Smoothwater: Smoothing a Ripple in Corporate Arrangement Proceedings

This comment discusses the use and judicial interpretation of arrangement provisions in the corporate context through the lens of Smoothwater Capital Corporation v. Marquee Energy Ltd., a 2016 decision of the Alberta Court of Appeal.

Arrangements are a common vehicle for corporations to effect fundamental changes. However, courts have recently expressed concern over flexible use of the arrangement provisions1 in the Canada Business Corporations Act2 and other provincial corporations statutes.3 The concern is that deal-makers view court approval of arrangements as simply a box to be checked in a larger process.4 In Marquee Energy Ltd. (Re),5 Justice Macleod of the Alberta Court of Queen’s Bench likened court approval of plans of arrangement to a rubber-stamping process.6 The Marquee decision, although overturned by the Alberta Court of Appeal, sent a warning to the corporate community that the increasingly liberal use of arrangements may be subject to greater judicial scrutiny in the future.

Under the arrangement provision of the CBCA,7 court approval replaces statutory safeguards contained in other fundamental change provisions of the Act, such as those dealing with the right to vote on and dissent to a transaction. The court is then granted broad discretionary powers. For example, it can provide parties with voting or dissent rights.8 This allows for complicated transactions to be effected with ease, while the supervisory role of the court protects parties’ interests.

In Marquee and Smoothwater Capital Corporation v. Marquee Energy Ltd.,9 Alberta Oil Sands (“AOS”) and Marquee Energy (“Marquee”) contemplated a merger. Smoothwater Capital Corporation (“Smoothwater Capital”), a shareholder of Alberta Oil Sands, opposed the merger. The transaction was planned to proceed by way of an arrangement whereby AOS would acquire Marquee shares in exchange for AOS shares. Marquee would become a wholly owned subsidiary of AOS, and the two entities would then complete a vertical short-form amalgamation to become one entity.10 Ultimately, the issue in Smoothwater was whether a non-applicant party (Smoothwater Capital) was entitled to vote on the arrangement.11

While the arrangement provision allows courts to order voting and dissent rights, it does not entitle any party to vote on the arrangement. Smoothwater Capital argued that its shareholders were entitled to vote on the transaction, as allowed by the Supreme Court of Canada in BCE Inc. v. 1976 Debentureholders.12 The Alberta Court of Queen’s Bench gave Smoothwater Capital a vote initially,13 but its decision was overturned on appeal.14 The Supreme Court held in BCE that, in order for an arrangement to be approved, a court must be satisfied that “(1) the statutory procedures have been met; (2) the application has been put forward in good faith; and (3) the arrangement is fair and reasonable.”15 Flexibility has been the mantra of the courts when determining whether the BCE criteria have been made out. For example, Justice Brown of the Ontario Superior Court noted in one instance that “ease of use has become the operating norm for utilizing the [arrangement provision].”16 A flexible interpretation of the requirements set out in s. 192 has provided deal-makers with a business-friendly mechanism for effecting fundamental changes.

However, the concern that has arisen in the lower courts is that flexibility has given way to unfairness. For instance, with respect to the third BCE requirement, that the arrangement be fair and reasonable, voting rights have been allocated to parties in an irreconcilable fashion. Marquee is illustrative of this: in that case, the parties could have used the amalgamation provisions in the ABCA to effect the transaction, whereby both parties’ shareholders would have the right to vote and dissent. They instead chose to proceed by way of an arrangement where no parties were entitled to voting or dissent rights; rather, a court had the power to grant those rights to them instead. Only Marquee (the party being arranged) was provided with the right to vote on the transaction. The result was that even though the effect of the transaction under the arrangement was ultimately the same as what would have been achieved under the amalgamation provisions (where voting and dissent rights are given to both parties), only one party was given the right to vote when the transaction proceeded as an arrangement. It is curious that voting rights were given to one party, while the other party’s shareholders were left at the discretion of the directors.

The Supreme Court found in BCE that the rights of other stakeholders (those not being arranged) can be considered in two circumstances: (1) where their legal rights are affected; and (2) where their economic rights are affected, in extraordinary circumstances.17 These considerations alleviate concerns over the affecting of parties’ rights. The above circumstances will require courts to scrutinize the fairness and reasonableness of transactions, and exercise their discretion to grant rights when necessary. A restrictive approach to the allocation of these rights is most appropriate. Overzealous allocation of voting rights to non-applicant parties opens a door; why are a non-applicant corporation’s shareholders, for instance, any more entitled to a vote than a corporation’s employees or creditors, when neither is statutorily entitled to such rights in an arrangement? The Alberta Court of Appeal rightly erred on the side of a restrictive approach, holding that fairness is determined from the perspective of the corporation being arranged.18 It also held that structuring a transaction to avoid a shareholder vote was a valid use of the arrangement provision.19 However, parties must remain aware that transactional certainty may be compromised in an arrangement if courts use their discretion liberally when granting rights.

Concerns over fairness are further alleviated by considering who is in the best position to effect fundamental changes in the best way for all parties involved. Corporate directors are owed deference as they are in the best position to determine what is in the best interests of their corporations. Directors themselves are concurrently regulated by a statutory fiduciary duty and a general duty of care.20 As such, courts should be reluctant to intervene where transactions have beneficial business purposes and are in the best interests of corporations. This does not mean that the rights of affected parties need be ignored, but simply that they need to be balanced with the benefits of the transaction.

The concern expressed in some lower courts as to the current use of the arrangement provisions has yet to be discussed by the Supreme Court of Canada. Although the Alberta Court of Appeal has made its position clear, how other jurisdictions handle the increasingly liberal use of arrangements will be of interest to commercial actors.

* BComm (University of Alberta), JD Candidate (University of Saskatchewan).

1 Marquee Energy Ltd. (Re), 2016 ABQB 563, [2017] 3 WWR 572 [Marquee]; (Re) Champion Iron Mines Limited, 2014 ONSC 1988, 119 OR (3d) 339 [Champion].

2 RSC 1985, c C-44, s 192 [CBCA].

3 See e.g. Business Corporations Act, RSA 2000, c B-9 [ABCA].

4 Championsupra note 1 at para 20.

5 Supra note 1.

6 Ibid at para 26.

7 Supra note 2, s 192.

8 Ibid, s 192(4).

9 2016 ABCA 360, 405 DLR (4th) 573 [Smoothwater].

10 Ibid at paras 5-11.

11 Ibid at para 1.

12 2008 SCC 69 at paras 138-51, [2008] 3 SCR 560 [BCE].

13 Marquee, supra note 1 at para 31.

14 Smoothwatersupra note 9 at para 50.

15 Supra note 12 at para 137.

16 (Re) Aastra Technologies Limited, 2014 ONSC 246 at para 13, 118 OR (3d) 465.

17 Supra note 12 at paras 130-35. “Extraordinary circumstances” is a reference to Corporations Canada’s policy on arrangements (“Policy Concerning Arrangements Under Section 192 of the CBCA”, Policy Statement 15.1 (Ottawa: Industry Canada, 7 November 2003) at 3.08).

18 Smoothwatersupra note 9 at paras 20-21.

19 Ibid at paras 45-46.

20 CBCAsupra note 2, s 122(1).