In a decision released on November 15, 2016, the Alberta Court of Appeal allowed the appeal of Marquee Energy Ltd. (Marquee) from a prior decision of the Court of Queen's Bench of Alberta which had required, as a condition to any final approval of a plan of arrangement involving Marquee, Alberta Oilsands Inc. (AOS) and the shareholders of Marquee, that Marquee's plan of arrangement provide for a vote of the shareholders of AOS. Notably, in the context of the proposed transaction, the shares of AOS were not being arranged and therefore the decision of the lower Court represented a marked departure from prior jurisprudence pertaining to plans of arrangement in Canada.
In its decision, the Court of Appeal emphasized three reasons for allowing the appeal:
- The provisions of the Alberta Business Corporations Act (ABCA) addressing the fairness and reasonableness of a plan of arrangement only refers to security holders and creditors of the company being arranged.
- The Court's role is to assess the plan of arrangement before it, not the process by which it was developed or the subsequent steps needed to implement the business plan of the parties.
- Directors of a corporation are required to resolve the interests of different stakeholders (which are not always aligned), and the Court should defer to the expertise of directors in these situations.
In May 2015, the Alberta government cancelled a number of oil sands leases owned by AOS in exchange for approximately $35 million in compensation. In anticipation of receiving this compensation, AOS had publicly disclosed the initiation of a process to identify, examine and consider a range of strategic alternatives. Further to this strategic process, in December 2015 AOS and Marquee entered into a confidentiality agreement and commenced preliminary discussions regarding a potential business combination.
In early 2016, Smoothwater Capital Corporation (Smoothwater) announced that it had acquired in excess of 10 percent of the AOS shares, and proposed to AOS that AOS liquidate the company and distribute the remaining cash to its shareholders. Subsequently, in March 2016, Smoothwater provided notice to AOS requisitioning a meeting of AOS shareholders for the purpose of voting to replace a number of AOS directors. AOS scheduled the requested meeting for September 2016.
During the summer of 2016, negotiations between Marquee and AOS continued. These negotiations culminated in an arrangement agreement dated August 19, 2016, that provided for a plan of arrangement whereby AOS would acquire Marquee, with Marquee shareholders exchanging each Marquee share for 1.67 shares of AOS (the Arrangement). As a result of the Arrangement, Marquee would become a wholly-owned subsidiary of AOS and, immediately following the completion of the Arrangement, AOS and Marquee would complete a vertical short-form amalgamation and continue under the name "Marquee Energy Ltd.". As AOS was only the issuer of shares in connection with the Arrangement, and neither AOS nor its shareholders were being arranged, the Arrangement as proposed did not require a vote of AOS shareholders under the ABCA.
Following receipt of an interim order of the Court of Queen's Bench of Alberta providing for the calling of a meeting of Marquee shareholders to vote on the Arrangement, Smoothwater brought an application to amend the interim order to provide AOS shareholders the right to vote. This application resulted in an order of the Court to the effect that Marquee could not proceed to seek final approval of the Arrangement unless AOS shareholders were provided with a vote on the Arrangement and granted dissent rights, each in a manner similar to such rights afforded to Marquee shareholders.
In arriving at its decision, the Court of Queen's Bench concluded that the primary reason for the chosen structure of the Arrangement was to deprive AOS shareholders of their right to vote on the subsequent post-closing short form amalgamation, and that such amalgamation was the essence of the proposed transaction. On this basis the Court determined that the Arrangement was not put forward in good faith and did not resolve the interests of AOS shareholders in a fair and reasonable way.
Marquee appealed the decision of the Court of Queen's Bench.
In reaching its decision to allow Marquee's appeal and to conclude the Arrangement without a vote of AOS shareholders or dissent rights in favour of AOS shareholders, the Court of Appeal relied on the following reasons:
- In considering the fairness and reasonableness of an arrangement, the Court is primarily concerned with the interests of security holders and creditors of the company being arranged. Smoothwater’s status to challenge the fairness of the Arrangement was limited because section 193(2) of the ABCA only refers to security holders and creditors of the company being arranged, and does not contemplate or require Court-approval of an arrangement from the perspective of any other person. Directors of AOS were prima facie entitled to execute fundamental changes of AOS in accordance with the ABCA, and only needed shareholder approval when required by statute. The Court of Appeal's decision implicitly confirmed that under corporate law, the authority to complete an acquisition through the issuance of shares rests with the board of directors of the acquiror. As a result, the decision prevented a divergent result between the implication of an acquiror using a plan of arrangement versus other alternative share-issuing acquisition structures, such as a share exchange take-over bid.
