Nova Scotia that will result upon the proclamation of the. Investor Protection Act, S.N.S. 1990, c. 15 (the "Investor

Transcription

1 One of the more significant changes to Company law in Nova Scotia that will result upon the proclamation of the Investor Protection Act, S.N.S. 1990, c. 15 (the "Investor Protection Act") is the addition to the Companies Act, R.S.N.S. 1989, c. 81 (the "Companies Act") of a new Section 135A. Pursuant to new Section 135A, the provisions of the Third Schedule to the Companies Act (the "Third Schedule") (with the exception of Sections 1, 11 and 13) will be applicable to all companies incorporated pursuant to the Companies Act, whether incorporated before or after the coming into force of Section 135A. Historically, the application of the Third Schedule has been limited to those companies continued under the laws of Nova Scotia which originate as Canada Business Corporations Act, R. S. C. 1985, c. C-44 ("CBCA") incorporations. The provisions of the Third Schedule in large part mirror those portions of the CBCA which confer the right to institute derivative actions, the oppression remedy and the right of dissent and appraisal in connection with certain prescribed fundamental changes. The focus of this paper will be on the latter right of dissent and appraisal and how it will operate to convey new rights to Nova Scotia shareholders.

2 - 2 - The Third Schedule was originally added to the Companies Act to satisfy the concern of the Director, Corporations Branch, that upon continuance out of the federal jurisdiction and into Nova Scotia, the minority shareholders of a CBCA company not be deprived of the statutory rights afforded to such shareholders pursuant to the CBCA. In many instances, therefore, case law considering the equivalent provisions of the CBCA will arguably be relevant in applying the Third Schedule in Nova Scotia. Case law dealing wi th the legislation of other provinces in Canada where CBCA-type provisions have been adopted will, to varying degrees, have similar application. Historically the protection afforded to minority shareholders of Nova Scotia companies has been limi ted to those rights conferred by the common law. The new rights that will be afforded pursuant to Section l35a will significantly expand the remedies currently available to shareholders of Nova Scotia companies. Section 2 of the Third Schedule confers the right of dissent and appraisal. This right will entitle a shareholder of a Nova Scotia company, in prescr ibed circumstances, to dissent from a course of action proposed by the company and to demand that the company pay fair value for the shares beneficially owned by that dissenting shareholder.

3 - 3 - The Triggering Events In order to claim the right of dissent and appraisal the onus is on the shareholder seeking the remedy to establish that one or more events prescribed by the Third Schedule have occurred. The types events which "trigger" the right of dissent pursuant to the Third Schedule are all actions by a company which will result in significant or fundamental changes to the company's activities, organization, assets or capital structure. These triggering events are enumerated in Sections 2(1) and 2(2) of the Third Schedule. The right of dissent is available to a holder of shares of any class where a court order conferring such right of dissent is granted in connection with an application made for court sanction of a compromise or arrangement made by a company wi th its creditors pursuant to Section 130 of the Companies Act. The right of dissent is also available to a holder of shares of any class if the company of which he is a shareholder resolves to: (a) amend its memorandum or articles to add, change or remove any provisions restr icting or constraining the issue or transfer of the shares of that class;

4 - 4 - (b) amend its memorandum or articles to add, change or remove any restriction upon the business or businesses that the company may carryon; (c) amalgamate wi th another company, other than any wholly owned subsidiary of the company; (d) (e) be continued under the laws of another jur isdiction under Section 133(5) of the Companies Act; or sell, lease or exchange all or substantially all its property other than in the ordinary course of business of the company. Finally, a right of dissent is available to a holder of shares of any class or series of shares entitled to vote separately as a class or ser ies, where the company resolves to amend its memorandum or articles to alter the capital structure of the company in any of the following manners: (a) (b) increase or decrease any maximum number of authorized shares of such class, or increase any maximum number of authorized shares of a class having rights or privileges equal or superior to the shares of such class; effect an exchange, reclassification or cancellation of all or part of the shares of such class; (c) add, change or remove the rights, privileges, restrictions or conditions attached to the class of such shares and, without limiting the generality of the foregoing, (i) remove or change prejudicially rights to accrued dividends or rights to cumulative dividends, (ii) add, remove or change redemption rights, prejudicially (iii) reduce or remove a dividend preference or a liquidation preference, or

