By Tauna Staniland, K.C., ICD.D, Joe Thorne, and Nadine Otten

What can you do when your corporation wants to complete a complex transaction requiring significant corporate restructuring that cannot be easily completed under the corporation’s governing statute?

One option is to use a plan of arrangement process – a process that is popular in other provinces but, until now, had never been completed through the court in Newfoundland and Labrador.

Stewart McKelvey recently represented Solace Power Inc., a growing local tech company, as it entered into a term sheet with an American manufacturing giant for an $18 million equity investment in the company, as part of their introduction into a major market.  The transaction involved the creation of a new corporate structure, the redemption of certain existing shares, conversion of notes and the issuance of new shares to the US investor, as well as the replacement or amendment of Solace’s existing unanimous shareholder agreement (“USA”).  To make matters more challenging, Solace is a widely held private company with over 70 shareholders (some of whom could not be located after passage of time since their initial investment) and under a traditional transactional path the replacement of the USA could only be completed with unanimous consent of all of Solace’s shareholders.

And therein lay the problem – the traditional path was a complex transaction that could be costly, time consuming and without certainty that it could lead to a successful closing even if approved at a shareholders meeting.

The solution? A plan of arrangement.

What is a plan of arrangement?

A plan of arrangement (or simply an “arrangement”) is a flexible, court-supervised process available to corporations under the Canada Business Corporations Act, RSC 1985, c C-4 (“CBCA”) and provincial corporate statutes (including the Newfoundland and Labrador Corporations Act, RSNL 1990, c C-36).  In this article, we focus on a CBCA arrangement, however arrangements can also be carried out exclusively under a provincial statute (subject to the particular terms of those statutes).

The purpose of plans of arrangement are to effect a wide range of transactions, reorganizations, and other fundamental changes including, for example, amendments to the terms of outstanding securities, exchanges of securities, friendly takeovers, three-cornered amalgamations, going-private transactions, squeeze-out transactions, and spin-off transactions.

Under Section 192 of the CBCA, a court has the discretion to approve a fundamental change or series of fundamental changes, when it is not feasible for a corporation to effect those changes under any other provision or combination of provisions of the CBCA.  The purpose of this provision is to permit major changes in corporate structure while ensuring individuals whose rights may be affected by such changes are treated fairly.

In recent years, the plan of arrangement has emerged as a preferred mechanism for implementing complex transactions by public companies and widely held private companies, due to their flexible structure and ability to effect complex transactions in a single step.

A plan of arrangement typically requires approval by at least two-thirds of the votes cast by shareholders at a shareholders’ meeting, rather than various thresholds as might apply to different steps of the arrangement under corporate law or the corporation’s USA.  Generally, shareholders are granted dissent rights by the court (allowing shareholders to follow a procedure to dissent in the transaction and be paid the pre-transaction fair value of their shares), as they would be for many other transactions involving fundamental changes under applicable corporate statutes.

Plan of arrangement: procedure

Once the corporation has negotiated, approved, and entered into a definitive arrangement agreement and settled the terms of the plan of arrangement, it may apply to the court to seek approval of the arrangement.

There are three main steps to the court-approval process:

1. Interim hearing. The applicant corporation attends an initial hearing, usually without notice, and obtains an interim order from the court establishing all of the procedural requirements for calling and holding the shareholder meeting to approve the arrangement agreement and any other business.
2. Shareholder meeting. The applicant corporation calls and holds the meeting for the purpose of considering and voting on the proposed plan of arrangement in accordance with its obligations under the interim order.
3. Fairness hearing. Following approval of the arrangement by the shareholders, the applicant corporation returns to court for a final hearing where the court determines if the plan of arrangement is fair and reasonable.  If successful, the order is granted approving the plan of arrangement, and the applicant corporation can proceed with the closing of the plan of arrangement.

The corporation’s regulator (in the case of the CBCA, the Director of Corporations Canada) plays a key role throughout the arrangement by: (i) reviewing the proposed plan of arrangement, as well as court and shareholder materials prior to the Interim Hearing; (ii) reviewing final court materials and results of the shareholders meeting prior to the Fairness Hearing; and (iii) vetting the Articles of Arrangement.  Upon concluding all other transaction documents and satisfying any other closing conditions, the Articles of Arrangement are filed with the regulator and all steps set out in the plan of arrangement are concluded automatically and concurrently.

Plan of arrangement: legal test

Pre-conditions

The applicant corporation must satisfy the following pre-conditions to apply for court approval under Section 192 of the CBCA: (1) it must be a CBCA corporation; (2) it must not be insolvent (or will no longer be insolvent immediately after the arrangement is effected); and (3) it must not be practicable to effect the fundamental change(s) under any other provision of the CBCA.

Note that the impracticability requirement has been established as a low threshold.  Implementing negotiated mergers and acquisitions by way of a plan of arrangement is routinely recognized as a legitimate use of the arrangement provisions.^[1]

Fairness hearing

At the fairness hearing, the applicant corporation must satisfy the court that:

• The statutory procedures have been met;
• The application is made in good faith; and
• The arrangement is fair and reasonable, which requires the court be satisfied that:
  • The arrangement has a valid business purpose; and
  • The objections of those whose legal rights are subject to the arrangement are resolved in a fair and balanced way.

