Western Canada Business Litigation Blog

BCCA Affirms Solicitor-Client Privilege as “nearly absolute”

Posted in Civil Litigation, Civil Procedure

In the recent decision in Soprema Inc. v. Wolrige Mahon LLP, 2016 BCCA 471, the British Columbia Court of Appeal confirmed the status of solicitor-client privilege as “nearly absolute” and clarified the test for determining whether a party has impliedly waived of solicitor-client privilege by making its state of mind a material issue in an action.

Soprema commenced an action against Wolrige Mahon LLP (“Wolrige”) claiming that Wolrige had made false representations about the accuracy of financial statements Soprema had relied on in deciding whether to exercise an option to purchase shares. Wolrige brought an interlocutory application seeking production of some of Soprema’s privileged documents, claiming Soprema had waived privilege over these by putting its state of mind at issue in the action. The chambers judge found that a waiver of privilege will be implied where a party has put its state of mind in issue in a manner that makes the privileged communications highly relevant to that state of mind, and where fairness and consistency require disclosure. He concluded that Soprema’s pleadings put its state of mind in issue because to succeed in its negligent representation claim it must have relied reasonably on the alleged misrepresentations and therefore Soprema’s understanding of its legal position was relevant to the issue of whether its reliance was reasonable. The chambers judge also found that Soprema would have an unfair litigation advantage if Wolrige had to defend the reliance claim without access to the privileged communications. As a result, the chambers judge ordered production of several categories of privileged communications between Soprema and its in-house and external counsel.

Soprema successfully appealed this decision.  The Court of Appeal found that the test the chambers judge relied on did “not adequately give effect to the near absolute protection of solicitor-client privilege mandated by the Supreme Court” of Canada.  The Court of Appeal held that waiver does not occur simply because a party’s state of mind as to its understanding of its legal position or advice it received was relevant to a material issue; if this were sufficient for waiver, the protection of solicitor-client privilege would be at risk any time a case involved reasonable reliance. The Court of Appeal found that before waiver can be implied, a party must voluntarily put into issue legal advice or its understanding of the law.  In the circumstances, Soprema had not voluntarily put its understanding of its legal position in issue based on its pleadings.

In its decision, the Court of Appeal confirmed the importance of solicitor-client privilege and that it “must be as close as absolute as possible to ensure public confidence and retain relevance”. The Court recognized that it is inevitable that upholding privilege where legal advice may have influenced a party’s state of mind will give a litigation advantage to the party claiming privilege because the other side will not have access to potentially relevant information about that party’s state of mind.  However, it found this advantage is not unfair because it arises from the protection of a fundamental principle of the legal system.

With thanks to articling student Rochelle Collette for her assistance.

How to Convert Your Canadian Judgment into Other Currencies: The Foreign Money Claims Act

Posted in Civil Litigation

Given that Canada, and BC in particular, has an economy driven largely by international trade, it will come as no surprise that many of those transactions are conducted in currencies other than the Canadian dollar.  What happens when you need to sue in Canada over a contract that deals in, for example, US dollars or Japanese Yen?  How and when do the courts address the conversion of foreign currencies?

In BC, this issue is addressed by the Foreign Money Claims Act (FMCA).  It provides the courts with authority to order that a judgment be stated in the amount of Canadian currency necessary to purchase the appropriate amount of “the other currency” based on the exchange rate of “a chartered bank located in British Columbia at the close of business on the conversion date.”  The test applied by the courts to invoke the FMCA is whether a judgment creditor will be “most truly and exactly compensated if all or part of the money payable” ought to be in a “currency other than the currency of Canada.” Measuring damages by using a foreign currency can apply in both contract and tort claims.

Section 1(2) of the FMCA provides that the conversion date is to be the last day before the judgment debtor makes a payment on the judgment.  However, where currencies have or may fluctuate wildly, this may result in a windfall to a judgment debtor. A recent case, Naturex Inc. v. United Naturals provides an example. United Naturals contracted to have Naturex deliver “plant extract products.” The shipments were payable in US dollars but, for reasons the court ultimately rejected, United Naturals stopped paying Naturex. Naturex sued to recover $248,000 US. Between the date the claim was commenced and the date of judgment, the value of the Canadian dollar fell against the US dollar. Unless adjusted, on the date of judgment, United Naturals would have received a “windfall” as it would require far fewer US dollars to pay the judgment in Canadian dollars. As a result, the court held that the most appropriate date upon which to order the conversion calculation was the date the claim was originally commenced, not the future date on which it may be paid.

