( Disponible en anglais seulement )
In August 2010, the Ontario Superior Court of Justice approved a plan of arrangement (« Arrangement« ) which allowed Magna International Inc. (« Magna« ) to eliminate its dual class share structure. A plan of arrangement is a court supervised procedure that requires the approval of shareholders and the court. As part of the court approval process, the court is required to assess the fairness and reasonableness of a plan of arrangement. The Arrangement was challenged at a hearing before the Ontario Securities Commission (« OSC« ) and during the court approval process principally because many of the usual indicia of fairness and reasonableness, such as a fairness opinion, a recommendation of the board of directors to support the Arrangement and shareholder rights of dissent and appraisal, were not present. In the circumstances, the OSC required enhanced disclosure to shareholders but permitted the approval process to proceed and the Court held that the Arrangement was « fair and reasonable ». Both the OSC and the Court relied heavily on the approval of the shareholders.
Background to the Arrangement
Before the Arrangement, Magna had a dual class structure comprised of Class A subordinate voting shares (“Class A Shares”) and multiple voting Class B shares (“Class B Shares”). The Class B Shares carried 300 votes per share and represented approximately 66% of the votes attached to Magna’s voting securities, but less than 1% of Magna’s equity. The Class B Shares did not contain any “coattail” protections for holders of Class A Shares in the event of a change of control transaction. In addition, the Class B Shares did not contain any “sunset” provision by which the Class B Shares would terminate or convert into another class of shares as of any specified date.
Under the Arrangement, Magna acquired and cancelled all of the outstanding Class B Shares indirectly owned by Stronach Trust, the controlling shareholder of Magna, for US $300 million in cash and 9 million Class A Shares issued from treasury. Three consulting agreements between Magna and Frank Stronach were also amended. In addition, Magna and Stronach Trust established a partnership relating to Magna’s vehicle electrification business.
The Special Committee
A special committee of independent directors of Magna (« Special Committee« ) was established to review and consider the Arrangement. CIBC World Markets (“CIBC”) was retained to act as independent financial advisor to the Special Committee. The primary motivation for the Arrangement was to achieve a sustained increase in the trading multiple of the Class A Shares after eliminating the dual class share structure. CIBC advised that it would not give the Special Committee a fairness opinion because it would not express an opinion regarding the likely trading price of an issuer’s securities following the announcement or completion of a transaction as it considered this to be inherently unpredictable.
The Special Committee was not able to conclude that the benefit of the Arrangement in the form of a sustained increase in the trading multiple of the Class A Shares would outweigh the cost of 11.44% dilution of the Class A Shares. Nonetheless, the Special Committee delivered a report to the Board, which recommended that the Board submit a special resolution approving the Arrangement to the shareholders of Magna for their consideration at the special meeting (“Special Meeting”) and that the Board make no recommendation to the shareholders as to how they should vote in this regard. The Special Committee recognized that the cost-benefit analysis was at the heart of whether the Arrangement was fair and reasonable and that specific holders of Class A Shares (“Class AShareholders”) may have different opinions on whether the benefits of the Arrangement outweighed the relative costs. On June 2, 2010, a notice of meeting and management proxy circular (the “Circular”) in respect of the special meeting to consider the Arrangement were delivered to the Magna shareholders.
Opposing Shareholders
Shareholders that opposed the Arrangement retained Morgan Stanley Canada Limited (“Morgan Stanley”) as its financial advisor. Morgan Stanley was of the opinion (“Morgan Stanley Opinion”) that the Arrangement is a transaction capable of being subject to a fairness opinion by a financial advisor and that the consideration being paid by Magna for the Class B Shares under the Arrangement was not fair, from a financial point of view, to the Class A shareholders.
OSC Proceedings
On June 15, 2010, the staff of the OSC commenced an application seeking an order to cease-trade the issuance of securities pursuant to the Arrangement on the basis that the Arrangement was contrary to the public interest. A panel of the OSC (“OSC Panel”) concluded that the Circular did not provide sufficient disclosure to the Magna shareholders to permit them to make an informed decision. The OSC Panel noted that, in these particular circumstances, the Circular should have contained substantially the same information and analysis that the Special Committee had in considering the legal and business issues raised by the Arrangement. Consequently, the OSC Panel ordered that the Circular be supplemented (the “Supplement”). The OSC Panel considered three factors in reaching this conclusion: (1) the fact that the Arrangement constituted a material related party transaction between Magna and the Stronach Trust; (2) the absence of any recommendation to the shareholders from either the Special Committee or the Board as to how they should vote on the Arrangement or as to their view of the fairness of the Arrangement to the shareholders; and (3) the absence of a fairness opinion with respect to the Arrangement.
The OSC Panel was not persuaded the Arrangement was abusive of the Magna shareholders or the capital markets and was unable to conclude whether or not the Arrangement was unfair to the Magna shareholders. The OSC Panel concluded that, with the benefit of the Supplement, the Class A Shareholders should be permitted to decide whether the Arrangement should proceed and that it was a business and financial decision that the shareholders were entitled to make. Following the decision of the OSC Panel, the Supplement was delivered to the Magna shareholders.
Special Meeting
At the Special Meeting held on July 28, 2010, 75.28% of the minority Class A Shareholders cast their votes in favour of the Arrangement.
The Legal Principles Applied by the Court
The Court applied the legal principles governing the consideration of a proposed plan of arrangement as set out by the Supreme Court of Canada in 2008 in BCE Inc. v. 1976 Debentureholders. The corporation seeking approval of an arrangement must satisfy the court that:
- the statutory procedures have been met;
- the application has been put forward in good faith; and
- the arrangement is fair and reasonable, that is, the arrangement must: (a) have a valid business purpose; and (b) resolve the objections of those whose legal rights are being arranged in a fair and balanced way.