Statutory procedures and good faith

In practice, the first two requirements are not difficult to meet.  Most of the statutory procedures are set by the court in the interim order.  The court has discretion under Section 192 of the CBCA to adopt any procedural rules it deems fit in the circumstances.  The good faith requirement is typically met if the “fair and reasonable” requirement is met.

Fair and reasonable

The applicant corporation bears the onus of establishing that the arrangement is fair and reasonable.  However, if shareholders voted overwhelming in favour of the arrangement at the meeting, the onus shifts to the parties arguing against the arrangement (if any).  The court will not second-guess business decisions agreed to by the shareholders absent strong evidence to the contrary.^[2]

The requirement that the arrangement have a “valid business purpose” requires that there be positive value to the corporation to off-set the fact that rights may be altered.  The court must be satisfied that the burden imposed by the arrangement on security holders is justified by the interests of the corporation.^[3]

Whether there is a fair balancing of rights is a question of fact.  The court must be satisfied that the arrangement strikes a fair balance across interested parties in light of the overall circumstances.  The court will consider factors such as the outcome of the shareholder vote, whether a fairness opinion was obtained by the applicant corporation, and the proportionality of compromise between various security holders.^[4]

Plans of arrangement are not without risk.  In a recent 2023 Alberta Court of King’s Bench decision,^[5] the Court refused to grant a final order approving a proposed plan of arrangement under Section 193 of the Alberta Business Corporations Act, RSA 2000, c B-9.  An interim order setting the procedure for the proposed arrangement was granted by the Court in April 2023.  But at the fairness hearing, the application for the order was opposed by certain shareholders and the Court found that the arrangement was not fair to shareholders – and in so doing:

• questioned the valid business purpose of the arrangement;
• took issue with the shareholder vote because of a dominate voting position of one of the arrangement parties;
• determined that the information presented to the shareholders at the shareholder meeting was “prejudicially out of date”;
• found dissent rights, while granted, would be practically unavailable given the insolvency of the company; and
• found it problematic that the fairness of the arrangement was not approved by a special committee of the board of directors or supported by an independent fairness opinion.

Solace Power Inc. v. All Holders of Common Shares

While increasingly common in other jurisdictions across Canada, Solace’s application marked the first plan of arrangement to proceed through the court in this province.

As noted above, the key factor in the decision to pursue a plan of arrangement was the broad discretionary powers of the court to approve transactions that could not practicably be carried out otherwise.

Solace’s plan of arrangement involved multiple steps, including: incorporating a new CBCA corporation (“HoldCo”) with a new USA; continuing Solace to the CBCA; an exchange of shares between Solace and Holdco; a redemption of a certain class of Solace’s shares; an amalgamation of HoldCo and Solace; an issuance of shares to the US investor; and a conversion of all outstanding convertible notes.  In addition, the arrangement expanded Solace’s board and retained and confirmed the continuing employee stock option plan.

Justice MacDonald of the Supreme Court of Newfoundland and Labrador first issued the interim order permitting Solace to call a shareholders meeting.  At that meeting, the arrangement was approved by Solace’s shareholders.  Justice MacDonald then approved Solace’s arrangement at the subsequent fairness hearing, determining that all procedures had been met and the arrangement was fair and reasonable to shareholders.

Solace closed the deal shortly thereafter and on filing of the Articles of Arrangement was immediately reorganized in accordance with the plan of arrangement steps.

Conclusion

Although it has significant advantages (especially in the right circumstances) the plan of arrangement is not without risk.  The court almost always grants dissent rights to the shareholders (and sometimes other security holders, too).  If dissent rights are exercised and the transaction closes, it can be costly for the corporation.  There are also additional costs associated with the court process and the applicant corporation will need to obtain an independent fairness opinion to provide independent support for the fairness of the transaction.  The process also always involves some degree of uncertainty, given the transaction is subject to both shareholder and court approval.

However, in the right circumstances the plan of arrangement is an efficient and ideal mechanism for effecting fundamental changes to a corporation, and has become an increasingly popular in other provinces.

The team at Stewart McKelvey has completed plans of arrangement in other jurisdictions and was very pleased to help Solace complete this “first of its kind” corporate reorganization in Newfoundland and Labrador.  Our team is well-equipped to assist with plans of arrangement, or any other corporate transaction or reorganization work you may need.

This client update is provided for general information only and does not constitute legal advice. If you have any questions about the above, please contact the authors or a member of our Mergers & Acquisitions or Corporate Formation/Reorganization Groups.

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[1] Aastra Technologies Limited (Re), 2014 ONSC 246 at paragraph 12.
[2] AbitibiBowater inc. (Arrangement relatif à), 2010 QCCS 4450 at paragraph 34.
[3] BCE Inc., Re, 2008 SCC 69 at paragraph 146.
[4] BCE Inc., Re, 2008 SCC 69 at paragraph 148 to 152.
[5] HEAL Global Holdings Corp (Re), 2023 ABKB 541.