As one appellate court reasoned:

The Court’s task is to select the most fair and equitable of the two possible conversion dates. It cannot be expected that either of these will allow perfect justice to be rendered. Given this, if any equities must fall unequally on the parties, they should fall more heavily on the wrongdoer than on the victim.

If your claim involves a foreign currency element or your damages may be better measured in a currency other than Canadian dollars, be mindful of the FMCA and be prepared to address the court on whether it ought to apply or not.

SCC Underscores the Importance and Protection of Privileged Communications before Administrative Bodies

Posted in Privacy

On November 25, 2016, the Supreme Court of Canada (the “SCC”) released two decisions that examine the protection of privileged communications before administrative bodies. The cases, which involve the Information and Privacy Commission of Alberta and Quebec’s Chamber de l’assurance de dommages, consider the ability of legislation to infringe on the established classes of solicitor-client and litigation privilege. Despite different administrative bodies, context, and types of privilege, in both cases the SCC emphasized the fundamental importance of such forms of privilege for the operation of our legal system and held that neither could be set aside absent clear and explicit legislative intent.

In Alberta (Information and Privacy Commissioner) v University of Calgary, 2016 SCC 53, the Information and Privacy Commission of Alberta ordered production of records from the University of Calgary which the University claimed were covered by solicitor-client privilege. The request was made pursuant to an application made under the Freedom of Information and Protection of Privacy Act (“FOIPP“) by a former employee of the University during the course of litigation with the University. The Commission sought to verify whether solicitor-client privilege was properly asserted by the University against the employee and issued a Notice to Produce Records to the University under section 56(3) of the Act. That section provides that a public body must produce records requested by the Commissioner “[d]espite…any privilege of the law of evidence.” The University refused to disclose the documents and applied for judicial review. Even though the litigation between the University and the employee concluded during the course of the proceedings, the case proceeded on a point of principle.

The specific issue considered by the SCC was whether the University could be compelled to disclose documents protected by solicitor-client privilege to the Commissioner or her delegate for review in order to determine the validity of the University’s claim of privilege.  Justice Côté, writing for the majority of seven sitting justices, held that section 56(3) of FOIPP does not require production of a document to the Commissioner when solicitor-client privilege is claimed.  That section failed to meet the “clear, explicit and unequivocal” language required to set aside solicitor-client privilege.

The majority reviewed and applied the well-established jurisprudence to the effect that solicitor-client privilege is “no longer merely a privilege of the law of evidence, having evolved into a substantive protection” and, according to some, having acquired “constitutional dimensions” and that it was to “remain as close to absolute as possible and should not be interfered with unless absolutely necessary.”  In analyzing the specific statutory provision and legislation in issue, the majority also emphasized that it was utilizing the “modern approach” to statutory interpretation and was thus “in no way. . .returning to the plain meaning rule” even though the Alberta Court of Appeal had concluded that an earlier SCC decision ousted the modern approach in favour of one of strict construction where solicitor-client privilege was in issue.

In Lizotte v Aviva Insurance Company of Canada, 2016 SCC 52, the SCC, with nine sitting justices, affirmed the findings of the courts below and concluded that litigation privilege cannot be rescinded absent an express statutory provision. In that case, the Quebec Chamber de l’assurance de dommages (the “Chamber”), an administrative body designed to ensure protection of the public in matters relating to damage insurance and claims adjustment, requested the disclosure of documents from an insurer involved in an investigation. The insurer refused on the basis that certain documents were protected by litigation privilege. The Chamber claimed that litigation privilege was lifted by operation of the statutory obligation for a party related to an investigation to produce “any… document.”

