Written by Will Osler, Brent Kraus and Jennifer Asquin
In the current economic climate, many companies are seeking alternative means of accessing capital for their businesses, including selling assets when other means of financing may not be available. When considering an asset sale transaction, both buyers and sellers should ensure that the seller's shareholder approval requirements under corporate legislation are not inadvertently triggered.
Under Canadian corporate law statutes, a "sale, lease or exchange of all or substantially all of the property of a corporation other than in the ordinary course of business of a corporation" requires special majority shareholder approval, being not less than two-thirds of the votes cast by shareholders who vote in respect of the resolution. In transactions involving a significant portion of a corporation's assets or high-value property, the question of what constitutes "all or substantially all" of a corporation's assets may not be as simple as it appears.
Courts look at the question from both a quantitative and a qualitative perspective, with the goal of determining whether the transaction "strikes at the heart of the corporate existence and purpose" of the corporation, or whether the sale would "effectively destroy the corporate business."
The quantitative aspect of the analysis involves determining what percentage of the total assets of the corporation will be sold. Courts will look at whatever factors the parties can demonstrate are relevant to establish the value of the assets sold by a corporation in relation to the assets retained, including their relative contributions to profits. In carrying out this analysis, courts have considered factors such as book value, market value, gross and net revenue, and EBITDA.
While the percentage of a corporation's assets being sold is relevant in considering whether a sale constitutes "all or substantially all" of a corporation's property, it is not necessarily the determining factor. Increasingly, courts are placing greater emphasis on a qualitative analysis in determining whether a transaction constitutes all or substantially all of the corporation's assets and have, in some instances, declared that the outcome of the qualitative analysis is determinative if the result conflicts with the outcome of the quantitative analysis.
Courts will consider whether the transaction "transforms the fundamental nature of the corporation," while taking into account that the purpose of the statutory provisions is to protect shareholders from a fundamental change occurring without their consent in the corporation in which they have invested. In making a qualitative analysis, courts will consider whether the transaction:
- is tantamount to a liquidation or winding up of the corporation;
- transforms the fundamental nature of, or effects a fundamental change to, the corporation;
- is not in furtherance of the purpose or objects of the corporation;
- constitutes a significant change to the line of business historically carried on by the corporation; or
- effectively destroys the corporate business.
It has been found that as little as 33% of a corporation's assets constituted substantially all of its assets in instances where the assets being sold were the corporation's main operating assets, and the effect of the transaction was to fundamentally alter the nature of the corporation, for example from an operating company to a holding company.
Series of Transactions May Also Trigger a Shareholder Vote
Courts have also indicated that a corporation would not necessarily be able to avoid meeting the "all or substantially all" test by conducting a series of smaller transactions over a period of time. Instead, the various dispositions would likely be analyzed as a single transaction in order to determine whether or not all or substantially all of a corporation's business was being disposed of.
The "Ordinary Course of Business"
It is also important to note that a court will consider whether the sale took place in the ordinary course of a corporation's business. Generally, unless the corporation is routinely involved in selling the types of assets that are involved in the transaction, a sale of a substantial portion of a corporation's assets will not be considered to be in the ordinary course of business. Additionally, even if a corporation is regularly involved in selling the types of assets involved in the transaction, a decision to continue such sales but not to replace the inventory, such that the sales collectively constitute a liquidation, has been found to be a sale that is not in the ordinary course.
Consequences of Failure to Obtain Shareholder Approval
If shareholder approval is not obtained and a shareholder objects prior to the transaction closing, the shareholder will generally seek an interim order restraining the sale until the corporation holds a shareholder vote in respect of the transaction. If the transaction has closed, dissenting shareholders may seek payment by the corporation of the fair value for their shares as if the transaction was a sale or wind-up of the business. Additionally, such claims are often combined with claims of oppression, which, if successful, provide the courts with broad discretion to make remedial orders such as a wind-down or liquidation of the corporation, disclosure of records, cessation of remuneration to the directors or injunctive relief, among others. In the worst case, where a shareholder can establish that the purchaser had knowledge of the requirement to obtain shareholder approval, or by virtue of the purchaser's relationship with the corporation ought to have had such knowledge, the shareholder may also seek remedies against the purchaser.
Corporations that are seeking to liquidate assets should either ensure that any proposed transaction does not constitute a sale of all or substantially all of its property, or must seek shareholder approval. As part of the due diligence process, prospective purchasers of a corporation's assets should gain assurances from the seller that it has complied with the shareholder approval requirements set out in the seller's governing corporate statute if there is a possibility that those requirements would be triggered by the proposed transaction.