Energy firms’ merger dispute seen as precedent-setting
A boardroom drama unfolding between an activist shareholder and two small oil and gas companies seeking to merge in Alberta could set a precedent for deal-making across the country, lawyers say.
Toronto-based Smoothwater Capital Corp., which bills itself as “Canada’s leading activist investor,” is attempting to influence a transaction between Alberta Oilsands Inc. and Marquee Energy Ltd., two Calgary-based juniors with limited stake in the province’s oil and gas sector.
The proposed deal has attracted the attention of legal experts from across Canada. “This case will be precedent setting and is fundamentally important for corporations and their shareholders as a result,” said Anita Anand, a law professor at the University of Toronto.
Smoothwater, which owns a 17 per cent stake in Alberta Oilsands, wants to quash the deal. Faced with this threat, Alberta Oilsands is attempting to join forces with Marquee while avoiding a vote by its own shareholders.
The case has risen through the court system, with Smoothwater now considering an appeal to the Supreme Court.
“In our view, the case raises important issues of national importance related to the balancing of shareholder rights and the role of boards,” Stephen Griggs, Smoothwater’s CEO, said in an email.
Executives behind Alberta Oilsands and Marquee believe they are ideally suited to merge because Alberta Oilsands lost key assets when the province cancelled its leases near Fort McMurray, giving it $35 million in cash to compensate for the losses. Marquee, meanwhile, owns oil and gas assets without sufficient cash to develop them.
The problem they face is that a
In our view, the case raises important issues … related to the balancing of shareholder rights and the role of boards.
formal amalgamation would require a vote by shareholders of both companies. If the deal was ultimately approved, those who voted against it would have the option to be bought out.
The fear is that if enough shareholders, such as Smoothwater, walked away, available funds to exploit Marquee’s assets would be drained, rendering the merger largely pointless.
Instead, the companies pursued a so-called plan of arrangement, which would involve swapping Marquee shares for Alberta Oilsands stock.
Marquee would become an Alberta Oilsands subsidiary and the two companies would merge.
Under this scenario, lawyers for the companies argue, only Marquee shareholders would have to vote because it’s their shares that are being converted.
Ninety-eight per cent of Marquee shareholders who attended a special meeting Monday voted to approve the arrangement.
Smoothwater, which wants Alberta Oilsands to distribute its cash to shareholders instead of joining forces with a “distressed” company, asked the court to require a vote by Alberta Oilsands stockholders.
In September, a Court of Queen’s Bench judge ruled in Smoothwater’s favour, arguing the plan of arrangement was pursued in bad faith to avoid an important shareholder vote. Justice Alan Macleod found it was “fair and reasonable” — key thresholds in the case — to allow the AOS vote to proceed.
The decision was at odds with the long-standing approach to plans of arrangement, which are widely used in corporate restructuring, mergers and property transfers, said Melissa Smith, a corporate lawyer and a partner at Borden Ladner Gervais LLP in Calgary. These types of deals have traditionally not demanded the acquiring company hold a shareholder vote, said Smith, who has been involved in several plans of arrangement.
The “surprising” ruling triggered uncertainty surrounding how the law would be applied in the future, because there were questions under what conditions a vote would be required, Smith said.
“It would have changed the deal certainty, the ability to say, ‘yes you need a vote, or no, you don’t need a vote,’ ” she said.
The decision, however, was quashed by the Alberta Court of Appeal, which this week ruled the law does not give Alberta Oilsands shareholders the right to vote on the arrangement.
The three-member panel said in a written decision the lower court judge erred in finding the deal was pursued in bad faith and in assessing whether the deal was fair.
Craig Ferris, a lawyer at Lawson Lundell LLP in Vancouver, said the appeal court decision is in line with long-standing interpretations of plans of arrangement, but he said the Supreme Court may still consider the case.
“The way these transactions are done does allow a properly advised corporation to avoid votes,” Ferris said. “While that’s been the law for a long time, it may be that the Supreme Court of Canada wants to look at whether that remains the law.”
Even without an appeal to Canada’s top court, the Alberta Oilsands deal must clear two more hurdles — approval by the TSX Venture Exchange and final court approval of the arrangement, which Smoothwater said it plans to contest.