Justice Gascon, writing for the unanimous court, held that a party cannot be denied the right to claim litigation privilege “without clear and explicit legislative language to that effect.” Legislation with a blanket provision requiring production of “any… document” was not deemed sufficiently explicit to abrogate litigation privilege. The SCC rejected arguments that litigation privilege be limited due to an overriding public interest and that it no longer reflects the more co-operative nature of the courts.

With thanks to articling student James Scott for his assistance in writing this blog post.

SCC Rules Debtors Impliedly Consented to Disclosure of Mortgage Discharge Statement

Posted in Privacy

On November 17, 2016, the Supreme Court of Canada (the “SCC”) released its decision in Royal Bank of Canada v. Trang, 2016 SCC 50. This case involved the proper interpretation of certain disclosure exceptions in the Personal Information Protection and Electronic Documents Act, S.C. 2000, c.5 (“PIPEDA”).

Writing for a unanimous court, Justice Côté overturned the Ontario Court of Appeal’s decision and ordered the Bank of Nova Scotia (“Scotiabank”) to disclose the debtors’ mortgage discharge statement to the Royal Bank of Canada (“RBC”) for two reasons: (1) such disclosure was required to comply with a court order pursuant to s. 7(3) of PIPEDA; and, (2) the debtors had impliedly consented to such disclosure. The SCC held that each of these two reasons would have been enough on their own to allow the appeal.

A Mortgage Discharge Statement is Personal Information under PIPEDA

PIPEDA is a federal privacy statute that generally prohibits organizations from disclosing personal information, such as that within a mortgage discharge statement, without the knowledge and consent of the affected individual. Section 7(3) of PIPEDA provides a list of legislative exclusions to the requirement of knowledge of consent, including where disclosure is required to comply with an order made by a court to compel the production of information.

Exception to Requirement of Knowledge and Consent of the Affected Individual

Phat Trang and Phuong Trang (the “Debtors”) had defaulted on a loan from RBC. The Debtors owned property in Toronto (the “Property”), for which Scotiabank held a first mortgage. After obtaining judgement against the Debtors in the amount of $26,122.76, RBC filed a writ of seizure and sale of the Property with the sheriff in Toronto, Ontario. The sheriff was permitted to sell the Property pursuant to subsection 9(1) of the Execution Act, R.S.O. 1990, c. E. 24.  However, it refused to do so until receiving the Debtors’ mortgage discharge statement from Scotiabank. The mortgage discharge statement was necessary for the sheriff to know Scotiabank’s interest in the Property, and to determine the rights as between Scotiabank and RBC.

After RBC’s attempts to obtain the mortgage discharge statement from the Debtors were unsuccessful, RBC brought a motion to compel the Bank of Nova Scotia (“Scotiabank”) to produce the mortgage discharge statement.

Both the trial court and the Court of Appeal held that the order sought by RBC did not constitute an “order made by a court” under s. 7(3)(c) of PIPEDA because it would be circular reasoning to hold that 7(3)(c), which permitted disclosure to comply with a court order, also provided the authority to seek such an order in the first place. In rejecting this reasoning, the SCC overruled Citi Cards Canada Inc. v. Pleasance, 2011 ONCA 3, a case where the Ontario Court of Appeal held that a mortgage disclosure statement was “personal information” under PIPEDA but that none of the exceptions in s. 7(3) of PIPEDA applied.

Procedural Rule Impedes Access to Justice

A point of contention was whether RBC should be required to make another application relying on rule 60.18(6) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, the effect of which would be to require the mortgagee (in this case, Scotiabank) to produce the mortgage discharge statement.

Justice Côté agreed with the reasoning of dissenting Justice Hoy at the Court of Appeal, writing that it would have been “overly formalistic and detrimental to access to justice” to conclude that RBC must make another application specifying that it would be relying on rule 60.18(6)(a) to obtain the order to compel disclosure (at para. 30). RBC had already made multiple trips to court to determine the amount outstanding on the Debtors’ mortgage to enforce a valid judgement. While RBC has many legal and financial resources, Justice Côté wrote that ensuring access to justice requires paying attention to the plight of all litigants.

