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Ontario court clarifies dissent procedure in arrangement transaction

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.[1] 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:

  1. 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.
  2. 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.
  3. 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.[2]  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.

Timeline

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

[1] 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.

[2] The quotation is from paragraph 27. It was not noted, but it goes without saying, that this provision should be reflected in the circular.

Ontario court clarifies dissent procedure in arrangement transaction

CHANGING COST TRENDS IN CLASS ACTIONS

Introduction

In 2013, Justice Belobaba released five decisions that addressed legal principles relating to awards of costs on class action certification motions. These cases sent a clear message to the class action bar: “[a]ccess to justice, even in the very area that was specifically designed to achieve this goal, is becoming too expensive.”[1] Justice Belobaba observed that, in some cases, overzealous counsel may be partially responsible for this trend. Using similar reasoning and language in Rosen v BMO Nesbitt Burns Inc., [2] Crisante v DePuy Orthopaedics,[3] Dugal v Manulife Financial, [4] Brown v Canada (Attorney General), [5] and Sankar v Bell Mobility Inc., [6] (collectively called the “Pentalogy”) Justice Belobaba recommended changes to the prevailing approach to cost awards on certification motions that, if followed, would turn Ontario into a “no cost regime”.

Background

In 1982, the Province of Ontario sought recommendations from various legal organizations to consolidate all procedural and substantive matters relating to class actions into a single statute, which led to the enactment of the Class Proceedings Act, 1992 (the “CPA”). [7]

One of the recommendations that the provincial legislature received was from the Ontario Law Reform Commission (the “OLRC”, now the Law Commission of Ontario). The OLRC identified three major goals of a class action regime: judicial efficiency; increased access to courts; and behaviour modification. In order to achieve these objectives, the OLRC recommended enactment of class action legislation with a “no-costs” regime as a general rule, whereby costs would not be awarded to any party in a class action at any stage of the proceedings, including an appeal, in order to meet the goals of judicial efficiency and increased access to justice. [8]

Justice Belobaba had these objectives in mind when he wrote his decisions in the Pentalogy. Justice Belobaba wrote that over the years he had spoken to many members of the class actions bar, and had come to appreciate and endorse the implementation of a “no-costs” regime that had been supported by the OLRC. His Honour’s reasons in Rosen included the following mea culpa:

I also wish that the recommendations on costs as set out in the Ontario Law Reform Commission’s Report on Class Actions had been accepted. Instead, the provincial legislature decided to adopt the views of the Attorney-General’s Advisory Committee and continue the “costs follow the event” convention for the very different world of class actions as well. I was a member of that Advisory Committee. I now realize that I was wrong and that the OLRC was right. I understand that the provincial Law Commission is undertaking a review of the Class Proceedings Act, including the costs provisions. Hopefully, our mistake will be corrected. [9]

Analysis

Justice Belobaba provided the court with statistics and directions that the judges should follow as part of the determination of costs on class certification motions. The starting point of Justice Belobaba’s analysis was Rule 57.01 of the Rules of Civil Procedure, which lists various factors that the court may consider in exercising its discretion to award costs. According to Justice Belobaba, the biggest limitations in the current jurisprudence on costs are the absence of reliable metrics and unclear analysis of the principles relied upon by the court while awarding costs. In order to create a clear and complete regime for awarding costs on such motions, Justice Belobaba:

1. Identified factors that the court should consider while deciding a costs award for a certification motion; and

2. Performed an analytical review of costs awards for certification motions over the past six years and developed a chart with various costs ranges for specific certification motions. [10]

In laying down his directions, Justice Belobaba recognized that a certification motion is one of the most important steps in any class action litigation and it requires a lot of preparation. Therefore, inevitably, the cost awards are higher in certification motions than in most other motions. Nonetheless, the costs must be reasonable. In order to determine whether costs are reasonable, Justice Belobaba suggested that the courts should take into account the amount of costs that an unsuccessful party could reasonably expect to pay and also undertake a comparative analysis of costs awarded in closely comparable cases. Above all, the courts should keep in mind that a fundamental objective of the CPA is to provide enhanced access to justice. [11]

In order to ensure that access to justice is achieved, Justice Belobaba also suggested that courts should rely less on the costs outlines submitted by counsel. Justice Belobaba indicated that he would accept cost outlines, but would not ask the lawyers to submit their actual dockets. After ensuring that the cost outlines are not unreasonable, he stated that he would do a comparative historical review of costs in order to make the process more transparent. Justice Belobaba collected data from the cost awards rendered in the past six years and stated that:

a. For the plaintiff’s side, on average, if the costs award sought was less than $500,000 then the amount awarded would be 63% of the costs sought. However, if the costs sought were more than $500,000, then the costs awarded would be 62% of the costs sought.

b. For the defendant’s side, on average, if the costs award sought was less than $500,000 then the costs awarded would be 50% of the costs sought. However, if the costs sought were more than 500,000, then the costs awarded would be 39% of the costs sought. [12]

