Section 192 of the Canada Business Corporations Act (CBCA) provides a flexible tool that allows corporations to achieve important change and undertake various corporate transactions, subject to court approval and oversight. This article aims to provide an update on the
Overview of the arrangement process
Corporations can consider plans of arrangement to undertake various corporate transactions, such as mergers, acquisitions, amalgamations or reorganizations. The key steps associated with a section 192 plan of arrangement are the following:
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Assess the business objectives, draft the plan of arrangement and obtain Board approval.
- Send relevant documentation to the Director appointed pursuant to the CBCA, who will review the proposed arrangement.
- File a court application to obtain the issuance of an interim order authorizing the company to call a special securityholders meeting to vote on the proposed plan. The interim order also sets out the time and format of the meeting, as well as the dissenting rights afforded to dissenting securityholders.
- Prepare and circulate an information circular.
- Hold the securityholders meeting and have the securityholders vote on the plan of arrangement. This can be done in person or virtually, as discussed below.
- File a court application to obtain the issuance of a final order sanctioning the plan of arrangement. Prior to issuing the final order, the court will notably ascertain that the plan is fair and reasonable and does not unfairly prejudice any interested parties, and that the solvency requirement is met. (More on this below.)
- Implement the plan of arrangement and complete any necessary filings with the relevant government authorities.
Virtual securityholder meetings
Corporations typically hold the securityholders meeting to vote on the plan of arrangement in accordance with the corporation's bylaws for securityholders meetings. From a statutory point of view, section 132(4)(5) of the CBCA provides that a virtual securityholder meeting can be held if the bylaws expressly permit it and if the platform being used permits all participants to communicate adequately with each other during the meeting.
However, since the COVID-19 pandemic, virtual shareholder meetings have gained popularity in large part due to their convenience and cost-effectiveness. Many publicly listed corporations have now turned to virtual formats to hold their annual general meetings. Special securityholder meetings to vote on plans of arrangement have not escaped this trend.
Solvency requirement
Pursuant to the CBCA, a company can apply to the court for approval of a plan of arrangement if it is not practicable for the company to effect fundamental changes to its capital structures otherwise, provided that the company is not insolvent. A corporation is insolvent if (a) it is unable to pay its liabilities as they become due or (b) the realizable value of the assets of the corporation is less than the aggregate of its liabilities and stated capital of all classes.5 In practice, applicants will usually demonstrate solvency to the court by providing recent financial statements, cash flow projections, expert opinions or an affidavit as to the corporation's solvency from a member of senior management.
The CBCA does not specify if the solvency requirement is to be met both at the interim and final order stages, and if all applicants must be solvent for the requirement to bet met. However, case law suggests that it is sufficient for the company not to be insolvent at the time of the final order, even if it is insolvent at the interim order stage. For example, in Arrangement relatif ŕ Pétrolia Inc., since the company did not meet the insolvency test at the interim stage, it submitted to the
Case law also suggests that the solvency requirement is met whenever there is at least one applicant that is not insolvent pursuant to the test set out by the CBCA.7 A corporation could therefore consider incorporating a new shell company to act as an applicant and satisfy the solvency requirement, which shell company would then be amalgamated with the principal corporation as a step in the arrangement.
However, in 2015, the
These decisions have yet to be discussed by the
Conclusion
Overall, section 192 of the CBCA provides corporations with a flexible mechanism to effect corporate transactions, subject to court approval. These transactions combine court oversight and securityholder approval to ensure that the process is fair. In recent years,
As for the solvency requirement, recent Canadian case law suggests that corporations must demonstrate solvency upon emergence from the arrangement and for a reasonable time thereafter. Where an applicant is unable to meet the solvency requirement of the CBCA, its debt restructuring may be more properly facilitated under an insolvency statute, such as the Companies' Creditors Arrangement Act.
Footnotes
1. Arrangement relatif ŕ
2. Arrangement relatif ŕ
3. Arrangement relatif ŕ
4. Arrangement relatif ŕ
5. Pursuant to section 192(2) of the CBCA.
6. Arrangement relatif ŕ Pétrolia Inc., 2017 QCCS 2785, at paras. 31 to 35.
7. See, notably, in
8. 9171665
9. 12178711
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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