Reasonable Expectations Constitute Implied Consent

Schedule 1, cl. 4.3.6 of PIPEDA acknowledges that consent for the purposes of the statute can be implied consent when the information is “less sensitive”. Clause 4.3.5 of PIPEDA further states that in obtaining consent, the reasonable expectations of the individuals are relevant. The SCC held that while financial information is generally extremely sensitive, it is a reasonable expectation of a mortgagor that his or her mortgagee would be entitled to provide a mortgage discharge statement in this context.

Justice Côté wrote that the sensitivity of the current balance of the mortgage must be assessed in the context of the related financial information already in the public domain, the purpose served by making the related information public, and the nature of the relationship between the mortgagor, mortgagee, and directly affected third parties. Certain information is already made publicly available when mortgages are registered electronically on title in part to allow creditors with a current or future interest in the land to make informed decisions. As such, the SCC concluded that the Debtors impliedly consented to the disclosure of the mortgage discharge statement by Scotiabank to RBC.

With thanks to articling student Jada Tellier for her assistance.

Alberta court ruling signals companies can’t block shareholder vote

Posted in Commercial

On September 27, 2016, I blogged about the decision of the Alberta Court of Queen’s Bench blocking approval of an arrangement in Re Marquee Energy Ltd,. and the Alberta Oilsands Inc. In that decision, the Court held that Alberta Oilsands shareholders must be allowed a shareholders vote even though the only company being “arranged” was Marquee Energy Ltd. The appeal of this order was heard on November 9 and on November 14, the Alberta Court of Appeal allowed the appeal, with reasons to follow. I will blog further once the reasons for judgment are released.

Out-of–Province Class Actions Hearings – the Supreme Court of Canada has its say

Posted in Class Actions

On November 13, 2015, I blogged about the Supreme Court of Canada granting leave to appeal in two related cases: Endean v. British Columbia, 2014 BCCA 61 and Parsons v. Ontario, 2015 ONCA 158.  These cases raised the issue of the scope of inter-jurisdictional coordination for national class actions in Canada by determining whether or not judges of provincial superior courts were able to sit outside their home jurisdiction when supervising a settlement of a national class action.

On October 20, 2016, the Supreme Court answered this question. In Endean v. British Columbia, 2016 SCC 42, the Court ruled unanimously as to result. Mr. Justice Cromwell, writing the majority reasons, ruled that that judges in Ontario and British Columbia

“…have the discretionary statutory power … to sit outside their home provinces, and a video link to an open courtroom in the judge’s home jurisdiction is not required” (see paragraph 4).

The Supreme Court has, as a result, removed a shadow that was cast over national class actions which required management in multiple Canadian jurisdictions.

The decision is interesting from a number of perspectives. The Court found the authority to conduct hearings outside of a judge’s home jurisdiction in the class action legislation in Ontario and British Columbia. It did not find it necessary to rely upon the inherent jurisdiction of provincial superior courts to control their own processes.  However, this finding by itself would have left a void in provinces or territories whose class action legislation differed from Ontario and British Columbia (or where there is no class action legislation). In order to fill this gap and not create a patchwork across the country, the Court found that the statutory provisions reflected and confirmed the inherent jurisdiction of provincial superior court. So judges of other provinces or territories are able to rely on that jurisdiction, if necessary due to the absence of express statutory authorization, to hold hearings outside of their home jurisdiction.

The Court also discussed the “Open Court” principle and ultimately found it did not require a video link to a home jurisdiction open court in every case. Rather, whether a video link is necessary was left to the discretion of the judge.

Finally, the Court wrote that in exercising the discretion to determine whether to hold a hearing outside the home jurisdiction, a judge should (1) weigh the benefits and costs of an out-of-province proceeding, including the issue of fairness to the parties, availability of the media and the interests of justice; and (2) consider whether terms, such as a video link, should be imposed to serve the interests of justice.

In the end, the Supreme Court has provided a principled and practical solution to allow the effective management and administration of national class actions.

Setting the Rules for Televising Trials in BC

Posted in Civil Litigation, Civil Procedure

On September 9, 2016, the B.C. Supreme Court issued the first decision to consider the court’s new practice directive concerning the often contentious question of whether to permit a trial to be recorded for broadcasting.

