee decision caught many by surprise as it represents a significant departure from existing jurisprudence. It has introduced a level of unpredictability into an otherwise relatively predictable process to effect M&A transactions in Canada.
Background on Arrangements
Court-approved arrangements have become the preferred method for implementing M&A transactions in Canada. They are favoured because they enable corporations to consummate a merger that could include a series of complex transactions and steps through a single court-approved process. Those transactions and steps could include, among other things, reorganizations (often complex and tax-driven), amalgamations, transfers of property or securities, amendments to corporate articles, settlements with creditors or any combination of the foregoing. An arrangement is a court-approved process that is available under corporate legislation across Canada. It requires an interim order from the court, after which the arrangement must typically be approved by a 2/3 majority of the votes cast by shareholders (present in person or by proxy at the relevant meeting) of the corporation being acquired (the corporation being "arranged"). Once such shareholder approval is received, the corporation being arranged applies to the court for a final order, which is typically granted if the court views the arrangement as "fair and reasonable".
The Court's Decision in Marquee
Marquee potentially raises important issues regarding the interpretation of the provisions of the ABCA that permit court-approved arrangements, and how those provisions interact with other sections of the ABCA. Section 193 of the ABCA governs court-approved arrangements, and provides that if the transaction can be effected under any other provision of the ABCA, an application to the court for an order to approve the arrangement may not be made unless it is "impracticable" to effect the transaction under that other provision. Section 181 of the ABCA permits amalgamations of two or more corporations incorporated under the ABCA – for unrelated corporations, the amalgamation agreement must be submitted to the shareholders of each amalgamating corporation for approval, and those shareholders have dissent rights.
It was the intention of MEL and AOI to enter into a merger to combine the capital of AOI with the oil and gas assets of MEL. Rather than effect that merger by way of a horizontal amalgamation under section 181 of the ABCA, which would have required the shareholders of MEL and AOI to approve of the amalgamation, the parties decided to proceed by way of a court-approved arrangement pursuant to which all of the outstanding securities of MEL would be tendered to AOI in exchange for newly issued securities of AOI, thereby making MEL a wholly-owned subsidiary of AOI. After the arrangement was completed, the two entities would amalgamate by way of a vertical amalgamation under the ABCA that did not require shareholder approval nor afford shareholders with dissent rights. Justice Macleod did not rule on whether it would have been impracticable to effect this merger under section 181 of the ABCA, though he did concede that "the threshold to establish this impracticability is low", and made passing mention of the United States Securities Act of 1933. Although Justice Macleod did not expand on this in his reasons, one advantage of an arrangement over other forms of merger is that, if the target has U.S. shareholders and the consideration includes securities, an exemption from the U.S. registration requirements is available if the securities are issued as part of a court-approved arrangement process.
The test for final approval of an arrangement was set out by the Supreme Court of Canada in BCE Inc. v 1976 Debentureholders,2 and was applied (at least in part) by Justice Macleod in Marquee, though final approval of the arrangement was not yet being sought. Under BCE, the corporation seeking approval of an arrangement bears the onus of satisfying the court that: (a) the statutory procedures have been met; (b) the application has been put forward in good faith; and (c) the arrangement is fair and reasonable. In order to determine whether the arrangement is "fair and reasonable", the court must be satisfied that the arrangement has a valid business purpose and the objections of those whose legal rights are being arranged are being resolved in a fair and balanced way. To this end, the CEO of MEL stated that the "purpose of the arrangement is to result in a larger, better capitalized and more competitive organization with greater exploration development capacity, as well as operation synergies and reduction of expenses as compared to [AOI] and [MEL] separately."
Justice Macleod accepted that the combining of AOI and MEL constituted a valid business purpose. But, surprisingly, he went on to hold that that purpose would not be achieved until the post-arrangement amalgamation was completed. Justice Macleod stated that he was "satisfied on all the evidence that the primary, if not the only, reason for the proposed arrangement of the acquisition by [AOI] of all of the [MEL] shares is so that the subsequent vertical amalgamation can take place […] without an [AOI] shareholder vote." Accordingly, Justice Macleod was not satisfied that the arrangement, which would not include the subsequent vertical amalgamation, had a valid business purpose. In addition, Justice Macleod was not satisfied that the arrangement was put forward in good faith as "it was done primarily to avoid a vote of [AOI] shareholders". Justice Macleod further stated that in viewing the transaction as a whole, "fairness and reasonableness demands that [AOI shareholders] should be entitled to vote and have the same rights […] as the rights accorded to the [MEL] shareholders". Justice Macleod ordered that the previously granted interim order be amended to require AOI to hold a meeting of its shareholders to approve the arrangement.
As noted above, the decision of Justice Macleod in Marquee has been appealed. If that appeal is not successful, then the decision raises questions as to whether acquirors will need to obtain shareholder approval of future court-approved arrangements. Requiring shareholder approval of acquirors would lead to increased costs, time delays and higher levels of deal risk and uncertainty for parties conducting an acquisition by way of a court-approved arrangement.