Not Fair, Not Reasonable: Alberta Court Declines to Heal a Flawed Plan of Arrangement

In HEAL Global Holdings Corp (Re), Justice E.J. Sidnell declined to approve a proposed arrangement (Arrangement) because it was not fair or reasonable. This recent Alberta Court of King’s Bench (Court) decision provides important guidance about how courts assess the requirement that an arrangement be fair and reasonable.

Background

In June 2023, HEAL Global Holdings Corp. (HEAL), Pathway Health Corp. (Pathway), and The Newly Institute Inc. (Newly) brought an application for a final order to approve the Arrangement. HEAL, Pathway and Newly previously obtained an Interim Order setting the procedure for the Arrangement in April 2023.

The proposed Arrangement involved an acquisition by publicly traded Pathway of all of Newly and HEAL’s issued and outstanding shares, other than Newly’s shares that were held by HEAL. HEAL and Newly are privately held.

Pursuant to the Arrangement, Newly shareholders would receive an approximate value of 22 cents per Newly share (Newly Share Price). In the months prior to the Arrangement, the value of Newly shares ranged between 60 cents and C$1.

54.4% of Newly shareholders were represented at a special meeting to vote to approve the Arrangement. Of these shareholders, 100% voted for the Arrangement (Approval).

After receiving notice of the Approval, one of Newly's shareholders opposed the final approval of the Arrangement (Final Order Application). Five additional Newly shareholders then joined in opposing the Final Order Application.

The Court's Decision

The Court applied the test from BCE Inc. v. 1976 Debentureholders and relied on the following findings to conclude the Arrangement was not fair and reasonable:

• Even though 100% of the Newly voted shares supported the Arrangement, the shareholder opposition to the Approval was not insignificant. The majority of the shares voted were held by HEAL (a party to the Arrangement) and Newly’s directors and officers (who had previously agreed to approve the Arrangement).

• The Arrangement excluded Newly shares held by HEAL, resulting in two different classes of Newly shareholders with different rights, privileges, restrictions and conditions.

• Between the time of the Interim Order and the Approval, there was a significant deterioration of Newly's financial circumstances that was not communicated to shareholders.

• Newly failed to provide additional information sought by its shareholders prior to the Approval. The corporation is obliged to provide additional or clarifying information to a shareholder on request, even after the vote on an arrangement. This obligation was heightened due to Newly’s failure to disclose the significant change in its financial position.

• Very little information was provided to Newly shareholders about how the Newly Share Price was determined, leaving Newly shareholders and the Court without a foundation to consider whether the Arrangement represented a good value.

• Ten days prior to the Final Order Application hearing, Newly indicated that it was on the brink of insolvency. While the court needs to be more willing to approve an arrangement when the arranged party is nearing insolvency, the potential of insolvency does not result in a "rubber stamp."

• Newly did not form a special committee. Instead, it relied on two outside directors that were appointed to the Newly Board eight months before they approved the Arrangement, after Newly began discussions with Pathway about a potential transaction. While a special committee is not required, it would have been a helpful tool to evaluate the fairness of the Arrangement considering the directors’ limited experience.

• Newly did not obtain a fairness opinion, claiming the cost would be excessive given its deteriorating financial position. The Court found that a fairness opinion was important given Newly's worsening financial position, recent share transactions with significantly higher share values than the Newly Share Price, and the limited experience of Newly's independent directors.

In light of all of these considerations, the Arrangement was not approved.

Key Takeaways

This decision highlights that despite a commercial context where all shareholders who voted supported the arrangement, sufficient evidence is still required to demonstrate to the Court that the arrangement is fair and reasonable to all relevant stakeholders.

In addition, this decision provides helpful clarifications and reminders about the process and requirements for the approval of an arrangement, including:

1. Per the recent decision of Smoothwater Capital Corporation v. Marquee Energy Ltd., the fair and reasonable test only applies to the corporations that are being arranged and only the effect on relevant stakeholders must be considered. Relevant stakeholders do not include individuals like employees or clients.

2. In the context of an arrangement, corporations must ensure that shareholders are properly advised and provided with up-to-date and accurate information.

3. Unlike the Canada Business Corporations Act, the Alberta Business Corporations Act does not require that an arranged corporation be "not insolvent." However, a corporation's solvency can be considered as part of the fair and reasonable test.

4. While a fairness opinion and special committee are not always required for the approval of an arrangement for a private company, certain circumstances may increase the importance of these tools.

5. The fact that a corporation may be on the brink of insolvency at the time of an arrangement does not relieve the corporation from satisfying the fair and reasonable test.

6. The benefit of a corporation's continued existence from an arrangement is not a sufficient reason to approve an arrangement.

Blakes was counsel to the Newly shareholder who led the successful opposition of the proposed Arrangement.

For further information, please contact:

David Tupper               +1-403-260-9722
Michael Dixon              +1-403-260-9786
Sophie Mansfield        +1-403-260-9738
 
or any other member of our Litigation & Dispute Resolution Group.