5 - 5 - ( i v) add, remove or change prejudicially conversion privileges, options, voting, transfer or pre-emptive rights, or rights to acquire securities of the company, or sinking fund provisions; (d) (e) increase the rights or privileges of any class of shares having rights or privileges equal or superior to the shares of such class; create a new class of shares equal or superior to the shares of such class; (f) make any class of shares having rights or pr ivileges infer ior to the shares of such class equal or superior to the shares of such class; (g) (h) effect an exchange or create aright of exchange of all or part of the shares of another class into the shares of such class; or constrain the issue or transfer of the shares of such class or extend or remove such constraint. There is one general exception. If an amendment to the memorandum or articles of a company of the nature noted above is effected by a court order made under the author i ty of another Act, or pursuant to the oppression remedy afforded by Section 5 of the Third Schedule, no right of dissent is available to the shareholders. A br ief review of the foregoing list reveals the very broad range of corporate actions which will trigger the new right of dissent and appraisal. The right of dissent and appraisal conferred by the Third Schedule seeks to prevent undue hardship on the minority shareholders of a company by facilitating a means for those shareholders who dissent from a proposed action to

6 - 6 - "cash in" at a fair price. Transactions, such as the sale of corporate assets, the reorganization or alteration of a company's capital structure or an amalgamation, which previously required the approval of the shareholders of a Nova Scotia company by special resolution, may now have more significant consequences to a company if the minority chooses to dissent. One particular triggering event which has been considered recently in the case law is the resolution by a company to "sell, lease or exchange all or substantially all its property other than in the ordinary course of business of the company". Establishing the presence of this tr igger ing event requires the dissenting shareholder to prove not only that "all or substantially all" of the property of the company has been disposed of, but also that such disposition is outside "the ordinary course of business of the company". In two recent cases, considering a statutory provision which is largely the same as that contained in the Third Schedule, the Saskatchewan Court of Appeal concluded that to determine whether a transaction consti tutes the sale of "all or substantially all" it is insufficient to analyze the transaction on a purely quantitative or mathematical basis. Consideration must also be given to whether the proposed transaction involves a sale of all or substantially all of the assets of a company on a qualitative basis. It is not sufficient, or indeed

7 - 7 - conclusive, for the subject transaction to involve the disposition of a majority of a company's assets in terms of their monetary value. Rather, one must look to whether the proposed disposi tion will effectively destroy the corporate business of the company. (See: Holdings Ltd. v. Fayerman Brothers Limited [1985] 2 W.W.R. 647 (Sask. Q.B.); affd. at [1986] 2 W.W.R. 754 (Sask. C.A.) and Martin v. F.P. Bougualt Industries Air Seeder Division Ltd., formerly known as F.P. Bougault Industries Ltd., (1987) 38 B.L.R. 90 (Sask. C.A.». In the Martin case, Sherstobitoff JJ.A. reviewed the case law referred to in Holdings and concluded at page 94: "A common feature of all of the cases above referred to and in which the Court found a sale of all or substantially all assets is that, although the corporations sold a relatively small fraction of their assets, in each case, the assets sold were the operating assets. The effect of the transaction in each case was to fundamentally alter the nature of the Company from an operating company to a holding company and had the effect of destroying the company's main business". Wi th respect to the second part of the test, Vancise, J.A. commented in Holdings (see page 757) that the determination of whether the proposed sale is outside the regular course of business of a company is a question of fact requiring the decision maker to first consider what the company's regular

8 - 8 - business is. The Dissent and Appraisal Mechanism A shareholder who follows the procedure set out in the Third Schedule will, upon the triggering event being approved by the shareholders or the court order being granted (as the case may be), be entitled to be paid by the company the fair value of the shares in respect of which he dissents (Section 24). It is important that the procedural steps prescribed in the Third Schedule be adhered to by the dissenting shareholder rigorously. Where shareholder approval is required in respect of a particular triggering event the company is generally required to commence the process by circulating to its shareholders a notice of meeting and/or management proxy circular. Section 2(3) of the Third Schedule requires the company to include in the Notice of Meeting and/or Proxy Circular a statement advising its shareholders that any shareholder who dissents from the proposed action is enti tied to be paid the fair value of his shares in accordance with the Third Schedule. Failure to include this statement in the Proxy Ci rcular or Notice of Meeting does not, however, invalidate the meeting or the business transacted thereat.

