A Road Less Travelled?

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Francis N.J. Taman and Ksena J. Court

One of the more interesting trends in insolvency is the use of the arrangement provisions of the various Business Corporation Acts in Canada to reorganize the affairs of companies which, while not yet insolvent, are facing liquidity issues and are implementing innovative, pro-active solutions to avoid having to seek creditor protection. One recent case[1] demonstrates the power of such an approach.  While it is currently being reported as a corporate case involving an attempt to amalgamate two companies while avoiding the exercise of dissent rights by a minority shareholder, the motivation of one of the two companies involved in the arrangement was to increase its liquidity in order to more fully exploit its assets.  Since liquidity issues are sometimes a precursor to insolvency, the case caught our eye.[2]  The case highlights the advantages of a more proactive and imaginative approach to dealing with cash flow and liquidity issues.  It also brings into focus some of the strengths of the Alberta Business Corporations Act[3] as a mechanism for undertaking an arrangement.

It appears that Marquee Energy Ltd. (“Marquee”) had conventional oil and gas assets but lacked the liquidity to properly develop and exploit those assets.  Alberta Oil Sands Inc. (“AOS”) was in exactly the opposite situation.  AOS’ main assets and the focus of its business had been a number oil sands leases in the Fort McMurray area.[4]  Those leases were cancelled by the Alberta government and AOS received a $35 million compensation payment in 2015.

This appeared to be a match made in heaven.  Marquee and AOS developed a business plan under which the AOS cash would be used to develop the Marquee assets.  As part of this business plan, Marquee and AOS would amalgamate, creating a single company with both the assets and the liquidity to exploit those assets.

Unfortunately, much as in Romeo and Juliet, not everyone was as supportive of this relationship as the two companies would have hoped.  Smoothwater Capital Corporation (“Smoothwater Capital”) owned about 15% of AOS’ capital stock.  They opposed the amalgamation of the two companies.[5]

This created something of a challenge to AOS.  Section 183 of the Alberta BCA requires an amalgamation agreement between arms length parties be approved by special resolution[6] of the shareholders of both corporations. Even if that special resolution passed, any shareholders who voted against the resolution could exercise what are referred to as dissent rights[7] and force AOS to buy out their shares at their fair market value.  The specter was that if a sizeable number of shareholders dissented, AOS’ cash would be seriously depleted, undermining the object of the amalgamation.

The shareholders of Marquee, on the other hand, were not surprisingly supportive of the amalgamation.[8]  Marquee and AOS came up with an alternate strategy for achieving their business aims.  The transaction would proceed as an arrangement of Marquee under the Alberta BCA.  The arrangement transaction was conceived as follows:

  1. The shares of Marquee would be exchanged for 1.67 shares of AOS. The net effect of this would be to make Marquee a wholly owned subsidiary of AOS.  This would be the arrangement under the Alberta BCA.
  2. AOS would issue 206 million shares as part of this share for share exchange. This would lead to a dilution of the existing AOS shareholdings by about 49%.
  3. AOS would “vertically amalgamate” with its subsidiary Marquee under s. 184 of the Alberta BCA.

None of those transactions, including the vertical amalgamation, would require the approval of the shareholders of AOS.  Equally important, none of the transactions would provide the shareholders of AOS with dissent rights.  Moreover, only Marquee would be arranged under the Alberta BCA, so there would be no vote by the shareholders of AOS with respect to the arrangement.  Two-thirds of the shareholders of Marquee would have to vote in favour of the arrangement and the Court would have to approve it thereafter.

From a Court perspective, these sorts of arrangements are normally done in two steps.  The first step is to get an Order from Court approving the holding of a shareholders meeting to approve the arrangement.[9]  This Order was obtained by Marquee without notice to any other party, including Smoothwater.  Marquee disclosed to the Court that Smoothwater was a shareholder of AOS and would likely try to object to the arrangement.  An Order (the “Initial Order”) was granted approving the shareholder meeting.

Smoothwater, when it became aware of the Order, brought an application to vary the Initial Order to require that the shareholders of AOS be permitted to vote (and potentially dissent) with respect to the transaction in the same way that the Marquee shareholders would.  At the application, Smoothwater indicated that they did not oppose the underlying business plan other than for the fact they preferred to have AOS liquidated.  If an AOS shareholders vote was allowed and was successful, they intended to dissent and be bought out.

There is no specific test set out in the legislation with respect to the approval of an arrangement under the Alberta BCA.  However, the process is parallel to that in the Canada Business Corporations Act.[10]  The Supreme Court of Canada developed a test with respect to approving arrangements under the Canada BCA.[11]  The test parallels the test under the Companies’ Creditors Arrangement Act [12]:

  1. Statutory procedures must be met;
  2. The application is put forward in good faith; and
  3. The arrangement is fair and reasonable in that:
    1. The arrangement has a valid business purpose; and
    2. The objections of those whose rights are being arranged are resolved in a fair and balanced way.

