Court-approved arrangements revisited: Alberta Court of Appeal hits potential curveball from Marquee Energy Ltd. out of play

The Alberta Court of Appeal has overturned a controversial decision of the Alberta Court of Queen's Bench regarding court-approved arrangements in Alberta. The Alberta Court of Queen's Bench had granted an order providing shareholders of Alberta-incorporated Alberta Oilsands Inc. ("AOI") 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") (see our November 2016 MarketCaps). 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 appealed the decision, and the Alberta Court of Appeal allowed the appeal and set aside the provision granting AOI shareholders the right to vote.

Gowling WLG Focus

The Court of Appeal decision elicited a sigh of relief in Canadian legal and business communities as it realigns Alberta jurisprudence with the body of case law regarding plans of arrangement that has been decided to date. The Alberta Court of Appeal held that "fairness" must be examined from the perspective of the corporation being arranged, and it is not bad faith for a transaction to be structured in a way that will not require a shareholder vote, where there are other structures that would require such a vote.

The Alberta Court of Appeal's Decision

As one may recall from our previous MarketCaps article on this subject, MEL and AOI intended to merge to combine the capital of AOI with the oil and gas assets of MEL. The parties originally considered effecting that merger by way of a horizontal amalgamation under the ABCA, which would have required the shareholders of MEL and AOI to approve the amalgamation and would have afforded those shareholders with dissent rights. It was thought that, if the transaction proceeded in this manner, a significant shareholder of AOI (known to oppose the transaction) would vote against the amalgamation and, if it were approved, exercise its dissent rights. Instead, 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.

After applying the test¹ in BCE Inc. v 1976 Debentureholders, 2008 SCC 69 ("BCE"), the trial judge ruled that the arrangement was not "fair and reasonable" unless the AOI shareholders were given a right to vote on the arrangement, and a right to dissent.

The Court of Appeal stated that the ABCA does not contemplate or require court approval of the transaction from the perspective of any person other than the stakeholders of MEL, the corporation being arranged. The Court noted that fundamental changes of AOI were not being contemplated in the MEL arrangement and thus the BCE "fair and reasonable" test does not apply to AOI stakeholders. The Court also noted that the directors of AOI are prima facie entitled to execute fundamental changes of AOI in accordance with the ABCA and need only have shareholder votes when required by the statute.

The Court held that it is not bad faith for the directors to structure a transaction to avoid dissent rights. It noted that the liquidity of the corporation would be impacted if a minority of shareholders opposing the business plan dissented and cashed out. The Court concluded that there was therefore a legitimate business reason in this case for structuring the transaction as an arrangement.

The Court also noted other business advantages of proceeding by way of an arrangement: it permitted the use of a registration exemption under the United States Securities Act of 1933 with respect to U.S. shareholders, and it enhanced "transactional certainty" by not requiring a vote of AOI shareholders. The Court said that there is merit to the position that the choice of the structure of the transaction should not be taken from the directors without an express statutory provision to that effect and 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 meeting of AOI's shareholders should not be required.

The Court concluded that "[i]n summary, the trial judge's conclusion that the transaction structure was not selected in good faith was based on errors of principle. First of all, it was based on the idea that the [MEL] and [AOI] shareholders should be treated equally, something not found in the statute. Secondly, it examined "fairness" from the perspective of [AOI], not [MEL]. Thirdly, it assumed that it is 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."

Looking Ahead

For the time being, the surprising curveball decision that was rendered by the Alberta Court of Queen's Bench is "out of play." It appears that the Alberta Court of Appeal has restored the status quo to the court-approved arrangement process under the ABCA, but we will continue to monitor the situation going forward.