In British Columbia, like other provinces in Canada, trials and other court proceedings are not typically recorded for the purpose of media broadcasts. In contrast to the American experience, the public cannot watch even high profile civil or criminal trials on television. An exception is the broadcasting of proceedings before the Supreme Court of Canada, which are typically available.

In 2015, the B.C. Supreme Court issued Practice Direction 48 (the “PD-48”), which describes the procedure for applications for authorization to video record or broadcast court proceedings. PD-48 states that video recordings or broadcasts are prohibited unless authorized by the court. It prescribes a form of notice of application to be used by media organizations and requires that such an application be filed not more than 90 days and not less than 14 days prior to the start of the hearing. PD-48 provides that the argument in support of the application must address (a) fair trial rights, (b) privacy rights, (c) witnesses who will testify, and (d) the court and the administration of justice. PD-48 also addresses other matters, such as the physical criteria for recording equipment personnel, specific restrictions on what may be recorded, and a mandatory delay in broadcasting.

In Cambie Surgeries Corporation v. British Columbia (Medical Services Commission), 2016 BCSC 1686, Justice Steeves considered the first application brought under PD-48. The applicant, Pacific Newspaper Group, sought to set up a daily feed to host recordings of all proceedings in the trial for the purpose of recording or broadcasting. The underlying case has attracted immense public interest because it involves a constitutional challenge to BC’s ban on private health care for medically necessary services covered by the public health system.

Justice Steeves dismissed the application, and his reasons for doing so give some helpful guidance for those bringing future applications on behalf of the media. His decision demonstrates the following:

  1. The application must be brought in a timely way. Steeves J. made clear at several points in his decision that the 14-day deadline imposed by PD-48 must be respected.
  2. The court will ensure that any order made under PD-48 presents a fair and objective portrayal of the proceedings. He rejected an earlier attempt to have the application heard because of concerns with “an issue of objectivity” in the initial materials. He dismissed the application to broadcast the opening statements because the plaintiff had already completed its opening, and it would not be balanced if the public saw only the opening statement of the defendants.
  3. The court will be sensitive to the privacy interests of parties and witnesses. Steeves J. dismissed the application to record testimony in the trial because individuals will be testifying about “very personal matters” regarding their health, their medical histories and issues of diagnosis and treatment. The application to record expert evidence on historical and policy matters was also dismissed because the cross-examination of those experts may involve putting individual cases to them.

Justice Steeves adjourned the application to record the closing submissions because the court would not hear those submissions for some time.

New BC Franchises Act will come into force on February 1, 2017

Posted in Franchises

The B.C. Ministry of Small Business and Red Tape Reduction announced today that the new Franchises Act and the Franchises Regulation will come into effect on February 1, 2017. The Franchises Act is intended to “provide important legal protections for British Columbia-based franchisees who operate a franchise”. The Act largely mirrors legislation already in force in Ontario, Alberta, Manitoba, New Brunswick and Prince Edward Island, though there are distinguishing features across jurisdictions.

One of the important elements of the Franchises Act is the obligation imposed on franchisors to provide broad disclosure to the prospective franchisee. The Franchises Regulation, approved and released October 3, 2016, outlines the disclosure requirements for franchisors doing business in BC. The full text of the Franchises Regulation can be found here.

If you have questions about how the new Franchises Act and the Regulation may impact your operations in BC, contact Laura Bevan.

Impossible is nothing: Ontario court finds franchise disclosure before franchise location and head lease are determined is no disclosure at all

Posted in Commercial, Franchises, Real Estate

It’s common practice in Canada to enter into a franchise agreement before determining the location of the franchise – the franchisor and franchisee typically agree that the franchisor will use “best efforts” to find a suitable location for the business, often with the franchisee’s input and participation. Once the location is determined, it is common for the franchisor (or an associated entity) to enter into a head lease for the premises and sublease to the franchisee, which provides the franchisor with, among other things, the ability to step into the premises and take over the business if necessary.

