Alberta Court Applies “Fair and Reasonable” Test in Considering Plan of Arrangement

In HEAL Global Holdings Corp (Re), the Court of King’s Bench of Alberta (the “Court”) refused to approve an acquisition of a privately owned Alberta corporation pursuant to a plan of arrangement on the basis that the transaction was not “fair and reasonable” to affected securityholders. While the case involved unique facts, it is nevertheless a reminder to transacting parties and their counsel that court approval for a plan of arrangement is not a “rubber stamp”, and the court will carefully scrutinize all of the relevant circumstances, including the impact of the transaction on affected securityholders and the process through which the transaction was approved by the target’s directors, before granting its approval.

Key Takeaways

• Courts may consider whether shareholders can effectively and practically exercise statutory dissent rights in circumstances where a corporation being arranged has solvency concerns.
  
• While not legally required, the existence of a special committee and/or independent fairness opinion will support a court’s finding that an arrangement is fair and reasonable. The decision represents another shift in the jurisprudence around the importance of fairness opinions as “an indicia of fairness” as two relatively recent Ontario decisions (Sherritt International Corporation (Re) and Canopy Rivers Inc. (Re)) seem to downplay the comfort provided by a fairness opinion.
  
• Courts will scrutinize arrangements that provide holders of a single class of securities with different rights, privileges, restrictions and conditions. This analysis will still be applied in the typical situation where a target’s securities are held by another party within the transaction perimeter.
  
• The court will not simply “rubber stamp” transactions as fair and reasonable, even in the face of a dire financial outlook for arrangement participants. One of the targets in this case was noted to be in financial decline and, following the decision, the acquiring corporation announced it could not support its operations, resulting in the termination of all employees and the resignation of the entire executive management team and board of directors.

Background

Pathway Health Corp. (“Pathway”), The Newly Institute Inc. (“Newly”), and HEAL Global Holdings Corp. (“HEAL”) sought a final order for a proposed plan of arrangement under s. 193 of the Business Corporations Act (Alberta) (the “Act”) whereby Pathway would acquire all of the issued and outstanding shares of privately-held HEAL and privately-held Newly (other than the shares of Newly owned by HEAL) (the “Arrangement”). The Arrangement was opposed by a group of Newly shareholders.

Decision

In applying the “fair and reasonable” test set out in BCE Inc. v. 1976 Debentureholders, the Court principally considered whether the arrangement had a valid business purpose, and whether the objections of those whose legal rights were being arranged were being resolved in a fair and balanced way (based on a number of factors, none of which was determinative on its own).

Approval by Shareholders

Approximately 54.4% of Newly shares were represented at the special meeting held to consider the Arrangement. Of those not represented at the meeting, approximately 32% were absent (and there is no information about those shares), 10.5% had exercised dissent rights and had no right to vote, and 3% cast no vote and advised Newly that they opposed the Arrangement.

Typically, shareholder approval is given significant weight in determining whether an arrangement is fair and reasonable. Despite approval by 100% of the votes cast by shareholders at the meeting, the Court noted that:

• shares representing approximately 40% of the votes cast were held by HEAL and not subject to the Arrangement,
  
• shareholders did not have access to updated information regarding Newly’s declining financial condition, and
  
• shareholder requests for additional information went unanswered.

The Court concluded that, notwithstanding a unanimous vote in favour of the Arrangement at the special meeting, the opposition was not negligible or insignificant.

Treatment of Shareholders

The Court noted that the Arrangement would not treat all Newly shareholders as a class with the same rights, privileges, restrictions and conditions because it excluded certain shares held by the transaction parties. Newly shares owned by HEAL were not required to be surrendered on the basis that HEAL would become a subsidiary of Pathway and would be prohibited from holding its parent corporation’s shares under the Act. In its decision, the Court suggested that the shares should be included on the same basis as those held by unrelated shareholders and exchanged for Pathway shares (which HEAL would be required to sell within 30 days of the Arrangement to comply with the Act).

The conclusion is somewhat surprising because the exclusion of certain shares held by transaction participants is relatively common in go-private transactions. The analysis also raises the question of whether the same conclusion would be drawn in an all-cash deal, requiring a purchaser to pay cash to parties within the transaction perimeter to create the exact same rights and privileges for all shareholders.

Dissent Rights and Solvency

In connection with the Arrangement, Newly shareholders were entitled under the Act to dissent and be paid fair value for their shares. However, as is the case under many corporate statutes in Canada, the Act prohibits a corporation from making a payment to a dissenting shareholder if there are reasonable grounds for believing it would fail certain solvency tests after the payment. Newly’s information circular noted that the corporation would be unable to meet such solvency tests and, as a result, the shareholders would be deemed to have agreed to the conversion of their shares in the Arrangement (after addressing the procedural elements of registering a dissent under the Act). The Court found that these provisions, along with Newly’s financial deterioration, effectively removed any right of Newly shareholders to dissent to the Arrangement.

While the solvency issue was somewhat unique to this transaction, there is a growing trend among arranging parties to provide dissent rights that may cause issues associated with their exercise. As a result, courts and unhappy shareholders may scrutinize dissent rights more carefully on a go-forward basis.

Lack of Special Committee and Fairness Opinion

The Court noted there is no requirement that a special committee of independent directors be formed or an independent fairness opinion be obtained for an arrangement to be considered fair and reasonable. In determining whether an arrangement is fair and reasonable, the court will scrutinize the process undertaken by the target board and information it relied upon in reaching its decision. The test may be more onerous than the test applied in determining whether the directors satisfied their fiduciary duties.

While the lack of a special committee and/or fairness opinion may not be fatal in other transactions, in HEAL Global Holdings Corp (Re) their absence was exacerbated by other factors. The Court noted that Newly’s independent directors had only been appointed eight months prior (after negotiations regarding the Arrangement had already begun) and that recent share valuations were volatile. The Court’s decision underscores the importance of designing an effective process that considers all relevant circumstances. The emphasis on the absence of a fairness opinion runs counter to recent jurisprudence relating to the use of fairness opinions in arrangement transactions, so it will be important for parties to be thoughtful about their use as an indication of fairness.

For further information on the HEAL Global Holdings Corp (Re) decision or matters relating to arrangements, please contact any member of our Capital Markets or Mergers and Acquisitions Group.