9 - 9 - Unless notice of the purpose of the meeting or the dissent right has not been given, the dissenting shareholder is required to notify the company in writing, at or before the meeting, that he objects to the resolution ("Objection Notice") (Section 2(6». Within ten (10) days of the date upon which the resolution respecting the proposed action is adopted by the shareholders the company is required to send to the dissenting shareholder notice that the resolution has been adopted. Such notice is not required to be given by the Company, however, if the dissenting shareholder has voted in favor of the resolution or has withdrawn his Objection Notice (Section 2(7». After the dissenting shareholder receives the company's notice or, if he does not receive the company's notice, wi thin twenty (20) days after he learns that the resolution has been adopted, he must send to the company a written notice (the "Demand for Payment") containing: (a) (b) his name and address; the number and class of shares in respect of which he dissents; and (c) a demand for payment of the fai r value of such shares (Section 2(8».

10 After filing the Demand for Payment, the dissenting shareholder ceases to have any rights as a shareholder other than the right to be paid fair value. Full shareholder rights can only be reinstated to a dissenting shareholder if a) he withdraws his Demand for Payment before the company has made an offer to pay for the shares; or b) the resolution amending the memorandum or articles is revoked, the amalgamation or continuance is terminated or the sale, lease or exchange is abandoned. (Section 2(12». Wi thin thirty (30) days after sending the Demand for Payment, the dissenting shareholder must tender his shares to the company or its transfer agent. Failure to do so will nullify his right to be paid the fair value of his shares. Upon receipt of the dissenting shareholders' share certificates, the company (or transfer agent) is required to endorse on the certificates a notice that the holder is a dissenting shareholder. The certificates are then returned to the dissenting shareholder. (Section 2(11». No more than seven (7) days following the later of the day on which the action approved by the resolution is effective or the day the company receives the shareholder I s Demand for Payment, the company is required to send to each dissenting shareholder:

11 (a) (b) a written offer to pay for his shares in an amount considered by the directors of the company to be the fair value thereof, accompanied by a statement showing how the fair value was determined; or if the company is unable to meet the solvency test in Section 2(26), a notification that it is unable lawfully to pay the dissenting shareholder for the shares. (Section 2(13». The company is obliged to make the same offer on the same terms to every shareholder of the same class or ser ies. (Section 2(14». The dissenting shareholder has thirty (30) days to accept the company's offer. The company then has ten (10) days to make payment. (Section 2(15». If an offer is not made by the company, or the company's offer is not accepted by the dissenting shareholder, the company may, within fifty (50) days after the action approved by the resolution or court order becomes effective (or wi thin such further period as the court may allow), apply to the court to fix "a fair value" for the shares of any dissenting shareholder. (Section 2(16». If the Company does not make an application to court pursuant to Section 2(16), any dissenting shareholder is free to do so within a further period of twenty (20) days (or within such further period as the court may allow) (Section 2(17».

12 The Third Schedule does not designate the proper court of competent jur isdiction for the purposes of the application described in Section 2(16) or 2(17). The equivalent provision of the CBCA stipulates that the proper court is either the court in the jurisdiction where the company has its Registered Office or the Court in the province where the dissenting Shareholder resides provided that the company carries on business in that province. If the company or a dissenting shareholder applies to the court for relief in accordance with Section 2(16) or 2(17), all dissenting shareholders who have not already had their shares purchased by the company are automatically joined as parties and are bound by the court I s decision (Section 2 (19) ) The company is required to give notice to all remaining dissenting shareholders of the particulars of the court application and of their right to appear and be heard (Section 2(19». As indicated above, the obligation of a company to pay fair value to its dissenting shareholders is subject to the overall restriction that a company is prohibited from making any such payment if in order to do so there are reasonable grounds for believing that: (a) the company is or would after the payment be unable to pay its liabilities as they become due; or

13 (b) the realizable value of the company's assets would thereby be less than the aggregate of its liabilities (Section 2(26». If a company is unable lawfully to pay its dissenting shareholders the amount prescribed by the court, the company must, within ten (10) days of the court order, notify each dissenting shareholder that it is unable to lawfully pay. The dissenting shareholder may, within thirty days thereafter, either wi thdraw his notice of dissent, in which case his shareholder rights are reinstated, or retain his status as a claimant against the company, in which case payment must be made to him by the company as soon as the company is lawfully able to do so. If the dissenting shareholder chooses the latter option, his right to be paid in the event of a liquidation will rank subordinate to the rights of creditors of the company, but in priority to the company's (non-dissenting) shareholders (s.2(25». The appraisal remedy contained wi thin the Third Schedule is afforded to a dissenting shareholder in addi tion to any other right or remedy available at law. For example, an injunction may be sought by a dissenting shareholder in circumstances where the company's abili ty to pay fair value may be jeopardized by the proposed triggering event. Interim relief will be granted where the court perceives a substantial danger that the assets of the company will be significantly depleted if the proposed change is allowed to proceed prior to the conclusion of the procedural steps associated with the appraisal right (see:

