Written by Brent W. Kraus, Michael P. Theroux and Emerson Frostad
The Alberta Court of Appeal has confirmed that dissenting shareholders to a plan of arrangement may receive an interim payment for their shares while fair value of those shares is being determined by the courts. In Brookdale v Crescent Point Energy and Legacy Oil & Gas, 2018 ABCA 221, the Court of Appeal overturned an Alberta Court of Queen’s Bench decision that denied a dissenting shareholder an interim payment. Brookdale International Partners, LP and Brookdale Global Opportunity Fund, collectively (“Brookdale”) had made an application that sought an interim payment of funds related to dissent rights exercised on shares they owned in Legacy Oil + Gas Inc. (“Legacy”) in connection with the acquisition of Legacy by Crescent Point Energy Inc. (“Crescent Point”). The Court of Appeal directed an interim payment be made pending the determination of fair value of the Legacy shares.
In May 2015, Legacy entered into a plan of arrangement with Crescent Point, which would allow Crescent Point to acquire all outstanding shares of Legacy in exchange for shares in Crescent Point. Brookdale purchased common shares of Legacy in April and May of 2015, including after the plan of arrangement was announced.
Brookdale exercised its dissent right, which triggered a statutory requirement (section 191(7) of the Business Corporations Act (Alberta) (the “ABCA”)) for Legacy to make an offer to buy Brookdale’s shares. Legacy complied with this requirement and made an offer of $2.415/share (the “Statutory Offer”), which was rejected by Brookdale. Brookdale then made a court application for an interim payment, as contemplated in section 191(12)(c) of the ABCA, while the parties awaited court determination of fair value of Brookdale’s shares in Legacy. Legacy opposed this application, citing several concerns, including its ability to recover funds should the interim payment be greater than the fair market value determination.
The Court of Queen’s Bench, in a decision released on February 24, 2017, (Brookdale v Crescent Point Energy and Legacy Oil & Gas, 2017 ABQB 131) denied Brookdale’s application for an interim payment. The decision gave several reasons for denying the application. These included the fact that the right to dissent was voluntarily added to the plan of arrangement by Legacy, fulfilling a minimum fairness owed to dissenting shareholders. Additionally, the Court placed importance on the fact that Brookdale had no presence in Canada, limiting the ability of Legacy to recover any over-payment made on the interim payment.
The Court of Appeal overturned the Queen’s Bench decision and ruled that Brookdale was entitled to an interim payment. While the three-judge panel did agree that the court retains discretion to order an interim payment, the threshold to warrant an interim payment was much lower than suggested by the lower court. Namely, the Court stated that the chambers judge “placed too heavy an onus on the Appellants (Brookdale) to justify an advance payment.” The Court highlighted that dissenting shareholders have a statutorily mandated, fully vested right to be paid fair market value for their dissenting shares, not a more onerous right to go to trial to recover the sum. The ability to go to court to determine what dissenting shareholders should be paid exists in the ABCA only as a mechanism by which the parties can get assistance in determining the fair market value of the shares. The right to be paid out is vested, only the quantum of payment is in question. As for the ability to recover any over-payment after the fact, the Court of Appeal indicated that this issue can be resolved through undertakings and security, not a complete denial of an interim payment altogether.
The Court of Appeal also addressed the respondent’s over-payment argument by basing the interim payment amount on Legacy’s own Statutory Offer, which it described as an appropriate starting point for determining a fair interim payment. The Court concluded that it would not be reasonable for Brookdale to have to wait for an expected trial date in 2020 to receive any payments as a dissenting shareholder.
Taking these factors into consideration, the Court ruled that an interim payment of $2.415/share should be made into a trust account of Brookdale’s solicitors, with $2.00/share released to Brookdale upon providing an undertaking to repay any over-payment.
The provision of dissent rights in the context of merger and acquisitions transactions, whether mandated or provided voluntarily, is often a core element of fairness of the proposed transaction. Nevertheless, from a practical standpoint the exercise of dissent rights presents the dissenting shareholder with several practical hurdles, including the expense of adducing evidence as to fair value and the inherent delay in adjudicating the matter. This decision clarifies that a dissenting shareholder has a realistic prospect of securing an interim payment. Thus, the decision may remove one practical obstacle to the exercise of dissent rights and prevents the right from being a theoretical remedy without practical utility.