Applying the principles and the analysis of past costs awards described above, Justice Belobaba assessed costs sought in each of the cases in the Pentalogy. Justice Belobaba reviewed each case to determine whether the lawyers charged their time at rates consistent with the suggested hourly rates [13] or if they sought excessive costs. Justice Belobaba then compared the costs being sought with similar cases and reviewed each of the cases in the light of his chart of prior costs awards. Above all, in each of the decisions, he sought to ensure that the costs awarded were fair and reasonable and satisfied the objectives of the CPA. [14]

Conclusion

Whether Justice Belobaba’s suggestions and directions usher in a no cost regime remains to be seen. A decision of Justice Perell released soon after the Pentalogy signals that the courts may be adopting a more conservative approach towards awarding costs. [15] In Drywall Acoustic, Justice Perell echoed the concerns raised by Justice Belobaba and stated:

{16} While I would not express the point the same way as do the Plaintiffs, the Plaintiffs make a pertinent point in their observation that the costs in class proceedings raise access to justice concerns for plaintiffs. I agree, but I would add that access to justice is an entitlement of defendants just as much as it is for plaintiffs and the spiralling costs in class proceedings have become a threat to the viability of the class action regime […]

{18} The assessment of costs (and of lawyer’s fees) must adapt to a changing and evolving class action regime and every case requires individual treatment. [16]

By tightening the costs strings, courts potentially reduce the risk for plaintiffs in class actions to bring forward their claims and for plaintiffs’ counsel to pursue these claims. Further, a more restrictive approach to cost awards for certification motions may also make investing in plaintiffs’ class action litigation more attractive to third party investors and funders. However, some members of the plaintiffs’ class action bar have argued that by reducing costs awards, access to justice may actually be further reduced. [17] Some plaintiffs’ counsel have also suggested that, in fact, plaintiffs’ counsel principally bear the costs of class action litigation, and Justice Belobaba’s costs regime could result in plaintiffs’ counsel making a much greater investment in time and disbursements on certification motions than they could ever recover from the defendants. [18] Therefore, a more restrictive approach to awards of costs may increase the risk borne by plaintiffs’ counsel and force them to be more cautious before accepting the professional obligations associated with representation of the representative plaintiff in a class action.

On the other hand, in Justice Belobaba’s analysis of past costs awards, there is a greater disparity between the costs sought and those awarded to a successful defendant on a certification motion than between amounts sought and awarded to a successful plaintiff. For the defendants who are forced to litigate a class claim, which has yet to be tested on its merits, the prospect of a reduced recovery of costs would increase the financial risks that defendants’ lawyers or third party investors have to bear. Further, the risk of high costs awards have always acted as a reminder to plaintiffs of the penalty they may face for bringing an unmeritorious action. Therefore, reducing costs consequences could leave defendants more vulnerable to unmeritorious law suits, and possibly hold them hostage to legal proceedings without the plaintiffs risking significant financial consequences if they are unsuccessful.

How the costs regime for certification motions develops, and whether Justice Belobaba’s Pentalogy will affect the checks and balances for parties in class action litigation, can only be ascertained once other judges have had the opportunity to consider and apply, or choose not to apply, the principles laid down in the Pentalogy. However, Justice Belobaba’s Pentalogy has certainly succeeded in bringing back attention to one of the core objectives of class actions: providing access to justice at reasonable cost.

 

[1] Rosen v. BMO Nesbitt Burns Inc., 2013 ONSC 6356 [Rosen] at para 1.

[2] Ibid.

[3] Crisante v. DePuy Orthopaedics, 2013 ONSC 6351 [Crisante].

[4] Dugal v. Manulife Financial, 2013 ONSC 6354 [Dugal].

[5] Brown v. Canada (Attorney General), 2013 ONSC 6887 [Brown].

[6] Sankar v. Bell Mobility Inc., 2013 ONSC 6886 [Sankar].

[7] Class Action Proceedings Act, S.O. 1992, CHAPTER 6

[8] Ontario Law Reform Commission, Report on Class Actions, Ministry of the Attorney General Volume 1, 1982.

The OLRC recommendations stated:

s. 2(1) party and party costs should not be awarded to a party at the certification hearing or at the common questions stage of a class action, except

(a) at the certification hearing, where it would be unjust to deprive the successful party of costs, or

(b) in the event of vexatious, frivolous, or abusive conduct on the part of any party” Nonetheless, the legislature did not adopt the OLRC’s recommendations in this regard.

[9]Rosen, Supra note i at para. 2.

[10] Rosen, Supra note 1 at paras. 4-5.

[11] Ibid. at para 4.

[12] Ibid. at para. 5.

[13] The suggested guidelines for determining hourly rates for lawyers depending upon their years of experience can be found in the Information for the Profession released by the Costs Subcommittee of the Rules of Civil Procedure.

[14] Ibid. at paras. 8-17.

[15] The Trustees of the Drywall Acoustic Lathing and Insulation Local 675 Pension Fund v. SNC Group Inc., 2013 ONSC 7122. [Drywall Acoustic].

[16] Ibid. at para. 16 and 18.

[17] Kristen A. Thoreson, “Class Action Costs Orders Aim to Provide Greater Access to Justice”, The Advocates Society

[18] Julius Melnitzer quoting Kim Orr, “Judge takes aim at class counsel in lowering costs”, The Law Times, November 18, 2013

 

CHANGING COST TRENDS IN CLASS ACTIONS

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