Plans of Arrangement: Judicial Limitations in Unwinding a Completed Transaction

The Alberta Court of Appeal (“ABCA”) recently declined an opportunity to unwind a completed plan of arrangement despite one party’s failure to meet the formal requirements set out in the now amended s. 193 of the Alberta Business Corporation Act[1] (the “Act”). Taiga Gold Corp. v Munday[2] (”Taiga”) emphasizes that courts lack the statutory authority to unwind proposed plans of arrangement and that the statutory procedures within the Act must be complied with.

What is a Plan of Agreement?

A plan of arrangement is a court-approved procedure permitting corporate reorganizations, mergers and acquisitions, or other fundamental changes such as debt restructuring.

Legislation

The Act sets out statutory requirements and procedures for corporate reorganizations and arrangements. Section 193 specifically sets out requirements related to court-ordered plans of arrangement. On May 31, 2022, s. 193 was amended. This case was decided under the former provision, but the reasoning is likely consistent with s. 193 as it currently reads.

Section 193 previously placed obligations on a court approving a plan of arrangement. Among other requirements, the Act directed that courts “shall order” a meeting of those affected by the proposed arrangement (i.e., shareholders and option holders) to vote. The Act further allowed courts to dictate how many votes were required to pass a resolution.[3] Option holders were to be included in that majority as if they were a voting shareholder.[4]

The May 2022 amendments [5] relaxed the above obligations. Any obligatory language requiring a shareholder meeting following an Order approving a plan of arrangement was removed. Instead, among other things, the amendment granted courts discretion for “any interim or final order it thinks fit”.[6] In addition, courts are now given discretion to determine whether shareholder meetings and shareholder votes were required for a plan of arrangement.

Background

Taiga Gold Corp (“Taiga”) was a publicly traded mineral exploration company. SGO Mining Inc. acquired Taiga through a Court-approved plan of arrangement (the “Arrangement”) under s. 193 of the Act. Some of Taiga’s warrant holders (the “Appellants”) opposed the Arrangement.

Taiga sought an interim order to set a date for a shareholders vote to approve the proposed arrangement but did not advise the court that the Appellants opposed it. The chambers judge granted an interim order for a shareholder vote which notably excluded Appellants who were warrant holders. The vote proceeded with eighty-five percent of the shareholders voting in favor of the Arrangement. Although the warrant holders were not included, many were still aware of this order by virtue of also being shareholders.

The Supreme Court of Canada set out that before a plan of arrangement is approved, the applicant must satisfy the court that: (1) the statutory procedures have been met; (2) the application was put forward in good faith; and (3) the arrangement is fair and reasonable.[7] The Appellants argued these steps were not met. In particular, they argued that the Order violated s. 193 by excluding warrant holders, that the arrangement extinguished their contractual right to exercise their warrants or to commence a claim, and that step three was not met because only shareholders were offered full value for their shares. They also argued that the omission influenced the chambers judge’s decision and effectively prevented them an opportunity to influence the votes of others.

The chambers judge approved the Arrangement based on the shareholder vote. It was found that notwithstanding the meeting requirement not being met, this omission was not fatal, and that proper compliance would not have changed the outcome.[8] Despite the effect on the Appellants and the breach of the statutory procedure, the chambers judge still approved the Arrangement.

Issues

As set out by the ABCA, the issues were as follows:

1. Did the chambers judge err in concluding that the appellants’ legal rights were affected by the arrangement such that a meeting of warrant holders should have been ordered under section 193(4)(b) of the Act?
2. Did the chambers judge err in concluding that the Act’s procedural requirements were met; specifically, that she could waive the requirement to hold a meeting of warrant holders at which they could vote?
3. Did the chambers judge err in concluding that the arrangement was fair and reasonable to the appellants?
   

Findings

Issue #1: The chambers judge found that the Arrangement affected the legal rights of the Appellants. Under s. 193(4)(b), a meeting was required when such rights were affected by a proposed arrangement. The ABCA did not interfere with the chambers judge’s decision because there was no “palpable and overriding error”.

