SECURITIES REGULATION AND IR

CIRI would like to take this opportunity to thank Hellen Siwanowicz for her expertise and contributions as the author of the Securities Regulation and IR column for the past five years. Hellen generously volunteered her time to provide her insights on a wide range of issues and topics. Taking over for Hellen as members of CIRI's Editorial Board and authors of this column are Margaret McNee, Senior Partner and Paul Collins, Partner, at McMillan LLP. We look forward to delivering their thoughtful perspectives to readers.

For the past several years, the use of plans of arrangement has been the preferred method of acquiring public companies in Canada. While a takeover bid will frequently require that a subsequent going-private transaction be implemented following completion of the bid to enable the acquirer to obtain full ownership of the target company, the use of a plan of arrangement (an “Arrangement”) provides the acquiror with a single-step means to acquire 100% of the securities of the target. Completion of an Arrangement requires receipt of the approval of the target company’s shareholders, generally by a two-thirds majority of the votes cast, and approval of a Court in the jurisdiction of the target company. In determining whether to approve an Arrangement, the Court must be satisfied that the requisite statutory procedures have been met, that the Arrangement is being put forward in good faith and that the Arrangement is fair and reasonable, in the sense that the Arrangement has a valid business purpose and that the objections of those whose rights are being arranged are being resolved in a fair and balanced way. [1]

While the need to obtain the approval of the target’s shareholders to an Arrangement creates some uncertainty, the Court proceedings are, more often than not, rather routine affairs, with little suspense as to the eventual outcome. However, recent reversals of two lower court Arrangement decisions have, in one instance, brought into question prevailing market practice and thereby heightened the level of uncertainty and, in the other, confirmed prevailing market practice and thereby reduced the level of uncertainty in respect of Court approvals of Arrangements. In each instance, the Appeal Court’s decision has more clearly outlined the limits of shareholder democracy.

In Interoil Corporation v Mulacek,[2] the Yukon Court of Appeal refused to approve an Arrangement whereby ExxonMobil Corporation, the highest bidder in a competitive bid process, would have acquired Interoil. More than 80% of the shares voted by Interoil’s shareholders were voted in favour of the transaction. Interoil’s Board of Directors and shareholders had been provided with an opinion by an investment bank that had concluded that the proposed transaction was fair from a financial point of view to the Interoil shareholders. However, in fulfilling its statutory role, the Court refused to accept either the outcome of the shareholders’ vote or the fairness opinion as compelling indicia of fairness. The Court of Appeal refused to accept the outcome of the shareholders’ vote as a proxy for fairness because the Court was not satisfied that shareholders had been placed in a position to make an informed decision. The Court determined that the disclosure made to shareholders in the proxy circular had been inadequate “both as to the value they would be giving up and the value they would be receiving”[3]. Similarly, the fairness opinion had been extremely limited in scope and had not included any analysis to support its conclusion. A significant portion of the fees to which the opinion provider would be entitled was contingent upon the successful completion of the Arrangement. The Court observed that good corporate governance in the circumstances mandated that a second financial adviser be engaged on a flat fee basis, rather than on the basis of a contingency or success fee, to opine on the transaction’s fairness. The importance of an independent review was heightened where, in the Court’s view, the independent committee of the Board of Interoil formed to consider the transaction had taken a somewhat passive approach in the negotiations, which were led and reported on by management, and particularly where certain members of management stood to personally gain should the Arrangement be completed. While the lower court had been prepared to overlook these deficiencies on the basis of the shareholders’ vote, the Court of Appeal refused to do so, on the basis that the Arrangement must be objectively fair and reasonable in a more general sense.

The Alberta Court of Appeal in Smoothwater Capital Corp. v. Marquee Energy Ltd.[4] considered an Arrangement from the acquiror’s perspective. Smoothwater, a significant shareholder of Alberta Oilsands Inc., opposed that company’s proposed acquisition of Marquee Energy Ltd., which was to be completed by means of an Arrangement by Marquee. In the lower court, Smoothwater was successful in obtaining an order that would have required that the Arrangement be voted on and approved by both the shareholders of Alberta Oilsands and the shareholders of Marquee.

The Court of Appeal rejected Smoothwater’s position that the fairness and reasonableness of the Arrangement had to be considered from both the acquiror’s and the target’s perspective. The Court concluded that fairness and reasonableness were to be measured only from the perspective of Marquee as the “arranging” company. Alberta Oilsands was not arranging since following completion of the Arrangement, its shareholders would continue to hold the same class of shares with the same rights and privileges as before the Arrangement was completed and accordingly, the approval of its shareholders would not be required. The test of the fairness and reasonableness of an Arrangement was to be applied from the perspective of the arranging company. In the absence of a statutory requirement, the Court concluded that “the siren song of shareholder democracy does not undermine the legitimate powers of the board of directors of Alberta Oilsands to operate the corporation without having to check with the shareholders”[5].

In Interoil, notwithstanding the high level of support indicated by the shareholders’ vote, the Court of Appeal was not prepared to overlook what it viewed to be deficiencies in the disclosure and corporate governance practices of the target company. The Court’s obligation to ensure that the Arrangement was fair and reasonable would not be usurped by the exercise of shareholder democracy where that exercise was based on information and advice that the Court concluded were not adequate or objective and that were potentially undermined by conflicts of interest. In Smoothwater, the Court of Appeal concluded that a shareholder vote should not be imposed where not required by statute[6] and that the structuring of a transaction in a manner so as not to require a shareholder vote did not amount to bad faith.

Paul Collins is a Partner at McMillan LLP