Anita Anand is the J.R. Kimber Chair in Investor Protection and Corporate Governance at the Faculty of Law, University of Toronto
Recently, the Alberta Court of Queen's Bench handed down a decision regarding the proposed merger of Alberta Oilsands Inc. (AOS) and Marquee Energy Ltd. (Marquee) via a plan of arrangement.
The well-reasoned decision rightly suggests that it is within the court's discretion to decide whether all affected parties are being treated fairly and reasonably in a proposed arrangement. It is not up to the corporation seeking to be arranged to make this determination for the court.
After the announcement of the proposed plan of arrangement, Smoothwater Capital Corp., an activist investor that owns over 17 per cent of AOS, sought an order that a special meeting of the AOS shareholders be held to allow the AOS shareholders to vote on the transaction. Smoothwater did not seek to prevent the merger from occurring.
Both AOS and Marquee opposed the application, arguing that neither the Alberta Business Corporations Act (ABCA) nor any other Canadian corporate statute requires a shareholder vote by shareholders of the company that is not being arranged.
Justice Alan Macleod in the Alberta Court of Queen's Bench granted Smoothwater's application, finding that while the parties referred to the amalgamation as an "arrangement" (which could be permitted with board approval alone), the parties' business purpose was not going to be achieved until the amalgamation occurred. He concluded that the transaction was, in substance, an amalgamation, requiring approval from both AOS and Marquee shareholders. Marquee – though not AOS – has appealed the order.
The Court reasoned that the arrangement did not satisfy the good faith requirement set forth in the BCE decision and that, because it was structured to avoid an AOS shareholder vote necessary in an arm's length amalgamation, the transaction (as proposed) was not fair and reasonable to affected shareholders.
Some may argue that the decision creates uncertainty because no court has reached such a decision in the past. But the arrangement process set out in the ABCA requires the supervising court to review the substance of the proposed transaction and allows the judge presiding over the arrangement to discern what is fair and reasonable to all affected parties in a given transaction.
The court must look at the evidence and has the discretion to determine whether the flexibility sought to be exercised by the parties is fair and reasonable. Furthermore, the statute suggests that the arranging parties bear the burden of proving that it is impracticable to proceed under the amalgamation provision before turning to an arrangement.
Justice Macleod was well within the law relating to arrangements to have regard to Smoothwater's position in this transaction. His holding prevents AOS and Marquee from circumventing provisions of the Act (which would require shareholder approval) by invoking an arrangement process.
The landmark decision in BCE Inc. v. 1976 Debentureholders further supports this position as the Supreme Court set forth a number of factors underpinning "fair and reasonable," including security holders' positions before and after the arrangement, as well as the impact that the transaction will have on various security holders' (such as Smoothwater's) rights.
AOS and Marquee argued that their respective decisions to undertake the arrangement are within the business judgement of their respective boards and therefore off limits to a court's intervention.
Let's be clear: The business judgement rule is not a protective device to be used by boards ex ante. Rather, it is a tool to be used by the court (and only the court) when evaluating a business decision ex post, as part of the determination regarding whether the board has met its fiduciary duty. That is why, in BCE, the Supreme Court referred to instances when deference to board decisions should be granted. The business judgment rule does not permit a board to claim that its decisions are, by definition, fair and reasonable or demand that a court simply rubber stamp board decisions when exercising judicial discretion.
Simply because no precedent exists does not mean that the first-instance decision was wrong, especially when sections of the corporate statute are invoked in order to avoid a shareholder vote. An accurate interpretation of the law dictates that this decision should be upheld on appeal.