A recent decision of the Court of King's Bench of Alberta provides useful guidance to distressed companies that are considering arrangement transactions under business corporations legislation. In HEAL Global Holdings Corp. (Re), the Court refused to grant a final order in respect of a "three-corner amalgamation" that was approved by 100% of the voting shareholders of the two amalgamating corporations and where, absent the transaction, the ability of one of the corporations to continue as a going-concern was subject to significant doubt. Notwithstanding these facts, the Court held that arrangement was not fair and reasonable and rejected the proposed transaction.
The arrangement, which was attempted under the Business Corporations Act (Alberta), involved a publicly traded corporation (Pathway Health Corp.) and two other corporations (The Newly Institute Inc. and HEAL Global Holdings Corp.). HEAL already owned 22% of the shares of Newly and Pathway proposed to acquire all of the shares of Newly, other than the Newly shares already held by HEAL, by way of an exchange of Newly shares for Pathway shares. The exchange of select Newly shares, along with the failure to arrange other identically situated shareholders, resulted in HEAL and Pathway becoming the sole shareholders of Newly and the remaining Newly shareholders becoming shareholders in Pathway. This unequal treatment of a single class of holders was one of the main reasons why the Court held the arrangement was not fair and reasonable.
In addition to the differential treatment of shareholders, the Court identified a number of other flaws with the proposed arrangement. 10.5% of Newly's shareholders had exercised dissent rights in advance of the shareholder meeting and did not participate in the vote. These shareholders became entitled to be paid the fair market value of the shares but the Alberta legislation (like most common law jurisdictions) prevents such payment from being made if there are reasonable grounds for believing the corporation is insolvent. Newly had become insolvent over the course of the proceedings and, in accordance with the terms of the arrangement agreement, dissenting shareholders were deemed to have agreed to the conversion of their shares to Pathway. These provisions of the Arrangement effectively removed any true dissent rights from the transaction. Newly also failed to form a special committee to assess the transaction and failed to obtain an independent fairness option in the face of competing valuation evidence and in the circumstance where there was a wide range of recent values ascribed to the Newly shares, which were further reasons for the application being dismissed.
Unlike its federal counterpart, Alberta Business Corporations Act does not require the transacting corporation to be "not insolvent" for the purposes of effecting fundamental changes by way of plan of arrangement. In HEAL Global Holdings Corp. (Re), it was accepted that the court may need to be more willing to approve an arrangement when the arranged party is nearing insolvency and, while this may create additional flexibility in certain situations, the Court also recognized that the ABCA was "...not the appropriate legislative mechanism for dealing with corporate insolvency as this is the purview of the Bankruptcy and Insolvency Act... and the Companies' Creditors Arrangement Act". HEAL Global Holdings Corp. (Re) establishes that financial distress does not provide a license to disregard basic corporate governance norms or justify unequal treatment of identically situated shareholders. Corporations facing insolvency should heed this warning when facing shareholder opposition to an arrangement transaction.
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