A recent Ontario decision shines a light on the ability of shareholders to dissent in respect of a corporate transaction. This right, also known as an appraisal remedy, allows shareholders opposed to a business deal to opt out and be paid the “fair value” of their shares. It is available in certain corporate transactions, including court-approved arrangements (colloquially, “plans of arrangement”) under Ontario law. Having a small number of dissenting shares is often a condition to completing such a transaction.
The decision relates to a plan of arrangement pursuant to which a publicly listed Ontario company was restructured. It is focused in part on the distinction between being a registered shareholder and a beneficial owner of shares. Registered holders are those whose names appear on the company’s register (i.e. list) of shareholders, while beneficial owners hold shares through an intermediary, such as a broker. Corporate statutes provide that only registered holders are entitled to dissent rights.
The facts and arguments of the case are described below. Three takeaways are:
- Absent clear language to the contrary, a beneficial owner of shares who wishes to dissent by re-registering the shares in its own name may do so after (or, of course, before) the record date in respect of voting on the transaction.
- At least for Ontario companies, it may be possible to limit dissent rights, if the company wishes to do so, by requiring that only registered holders as of the record date may dissent.
- Dissent rights in an arrangement under Ontario’s Business Corporations Act (the “OBCA”) are not provided for by section 185 (the dissent provisions) but rather by the interim court order, which is made per section 182 (the arrangement provisions).
Facts and Argument
The company, Partners Value Investments Inc., called a special meeting of shareholders to consider an arrangement pursuant to which it would be restructured as a limited partnership. Shareholders would receive partnership units in exchange for their shares. The company followed the normal procedure of obtaining an interim order in respect of the transaction, which included the provision that registered shareholders could dissent by notifying the company in writing two days prior to the meeting. This two day pre-meeting requirement is typical.
The information circular that was sent to shareholders in respect of the transaction explained, among other things, the two methods by which a beneficial owner could dissent: by having the shares re-registered in its name and delivering a notice of dissent itself (“method 1”), or by instructing its intermediary, as registered holder, to dissent in respect of its shares (“method 2”). This is also typical, and reflective of the OBCA dissent provisions.
The applicant, a beneficial owner of shares, sought to dissent via method 1. It therefore had the shares it owned re-registered in its name, and delivered the notice of dissent within the time period described in the interim order and circular. The company rejected the purported dissent on the grounds that the shareholder was not a registered holder as of the record date, even though it was a registered holder when it delivered its notice of dissent in accordance with the requirement to do so two days in advance of the meeting.
The company’s rationale was that section 185 of the OBCA, the dissent provision, provides that only shareholders entitled to vote on a matter are able to dissent, and only registered shareholders as of the record date are entitled to vote on the arrangement. Beneficial owners don’t vote directly, but rather instruct their intermediary (e.g. their broker) as to how to vote on their behalf.
Findings (and One Quirky Fact)
The court rejected the argument on a few grounds, of which this summary focuses on one: section 185 provides the right to dissent in respect of certain corporate procedures, excluding arrangements. The shareholder’s right to dissent stems rather from the interim order, which was made pursuant to section 182, the arrangement provision of the OBCA. The order referred to section 185, but in relation to the procedure for dissenting, rather than as to who is entitled to dissent. This is typical wording for an interim order of this nature.
There is at least one unusual fact that was favourable to the shareholder. The record date preceded the announcement of the arrangement and the filing and mailing of the circular, per the timeline below. This is not typical, and the result was that it was impossible for a beneficial owner to have shares re-registered in their own name (or to do anything else) after learning of the arrangement but before the record date. As such, if only registered shareholders as of the record date could dissent, it would have made no sense for the circular to have described (as it did) method 1 as a viable dissent option.
Analysis and Commentary
The decision implies that the company could mandate that only registered holders as of a record date are able to dissent, “by including appropriate language” in the order and the plan of arrangement. This appears to open to door for companies to take a more restrictive approach to granting dissent rights than is current practice. The decision does not explicitly or implicitly sanction limiting the right of beneficial shareholders to dissent via method 2 (having an intermediary dissent on their behalf). It does, however, raise the issue of whether other aspects of the timing conventions around dissenting in an arrangement transaction could be subject to change.
Court decisions in respect of dissent procedures are rare, but dissent rights are frequently granted in arrangements and in certain other transactions. The guidance provided in this decision is therefore valuable to companies, shareholders and their advisors.
March 17, 2016 – notice of meeting and record date (two subsequent amendments, March 28 and April 20 to clean up technical stuff)
April 15, 2016 – record date
April 25, 2016 – news release announcing arrangement; arrangement agreement filed
May 3, 2016 – meeting materials filed on SEDAR
May 19, 2016 – shares beneficially owned by applicant re-registered in its own name
May 24, 2016 – notice of dissent delivered, per the requirement of two days in advance of the meeting
May 26, 2016 – meeting held
 The plan of arrangement, formally speaking, is a document appended to the main agreement between the transaction parties, laying out the procedure pursuant to which the transaction will be effected.
 The quotation is from paragraph 27. It was not noted, but it goes without saying, that this provision should be reflected in the circular.