The Supreme Court highlighted that it was the legal rights and interests of those who were objecting which had to be considered in determining whether the arrangement was fair and reasonable.

The Justice hearing the application held that the essence of the proposed transaction was an amalgamation between Marquee and AOS which was a valid business purpose.  The primary reason for using the arrangement was to avoid the vote and possible dissent rights of the shareholders of AOS.  While the underlying business purpose was put forth in good faith, the method was not.  In light of the significant dilution of shares, the legal rights of AOS’ shareholders were being affected.  As proposed, the arrangement was not fair and reasonable but could be made so by allowing AOS’ shareholders voting and dissent rights equivalent to those that Marquee’s shareholders would have.

The Court of Appeal overturned the decision of the Court of Queen’s Bench.  The Court began by noting that the transaction in question was an arrangement.  It held that the Alberta BCA did not contemplate or require Court approval of the arrangement from the perspective of any person other than the stakeholders of Marquee. Therefore, the question of reasonableness and fairness is to be determined from the perspective of the arranged corporation, being Marquee.  “Fairness to Marquee stakeholders does not depend upon fairness for Alberta Oilsands stakeholders.”[13]

From Marquee’s perspective, the arrangement was a takeover by AOS.  No vote from AOS shareholders was required for that.  It was not appropriate to recharacterize the transaction from an AOS perspective and then use that characterization to vary Marquee’s arrangement.  It is the arrangement itself that must be approved by the Court, not subsequent steps used to implement the business plan.

The directors of AOS, the Court noted, were entitled to execute fundamental changes of AOS in accordance with the Alberta BCA.  AOS is only required to have a shareholders’ vote on a fundamental change where the Alberta BCA indicates that one is required.  Additionally, the Court noted both the Supreme Court of Canada and the Ontario Superior Court of Justice had both held in separate cases that there was nothing improper with a company structuring a transaction to avoid a shareholder vote.[14]

This decision shows that there are some significant advantages to be gained by using the Alberta BCA to restructure a corporation.  There appears to be significant flexibility to structure the transaction to control the uncertainty that always lurks behind any vote by shareholders and creditors.  It also highlights the advantages to corporations dealing with liquidity issues proactively, while they still have the time and the cash to be able to maneauver.  Unfortunately, many businesses seem driven by a desire to avoid admitting their problems or at least to avoid involving restructuring professionals in dealing with potential issues.  In most cases, by trying to avoid the unpleasantness, they limit themselves and the results can often be a tragedy.

Francis N.J. Taman and Ksena J. Court practice secured and unsecured realization and insolvency at Bishop & McKenzie LLP in Calgary, Alberta.

[1] Smoothwater Capital Corporation v. Marquee Energy Ltd., 2016 ABCA 360 (“Smoothwater”).

[2] To be clear, in Smoothwater, there is no suggestion that Marquee Energy Ltd. was insolvent or heading towards insolvency.  Based upon the reasons, they had business assets but lacked sufficient liquidity to exploit them to the extent they desired.  However, in light of the fact that for other businesses, liquidity issues can be a precursor to insolvency, we thought that this particular case bears some consideration by those who are acting before circumstances force them to seek creditor protection.

[3] RSA, c. B-9 (the “Alberta BCA”).  It should be noted that it is also possible to pursue an arrangement under s. 170 of the Companies Act, RSA 2000, c. C-21.

[4] Re: Marquee Energy Ltd., 2016 ABQB 563 (the “QB Decision”) at para 3.

[5] It appears that they were not the only AOS shareholders in opposition to the amalgamation.  The QB Decision at para 4.

[6] A resolution passed by not less than 2/3 of the votes cast by the shareholders who vote with respect to that resolution.  Alberta BCA, s. 1(ii).

[7] Alberta BCA, s. 191.

[8] We acknowledge this is a departure from the fact pattern in Romeo and Juliet where neither family supported the match.

[9] The second step is approval of the arrangement by the Court.  It should be noted that while the Smoothwater application was not the application to approve the arrangement, the Court of Queen’s Bench examined that test in order to determine whether to vary the Initial Order.

[10]RSC 1985, c. C-44 (the “Canada BCA”), s. 192

[11] BCE Inc. v. 1976 Debentureholders, 2008 SCC 69 at para 156.

[12] RSC 1985, c. C-36.

[13] Smoothwater, at para 23.

[14] Ibid at para 45 & 46 citing BCE Inc. v 1976 Debentureholders, 2008 SCC 69 and McEwan v. Goldcorp Inc. (2006), 21 BLR (4th) 262

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