In a recent decision with wide-ranging implications across Canada, the Ontario Superior Court has all but foreclosed this practice. In Raibex Canada Ltd. v. ASWR Franchising Corp., (2016 ONSC 5575) the court held that the franchisor failed to meet the disclosure requirements in the Arthur Wishart Act (Franchise Disclosure), (2000, S.O. 2000, c. 3) because the location of the business, and therefore the terms of the head lease, were not known and therefore could not be disclosed.

Often, franchisors do not want to take on the obligations of a head lease without having a franchisee lined up to assume those obligations. Under the court’s reasoning in Raibex, the franchisor’s statutory disclosure obligations will not be met unless it is in a position to disclose a materially complete and materially accurate form of sublease, including the provisions said to be incorporated from the head lease. Franchisors may therefore find themselves in a tough spot when negotiating head leases.

In September 2012, the defendant franchisor in Raibex provided the principal of a prospective franchisee with a Franchise Disclosure Document for an AllStar Wings and Ribs franchise in Mississauga, Ontario. The location of the franchise had not yet been determined, and so no head lease was included in the disclosure document. A draft sublease was included  in the disclosure that provided that the franchisee accept all the terms, covenants, conditions and obligations in the head lease as negotiated by the franchisor and the landlord.

The Franchise Agreement was executed in November 2012. The location of the franchise – an existing restaurant space to be converted to an AllStar Wings and Ribs franchise – was determined by June 2013, and the franchisor’s development entity negotiated a head lease with the landlord. The head lease included a term requiring prepayment of five months’ rent, to be released one month per year for the first five years, together with a security deposit, for a total amount due of $120,000. Though not a party to the head lease, the franchisee “participated to some degree” in the negotiation of the head lease and was aware of the prepayment requirement. The head lease was dated September 19, 2013, and the sublease was signed October 23, 2013, though the court found that the franchisee did not receive a copy of the executed head lease until after the sublease had been executed.

The franchise opened in March 2014. In July 2014, the lessor invoiced the franchisee for the prepayment amount due under the head lease and outstanding construction costs. The franchisee refused to pay, and on July 25, 2014, served notice of rescission of the franchise agreement.

The franchisee claimed that the franchisor’s disclosure was deficient; the franchisor argued that it was impossible to disclose a head lease that did not yet exist.

The court found the franchisee was entitled to rescind the franchise agreement because the terms of the lease – comprised of both the head lease and the sublease – were critical components of franchise disclosure, and found as follows:

The focus of the AWA is on protecting the interests of franchisees. The mechanism for doing so is the imposition of rigorous disclosure requirements on franchisors and strict penalties for noncompliance. If a franchisor can make disclosure at a premature state and avoid those rigorous disclosure requirements, the purpose of the legislation is defeated.

If it is simply impossible to make proper disclosure because material facts are not yet known, then the franchisor is not yet ready to deliver the statutorily required disclosure document. The franchisor must wait – it does not get excused from its statutory obligations.

The court found it was immaterial that the franchisee knew no location had been selected at the time of disclosure, and participated in the selection of the location and the negotiation of the head lease, as the franchisee cannot waive the disclosure requirements of the AWA. If the disclosure document is materially inadequate, then statutory requirements simply have not been met.

The court also found that the franchisor’s disclosure of the potential franchisee’s costs was materially inadequate. The franchisor disclosed an “Estimate of Development Costs” in the disclosure document based on development from a “shell” premises, not the conversion of an existing restaurant space. The franchisor disclosed that the cost of converting an existing space may be significantly lower, but that the franchisor had “no reasonable means of estimating or predicting these costs with any certainty” and that costs could “vary dramatically from location to location.” The court found that this “broad disclaimer” was essentially an admission that the costs disclosure obligation in the AWA could not be met and held “[a]gain, if a location had been determined, these broad caveats based upon costs being “highly site-specific” would be unnecessary and proper disclosure would be made.”

The court found that these defects in disclosure were “egregious” and amounted to no disclosure at all. The franchisee was therefore entitled to rescind the franchise agreement.

The decision may be applied in any jurisdiction with similar statutory provisions. The B.C. Franchises Act is expected to be brought into force in early 2017.

