BC Court of Appeal Clarifies Voting Provisions for Arrangements Under the Business Corporations Act 

publication 

Fall 2006 - (Mergers & Acquisitions Brief Fall 2006)

Mergers & Acquisitions Brief Fall 2006

A May 18, 2006 decision of the British Columbia Court of Appeal has clarified certain voting requirements in connection with statutory plans of arrangement under sections 288–291 of the Business Corporations Act (British Columbia) (the "BCA").

The decision related to an appeal by Inex Pharmaceuticals Corporation of a British Columbia Supreme Court decision made in connection with Inex's application under BCA s. 289 ("Adoption of Arrangement") to convene a shareholders' meeting to approve and adopt an arrangement by its shareholders. The arrangement, which involved spinning out some Inex assets into a to-be-created sister corporation, was opposed by a group of unsecured noteholders who convinced the Supreme Court that they should have some say as to the implementation of the arrangement and be entitled to vote on it.

Although Inex was successful in arguing that the proposed arrangement did not violate the terms of the notes and obtained a Supreme Court order to that effect, the Supreme Court still ruled that the noteholders were entitled to vote on the arrangement. The lower court indicated that, in its view, this vote would not subsequently be binding on a court when convening the hearing in connection with the issuance of orders approving and implementing the arrangement under BCA s. 291 ("Role of the Courts in Arrangements"). Inex appealed that portion of the lower court ruling on the grounds that the noteholders would vote against the proposal and, as a result, the arrangement could never be "adopted" as required by s. 289 nor be presented before the Court and considered for the orders required under s. 291.

In considering Inex's appeal, the Court of Appeal noted that the persons permitted to vote on the adoption of an arrangement between a corporation and its shareholders are expressly listed in s. 289(1)(a), which does not include creditors. The Court noted that while s. 291 gives a court latitude to require that an applicant company convene meetings and conduct votes of "persons the Court considers appropriate," this wide latitude is not to be construed as the power to amend the list of persons permitted to vote under s. 289. By contrast, where an arrangement is proposed between a company and its creditors, creditors are permitted to vote on it as required by s. 289(1)(d).

There is nothing in the BCA or the Court of Appeal's decision that precluded the noteholders from attending the hearing brought under s. 291 to argue that they were being unfairly treated. The decision merely prevents their opposition from creating a situation where the required hearing will not be held at all.

What the Court of Appeal did not clarify is the question of when a court might properly order a vote of "appropriate" persons under s. 291(2)(b) and the effect that such a vote might have on orders made under s. 291. Perhaps the section will be judicially interpreted to be no more than a codification of the traditional right of a court, in arrangements, to subdivide classes of shareholders or creditors for voting within their respective class entitlements.

Alternatively, it might be argued that s. 291(2)(b) will allow the court to order persons who are not expressly entitled to vote on the arrangement per se, but who argue that their rights are being adversely affected in a way that the court should consider in making its orders under s. 291, to meet and vote in order that they may speak to the court with a more or less single voice. It must be remembered, however, that s. 291 only gives the court limited powers to alter an adopted arrangement because, under that section, the court can only approve it on "substantially" the terms that were adopted if the court decides not to reject it. This limitation of the court's power makes sense because ordering the implementation of a substantially different arrangement would render the adoption vote meaningless.

The Court of Appeal decision also suggests that an arrangement under which a company's creditors' ability to collect on their debts may be adversely affected, does not thereby become a "creditor arrangement" entitling them to vote. Presumably, the test is whether their actual legal rights to collect a debt are affected, not whether the economic effect of the arrangement may make collection less likely. Thus, creditors may have to look to the available protections, if any, afforded by other statutes should they believe that a proposed BCA arrangement will effectively result in a preference or similar event for which there is a creditor remedy.

This article appeared in Mergers & Acquisitions Brief Fall 2006.