The Court’s Decision
The Court was satisfied that the applicable statutory procedures had been met, that the application for the Court’s approval of the Arrangement was put forward in good faith and that the Arrangement was fair and reasonable. The Court’s decision focused on the two-prong “fair and reasonable” test.
Valid Business Purpose
The Court held that the Arrangement had a valid business purpose. The Court noted that the potential benefits of the Arrangement do not have to be guaranteed and that Magna demonstrated that the corporate governance and financial benefits of the Arrangement to the corporation had a reasonable prospect of being realized. The Court stated that the valid purpose inquiry is fact specific and that the level of judicial scrutiny will be dependent on the necessity of the arrangement to the continued operations of the corporation. The lower the degree of necessity, the higher the degree of judicial scrutiny will be applied. However, even on a standard of careful scrutiny, the Court acknowledged that the elimination of the dual class share structure would benefit Magna.
Fair and Balanced Analysis
The opposing shareholders submitted that the Court must address the cost-benefit analysis pertaining to the Class A Shareholders in order to assess the fairness and reasonableness of the Arrangement. The opposing shareholders argued that the Court was no more able to resolve this analysis than the Special Committee, which was not able to come to a conclusion in this regard. The Court agreed that it was unable to conclude that the Class A Shareholders would realize benefits from the Arrangement that would exceed the costs to them, however, the Court stated that the proper issue for consideration was whether other indicia of fairness were sufficient to support a finding that the “fair and balanced” test was satisfied. The Court noted that it did not need to make a precise determination of the relative financial costs and benefits of the Arrangement and could reach such a conclusion based on other indicia of fairness.
The opposing shareholders argued that the Arrangement was unfair from a financial point of view to the Class A Shareholders because of the absence of traditional indicia of fairness and reasonableness, such as a fairness opinion, a recommendation from the Board or Special Committee and the existence of dissent and appraisal rights. The Court reviewed each of the traditional indicia of fairness and reasonableness that were absent in this case and considered the impact on the fairness and reasonableness of the Arrangement.
The Court did not draw an adverse inference from the absence of a fairness opinion from CIBC because the opposing shareholders, with ample opportunity, did not challenge CIBC’s reason for not giving a fairness opinion. Further, the Court noted that the Morgan Stanley Opinion did not dispute CIBC’s rationale for withholding a fairness opinion, nor did it address the prospective trading multiples of Magna.
Further, the Court did not draw an adverse inference from the fact that the Board and Special Committee did not make a recommendation as to whether the Class A shareholders should vote in favour of the Arrangement. The Court recognized that the Special Committee could not have reasonably made a recommendation without a fairness opinion from its financial advisor. It was also held that there was no evidence to demonstrate that the directors had failed to fulfill their statutory duties to determine whether the Arrangement was in the best interests of Magna. The Court noted that while a director cannot abdicate his or her statutory duty “to act honestly and in good faith with a view to the best interest of the corporation”, Ontario law does not require that the directors, or a special committee of directors, make a recommendation to shareholders regarding proposed related party transactions. The Court distinguished between the duty to act in the best interests of a corporation from the duty to act in the best interests of the shareholders of the corporation. It was held that the directors satisfied their duty to decide that the Arrangement was in the best interests of Magna before seeking the approval of the shareholders. The Court noted that under corporate or securities law, the directors did not owe a duty to the Class A Shareholders to determine that the Arrangement was in their best interests, separate from Magna, before seeking their approval.
Finally, the Court stated that the absence of dissent and appraisal rights in this case did not negatively affect the fair and balanced analysis because the Class A shares were not being acquired on a compulsory basis and the Class A shareholders had the option to sell their shares on the open market.
The Court determined the principal issue to be decided with respect to the “fair and balanced” test to be the weight to be attached to the affirmative vote of the Class A shareholders. In this regard, the Court considered: (1) whether the vote could reasonably be regarded as a proxy for the fairness and reasonableness of the Arrangement; and (2) if so, whether there is any reason arising out the circumstances of the vote that would prevent the Court from relying on that vote as an indicia of the fairness and reasonableness of the Arrangement.
With regard to the first question, the Court held that the affirmative vote of the Class A Shareholders could be reasonably regarded as a proxy for the fairness and reasonableness of the Arrangement because the Class A shareholders would not have voted in favour of the Arrangement unless they believed that there was a reasonable possibility that the potential benefits outweighed the costs. Another important consideration was that no Class A shareholders expressed that they were unable to reach a decision on the issue.
With regard to the second question, the Court identified four circumstances that could prevent it from adopting the conclusion inherent in a shareholder vote: (i) a significant number of shareholders indicate that they are unable to reach a decision; (ii) demonstration of misleading disclosure; (iii) demonstration of incomplete or inadequate disclosure; (iv) evidence of competing economic interests among shareholders; and (iv) coercion evident in the structure of a Arrangement or inherent in the voting arrangement. The Court concluded that these circumstances were not present.
Although the Court was unable to make its own factual determination regarding the financial costs and benefits of the Arrangement, the Court concluded that Magna had satisfied the “fair and balanced” test based on the following other indicia of fairness: (i) the outcome of the shareholder vote; (ii) the market reaction to the announcement of the Arrangement; and (iii) the presence of a liquid trading market in which Class A shareholders who oppose the Arrangement could sell their shares.
Further Developments
Certain opposing shareholders appealed the decision. The appeal was dismissed by the Ontario Divisional Court on August 30, 2010.
