A recent decision of the Alberta Court of Appeal denying shareholders of an acquiring company the right to vote in a plan of arrangement (PA) has re-injected a substantial degree of certainty into M&A law.
The unanimous ruling in Smoothwater Capital Corporation v. Marquee Energy Ltd. overturned a controversial decision of the Court of Queen’s Bench granting an order giving shareholders of Alberta Oilsands Inc. (AOI) the right to vote on AOI’s proposed acquisition of Marquee Energy Ltd. (MEL). Historically, Canadian courts have only required a shareholder vote from the target company.
“The original decision would have had acquirers looking over their shoulders every time they considered plans of arrangement as a way of effecting a merger,” says David Tupper of Blake, Cassels & Graydon LLP in Calgary. “There was a lot of talk about how to distinguish the decision to avoid its result.”
In this case, the merger was intended to combine AOI’s capital with MEL’s oil and gas assets. The parties did consider merging by way of a horizontal amalgamation under the Alberta Business Corporations Act (ABCA). This approach would have required a vote from the shareholders of both companies and afforded them dissent rights.
But Smoothwater, a major shareholder of AOI and one with an activist bent, had made its opposition to the transaction known and would likely have exercised its dissent rights. This led the parties to agree on a court-approved arrangement by way of a share exchange that would make MEL a wholly-owned subsidiary of AOI.
Court-approved PAs are common in Ontario, Alberta and British Columbia. “The advantage of PAs is that they constitute a well-defined process,” says Riley Dearden of Gowling WLG in Calgary. “If parties follow that process and demonstrate that the arrangement is fair and reasonable, judges are usually fine with the transaction.”
Under the provisions of the Alberta Business Corporations Act (ABCA), which are similar to those in other provinces, a PA only requires a vote from the “arranged” company and, even with respect to that company, only grants rights to dissenters in very narrow circumstances.
“Dissent rights are not automatic even in the case of the target company,” Tupper says.
As the Court of Appeal saw it, nothing in the ABCA gave the acquiring company’s shareholders a right to vote. Here, only Marquee was fundamentally altered by the transaction and therefore a vote was required only from its shareholder. “The mere fact that AOI, the acquiror, was affected by the transaction did not give its shareholders the right to vote,” he says.
The court also confirmed two other important principles: what was “fair and reasonable” had to be determined from the perspective of the target company, and that directors were not necessarily acting in bad faith if they structured a transaction by way of a PA in order to avoid dissent rights.
“There were legitimate business reasons in this case for structuring the transaction as an arrangement,” Dearden says. “The liquidity of AOI would be impacted if a minority of shareholders opposing the business plan dissented and cashed out. And proceedings by way of arrangement allowed for the use of a registration exemption for American shareholders under US law.”
According to Tupper, Smoothwater makes it difficult for activists to raise anew the issue of voting rights for acquiring shareholders. “In addition to dealing with the particular facts of this case in detail, the Court provided a great deal of general commentary on the purpose of Pas, and the need for transactional and legal certainty.”
Still, Tupper acknowledges that Smoothwater is yet another symptom of the growing creativity of shareholder activists in Canada. “We’re going to see continued activity of this kind, despite the mixed results activists have achieved,” he says. “But they might be better off simply to appear at the fairness hearing and make their case. They wouldn’t even have to file a dissident circular — just hire a lawyer and show up.”