In Smoothwater Captial Corporation v. Marquee Energy Ltd., the Alberta Court of Appeal clarified that the inquiry into whether a plan of arrangement is “fair and reasonable” pursuant to section 193 of the Alberta Business Corporations Act, (“ABCA”) (which is analogous to section 192 of the Canada Business Corporations Act, [“CBCA”], and similar statutes in other provinces) focuses solely on the company being arranged. The Court also held that it was not bad faith to choose to proceed by way of arrangement so as to avoid dissent rights.

The transaction was originally planned as an amalgamation of Marquee Energy Ltd. (“Marquee”) and Alberta Oilsands Inc. (“Oilsands”), aimed at using Oilsands’ significant cash reserves to exploit certain oil and gas assets Marquee owned. However, one of Oilsands’ significant shareholders, Smoothwater Capital Corporation (“Smoothwater”) indicated that it did not support the transaction and would exercise its dissent rights if the transaction went ahead. This would have significantly reduced Oilstands’ cash reserves, effectively defeating the purpose of the transaction.

Rather than proceed with an amalgamation, the directors of Marquee and Oilsands chose to proceed by way of a plan of arrangement of Marquee, so that only the Marquee shareholders would have a vote and none of the shareholders would have dissent rights (as dissent rights are only provided for arrangements under the CBCA and the Ontario Business Corporations Act).

The interim hearing proceeded ex parte, but prior​ to the meeting of Marquee’s shareholders, Smoothwater brought a motion in the application to amend the interim order to provide Oilsands shareholders a right to vote on the transaction (and potentially dissent). The motion judge allowed the motion, holding that the arrangement was effectively an amalgamation, and the Oilsands shareholders should therefore be given a vote as they would have had on an amalgamation. The motion judge also held that while the transaction had a valid business purpose, the specific tactic (an arrangement) was chosen in bad faith, because it was selected primarily to disenfranchise Oilsands’ shareholders.

The Court of Appeal allowed the appeal, essentially holding that the motion judge misinterpreted the statutory framework. Before engaging in its analysis, the Court dismissed Marquee’s objection that the issue was premature and that it should be dealt with at the hearing for the final order, holding it had all the facts necessary to determine this aspect of the “fair and reasonable” test as an “accelerated” aspect of the final hearing. The Court also held that Smoothwater’s standing, as a third party, was very limited.

On the primary issue of whether the arrangement was fair and reasonable, the Court held that the inquiry was exclusively focused on Marquee’s shareholders. The Court held that the extent to which shareholders are given voting rights in any given transaction are defined by statute, and Oilsands’ shareholders neither are given voting rights in the Marquee arrangement by the arrangement provisions in the ABCA, nor those relating to fundamental transactions in respect of Oilsands. The Court held there was no basis in statute for equality of treatment as between Marquee and Oilsands’ shareholders. Finally, the Court made the specific holding that it was not bad faith for the directors of Marquee and Oilsands to structure a transaction as an arrangement in order to avoid dissent rights

This decision is notable because the Court narrowly circumscribed the scope of the inquiry on a plan of arrangement hearing, and explicitly held that such a definition was desirable because it favoured commercial certainty. This guidance will be of assistance to all corporations involved in, or contemplating, plans of arrangement.