Issue #2: The use of “shall order” in s. 193(4)(b) imposed a mandatory requirement for a meeting. Therefore, the trial judge erred in approving the arrangement without a meeting even if the vote outcome was a foregone conclusion; failing to allow a meeting undermined the “democratic process … enshrined in the statute” and prevented warrant holders from advocating their side to other shareholders. However, the ABCA also stated that the Act did not require a two-thirds majority of warrant holders in favour of the arrangement. The ABCA granting such latitude to warrant holders would improperly give them more voting power than shareholders and effectively function as a “veto” over the shareholders. Ultimately, pursuant to s. 193(9), the court may consider the results of the votes that did occur (i.e., between only the shareholders here) as it exercised its discretion.

Issue #3: The Appellants argued that the chambers judge reversed the onus of proof and improperly forced them to establish that the arrangement was fair and reasonable when it should have fell on the Taiga. Per the ABCA, the expert evidence proffered was purely theoretical and featured insufficient evidence to show that the offer price did not reflect the warrants’ value. Therefore, the arrangement was considered fair and reasonable.

Conclusion: The ABCA recognized that s. 193(4)(b) of the Act was not satisfied – a meeting for the Appellant warrant holders to vote on the arrangement should have occurred. However, notwithstanding this violation, any remedies sought by warrant holders were considered extraordinary given that the transaction had been completed. No provisions in the Act allow courts to unwind a completed transaction – it only allows them discretion to approve an arrangement (prior to completion) under s. 193(9). As the ABCA provides:

Ultimately, the relief sought here would involve a partial unwinding of the transaction. It is far from clear that we have the authority to do that. We also have no way of determining whether the transaction would have proceeded had either of the requested changes been made prior to its completion, and we are not willing to change terms that may have been critical to the agreement.

If the appellants had wanted to preserve their ability to receive an effective remedy on appeal, it would have been wise to apply to the chambers judge or a justice of this Court for a stay pending appeal, regardless of the tight timelines involved.

Although there was an error in approving the arrangement, the transaction has been completed. We are unwilling to amend the transaction documents as the appellants requested particularly when, on this record, we share the chambers judge’s view that the proposed arrangement was fair and reasonable.[9]

Takeaways

This decision sends a strong message from the highest court in Alberta to all parties involved in a court-ordered plan of arrangement. More shareholders voting in favor of denying the Arrangement or the chambers judge finding a “substantively unfair arrangement” may have impacted the outcome here. However, despite these considerations, the following takeaways are evident:

1. courts are reluctant to interfere with and unwind a completed plan of arrangement, even if it was done in error, given the lack of statutory authority under the Act for them to interfere with a completed arrangement;
2. notwithstanding the ultimate outcome in this decision, the procedural guidelines in the Act are not optional. While courts now have greater discretion over the approval process and what follows, any plan of arrangement must still adhere to and be compliant with the statutory requirements set out in Act; and
3. parties whose rights are affected and that intend to seek appellate relief following an Order granting a plan of arrangement must act quickly to apply for a stay pending appeal to preserve their rights. Failing to do so removes the courts’ ability to grant any form of relief.

This decision is yet to be cited in Alberta or elsewhere. However, moving forward, there is little reason to believe that the amendments to the Act would produce a different conclusion than seen here. The Act, as currently written, removes language obligating a court to order a shareholder meeting and gives courts in Alberta more discretion to make an order approving an arrangement.

Please consider contacting a lawyer at McLennan Ross if you are involved on either side of a plan of arrangement. We are happy to assist you in ensuring that the above factors and procedures contained therein are met. As this decision makes clear, having experienced counsel walk you through the process and components underlying a plan of arrangement is vital for both an applicant seeking to obtain a court-ordered plan of arrangement or an involved party seeking to preserve their rights following an order.