In an extremely rare decision (the Decision), the Supreme Court of British Columbia in 2019 declined to approve an M+A transaction (the Transaction) involving Core Gold Inc. (Core) and Titan Minerals Limited (Titan). The Transaction was structured as a plan of arrangement under the Business Corporations Act (British Columbia).
Background
A plan of arrangement is a statutory procedure used, among other things, to effect a takeover of a company without having to go through the formal takeover bid requirements pursuant to securities legislation. The outstanding securities of a target company (in this case, Core) are “arranged” (typically this means they are exchanged, amended or reorganized) resulting in an acquisition of those securities by the acquiring company (in this case, Titan). Plans of arrangement have become the primary mechanism to effect Canadian M+A transactions.
A detailed summary of the features of a plan of arrangement is outside the scope of this post. However, the following features are relevant to the Decision:
Court Approval
Plans of arrangement must be approved by the relevant court in a final order. The key burden to be established by a proponent in such a court hearing is that the arrangement is fair and reasonable. Most arrangements also involve the target company applying for an interim order that provides for a meeting of its shareholders to approve the plan of arrangement. An interim order was obtained in connection with the Transaction, but the petition for a final order was dismissed for the reasons set out in this post.
While there is no assurance that the court will approve a plan of arrangement, it is highly uncommon for a plan of arrangement not to be approved. A shareholder opposing a plan of arrangement is entitled to attend the court hearing and argue that it is unfair - however, in practice, court applications are rarely opposed. Not only was the Transaction hotly contested, the court hearing was opposed by a well-organized shareholder and his counsel.
Dissent Rights
A plan of arrangement typically entitles any shareholder to “dissent” in respect of the arrangement and instead require that their shares be acquired by the target company (or the buyer) for their fair value. Such a dissent right is not typically problematic in practice.
Fairness Opinions
While not legally required, it is fairly common for a board and/or special committee of a public company involved in a plan of arrangement to seek a fairness opinion from its financial advisor. In practice, the fairness opinion is primarily intended to demonstrate diligence by the board and/or special committee in considering and approving its terms, and the transaction’s fairness to shareholders from a financial point of view. Fairness opinions are often but not always given by financial advisors who are independent of the company. The fairness opinion obtained in connection with the Transaction was given by a non-independent financial advisor.
Decision
Mr. Justice Groves of the Supreme Court of British Columbia dismissed Core’s petition for approval of the arrangement with Titan, finding that Core had failed to establish that the Transaction was fair and reasonable. In dismissing the petition, the Court seemed to be most influenced by the following factors:
No Independent Fairness Opinion
The Court seemed quite surprised that the proponents of the arrangement did not provide shareholders with an independent fairness opinion. At various times, Mr. Justice Groves referred to this decision as “an oversight”, “odd at best” and questioned whether it was made because the results of an independent fairness opinion were thought by the proponents to be too risky or potentially self-defeating. Without an independent fairness opinion to rely on, the Court felt it was unable to reconcile the significant difference between assessments of value put forward by the proponents on the one hand and the opposing shareholder on the other hand. Mr. Justice Groves took it upon himself to consider the value of the Titan shares, and in this regard he considered allegations of unlawful conduct made against Titan’s management team and the apparent lack of liquidity associated with Titan’s shares.
If the Decision is followed, independent fairness opinions may be legally required in the context of contentious arrangements going forward.
Tight Timeline
Mr. Justice Groves questioned how a detailed analysis of the materials and issues presented to the Court could be considered and analyzed on such a short fuse. He stated that an adequate judicial determination was not possible on a tight timeline. It was his view that a hearing with the volume of materials presented to the Court should have been set for a week as opposed to two days. In the Decision, Mr. Justice Grove placed criticism for the timeline at the feet of the proponents.
Potential Inability to Pay Dissenting Shareholders
The opposing shareholder attempted to raise concerns regarding Core’s and/or Titan’s ability to satisfy the obligation to pay dissenting shareholders the fair value of their shares, and argued that the proponents should therefore be required to post security for this obligation. After considering the proponents’ arguments opposing security, the recent lack of liquidity of Titan’s shares, and what he perceived to be “the arguable overvaluing of its assets in the non‑arm's length fairness opinion”, Mr. Justice Groves stated his view that there was a substantial possibility that the dissenting shareholders here may, in fact, not receive the benefits of the Transaction. While the Court stopped short of requiring the proponents to post security, Mr. Justice Grove also did not rule out that shareholders might be entitled to guarantees in some circumstances. This would represent a significant departure from current market practice.
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You can view the full text of the Decision in Core Gold Inc. (Re), 2019 BCSC 1267 (CanLII) here.
DISCLAIMER: This post is intended to convey general information about legal issues and developments as of the date above. It does not constitute legal advice and must not be treated or relied on as such.