Alberta Court orders Shareholders’ Vote of Non-Arranging Corporation in a Plan of Arrangement

Posted in Commercial

On September 14, 2016, Mr. Justice Macleod of the Court of Queen’s Bench of Alberta gave oral reasons for judgment in Re Marquee Energy Ltd. and The Alberta Oilsands Inc. (unreported, Action No. 1601-11071, Judicial Centre of Calgary).  In doing so, he ordered that The Alberta Oilsands Inc.’s (“AOI”) shareholders be required to vote to approve that arrangement in advance of it proceeding for final court approval.  He made this order notwithstanding the fact that the relationship between AOI and its shareholders was not proposed to be “arranged” by the Plan of Arrangement.

An arrangement had been proposed whereby shareholders of Marquee Energy Ltd. (“Marquee”) would be receive shares in AOI in exchange for their Marquee shares and, once the shares were exchanged and Marquee was a wholly owned subsidiary, a vertical amalgamation would occur between Marquee and AOI. A vertical amalgamation does not require a shareholder vote and no dissent rights are granted.  AOI argued that since nothing changes in the relationship between it and its shareholders that AOI’s shareholders were not entitled to vote as they were not being “arranged”.  The interim order, granted ex parte (without notice to any other party), only required a vote of Marquee’s shareholders on the proposed arrangement.

Smoothwater Capital Corporation (“Smoothwater”), which markets itself as “Canada’s Leading Activist Investor”, was a significant shareholder of AOI and had been actively suggesting to AOI that it distribute the significant cash it had on hand to its shareholders. Smoothwater brought an application asking the court to require AOI to hold a vote of its shareholders and to only allow the application for final approval of the Plan of Arrangement to proceed if AOI obtained approval by way of special resolution (66 2/3% approval). After the hearing, the Court granted what it termed Smoothwater’s “unusual” application.

The decision is striking from a number of perspectives. First, the Court reviewed the application on the basis of the Supreme Court of Canada’s decision in Re BCE Inc. (2008 SCC 69). Of course, BCE is a decision which sets out the test for the final approval of a Plan of Arrangement as opposed to an interim application seeking the court to order a vote as a condition for proceeding with the application for final approval.  Other than BCE, the Court cited no authority in support of the application before it or the order it made.

The Court then proceeded to measure the proposed Plan Arrangement against the test for final approval of the Plan of Arrangement – a pre-vetting of the Plan of Arrangement to determine if it could move forward without a vote of AOI’s shareholders. The Court first concluded that the only business purpose of the Plan of Arrangement was the merger of AOI and Marquee but that this purpose was not being accomplished by the Plan of Arrangement, which only made Marquee a wholly owned subsidiary.  The business purpose was not accomplished until the vertical amalgamation was finalized.  The Court was satisfied that the only reason the Plan of Arrangement was proposed was as an attempt to complete this transaction without an AOI shareholder vote and without providing dissent rights, both of which would be required if this was an amalgamation between arm’s length corporations.

As a result of this finding, the Court found that AOI should not be allowed to use the Plan of Arrangement to avoid safeguards that would otherwise be provided by other provisions of the Alberta Business Corporations Act (“ABCA”).

Surprisingly, the Court went further and found that the Plan of Arrangement was not put forward in “good faith” because it was done to avoid a vote of AOI’s shareholders and dissent rights. He found that the “good faith” aspect of the Plan of Arrangement final order approval test would only be met if AOI’s shareholders were given the right to vote and were provided with dissent rights as if this were an amalgamation under the ABCA.

Finally, the Court ruled that approval would not be “fair and reasonable” unless AOI’s shareholders had the right to vote and were granted dissent rights. He rejected the argument that AOI’s shareholders were not being “arranged”.  He found that they were to be diluted as a result of the shares issued to Marquee’s shareholders as a result of the share exchange included in the Plan of Arrangement and that this was sufficient to require the shareholder vote.

This decision falls outside current Canadian jurisprudence as well as current TSX Venture Exchange policies that apply to this transaction. This appears to be the first time in Canada that a court has ordered a vote in these circumstances and a number of the findings of the Judge run counter to other Canadian decisions.

I understand an appeal has been set for November, 2016. If it goes ahead, this is the type of case that may ultimately find its way to the Supreme Court of Canada.