- The Court's role is to assess the arrangement before it, not the process by which it was developed, alternate structures that could have been used to effect the transaction or the subsequent steps needed to implement the parties' business plan. The Court of Appeal found the lower Court's reasoning that the transaction was in substance an amalgamation was inappropriate, as was the lower Court's re-characterization of the transaction from the perspective of AOS. The Court's role is to assess the arrangement put before it, not the process by which it was developed or the subsequent steps needed to implement the business plan. Because the arrangement before the Court was an arrangement of shares of Marquee, not those of AOS, the Court of Appeal determined that the fairness and reasonableness test for plans of arrangement as provided for in BCE Inc v 1976 Debentureholders, 2008 SCC 69 (BCE) must be applied from the perspective of Marquee, and not AOS. Arrangements do not necessarily require a shareholder vote, and structuring the transaction to avoid triggering a vote or dissent rights is not unreasonable, unfair or demonstrative of bad faith. In this sense, the Court of Appeal's decision followed similar conclusions reached in McEwen v Goldcorp Inc.,  OJ No 4265, 2006 CarswellOnt 6584 (Ont Div Ct).
- Directors are required to resolve the tension between different stakeholders, and the Court should defer to the expertise of directors in these situations. The Court of Appeal recognized that directors must make decisions about the operation of the corporation, and it may be impossible to reconcile all interests. In negotiating the Arrangement, the directors of AOS were required to resolve the tension between different stakeholders of AOS, and the Court should defer to the expertise of directors in these situations. The Court recognized multiple business advantages for structuring the transaction using a Court approved plan arrangement. In particular:
- An AOS shareholder vote would trigger dissent rights, and avoiding a vote would ensure AOS would not have to divert cash from the parties' underlying business goals to pay dissenting shareholders.
- Court approval of the transaction was helpful in providing the parties with an exemption from the requirement to register AOS shares issuable to shareholders of Marquee resident in the United States under the United Stated Securities Act of 1933.
- Not requiring a vote of AOS shareholders ensured "transactional certainty", including in the context of Smoothwater's opposition to the Arrangement, which was a consideration especially important to Marquee.
In reaching its decision, the Court of Appeal also stressed the importance of certainty in commercial law for those in control of, or advising, public companies. The choice of how to structure a transaction should not be taken away from the directors without an express statutory provision to that effect. In this sense, the Court of Appeal decision prevented the substantively divergent results that would ensue from choice of transaction structure (for example, where directors of an acquiror would retain the authority under corporate law to issue shares in connection with a share exchange take-over bid, but potentially have such authority taken away in connection with a plan of arrangement).
As a result of these factors, the Court of Appeal determined that a shareholder meeting of AOS was not required. Interestingly, the Court considered whether Smoothwater's application was barred because it was only advancing "economic interests" (e.g. dilution) and not "legal interests", a distinction made in BCE. The Court found it difficult to draw a distinction between Smoothwater's economic and legal interests, stating that BCE should not be read as holding that economic interests are irrelevant, and ruling that Smoothwater's application could not be dismissed on the basis that it only seeks to advance economic interests.
The ruling of the Court of Appeal emphasizes the deference Courts should provide commercial parties in choosing how to structure transactions, and provides greater certainty for parties using Court-approved plans of arrangement. In addition, the decision confirms for transaction parties and their advisors the prior foundation on which Canadian mergers and acquisitions have been structured.
What remains unclear is the role of parties in arrangement proceedings whose only interests being effected are economic, and who are not stakeholders in the company proposing the arrangement. Although these parties will not have a right to vote, the Court has indicated that these interests remain relevant, but how they will be considered during future fairness hearings has not been defined.