14 Bradley Resources Corporation v. Kelvin Energy Ltd. (1985}5 W.W.R. 763 (Alta. C.A.}}. The Determination of "Fair Value" The amount paid to a dissenting Shareholder in respect of the "fair value" for his shares may ultimately be arrived at in one of two ways. The company may submi t a wr i t ten offer to purchase the dissenting shareholders I shares in an amount considered by its Board of Directors to be the fair value. If such offer is acceptable to the dissenting shareholder, the matter is concluded. Al ternati vely, failing agreement between the parties, either may apply to the court for a determination of fair value. No definition of "fair value" is contained within the Third Schedule and little statutory guidance is given as to how "fair value" is to be determined. The Third Schedule does, however, fix the time frame for the determination of fair value. Pursuant to Section 2(4) of the Third Schedule, the fair value amount payable to a dissenting shareholder is required to be determined as of the close of business on the day before the resolution effecting the triggering event was adopted or, in the case of a court order sanctioning a compromise or arrangement, on the day before the order was granted (Section 2(4)}.

15 The Third Schedule does not expressly indicate whether fair value should take into account the effect or anticipated effect of the proposed triggering event itself. It is worthy of note, however, that an earlier version the CBCA expressly stipulated that fair value should exclude such considerations. This earlier CBCA provision was deleted in a subsequent amendment to the Act and, as a consequence, has left open the question whether the legislators intended to encourage the courts to freely exercise their judicial discretion. section 2(4) of the Third Schedule states that a dissenting shareholder who follows the procedure prescr ibed by the Third Schedule is (subject to Section 2(26» entitled "to be paid by the company the fair value of the shares held by him " (emphasis mine). It is interesting to note, in contrast, that Section 2(16) states that, if the company and dissenting shareholder cannot settle the matter themselves, apply to the court "to fix a fai r value for the company may the shares " (emphasis mine). Is there one fair value to which the dissenting shareholder is entitled, or many? In Holdings Ltd. v. Fayerman (1987), 57 Sask. R. 41 (Q.B.) Mr. Justice Hrabinsky considers the decision of Mr. Justice Greenberg in Re Domglas Inc.: Domglas Inc. v. Jarislowsky (1980), 13 B.L.R. 135 (Que. S.C.); affd D.L.R. (3d) 521 and states the following at page 144:

16 "Greenberg, J., after pointing out that the Canada Business Corporations Act does not define the term 'fair value' as is the case in the Business Corporations Act of Saskatchewan, went on to review dictionary and other definitions of 'fair value' and then at p. 164 stated: 'Thus, a 'fair' value is one which is just and equitable. That terminology contains within itself the concept of adequate compensation (indemnity), consistent with the requirements of justice and equity. This Court is therefore exercising an equi table, as well as a legal, jurisdiction. Moreover, it must exercise its judicial discretion in order to arrive at 'a', not 'the' fai r value.' And further on the same page he stated: 'The distinction between the def ini te article 'the' and the indefinite article 'a' is too elementary to require elaboration here. 'The' fair value implies that there is one such specific value. 'A' fair value implies that there is not one, and only one, sacrosanct fair value, but rather var ious possible fai r values; i. e., a range within which 'a' fair value is to be fixed by the Court.' From the foregoing, I conclude 'a fair value' is one which is just and equitable and contains within itself the concept of adequate compensation. It implies that there is not only one fair value, but a range within which a fair value is to be fixed by a court." Mr. Justice Hrabinsky also concluded in Holdings that neither party bears any onus of proof. Rather, the duty is

17 on the court to determine a fair value. In discharging that duty Section 2 (21) of the Third Schedule expressly provides that the court is free to appoint one or more appraisers to assist the court in fixing a fair value. There are a number of cases dealing with the subject of which valuation technique the Court should apply in fixing fair value. The major i ty of cases agree that no single valuation technique will have universal application. The appropriate valuation method will largely depend upon the individual circumstances of the subject company. In Kelvin Energy Ltd. v. Bahan (1987), 79 A.R. 259 (Q.B.), Forsyth, J. concludes on the basis of the available authorities that there are four generally accepted methods of valuation available to the Court: 1. market price; 2. net assets approach; 3. earnings or investment value approach; 4. a combination of the foregoing. The market pr ice method fixes the fai r value as the price per share that would be arrived at in an open market between a willing buyer and seller negotiating at arms length. As a result, this test is not readily applicable in circumstances

18 where there is no actively trading market for the company's shares. The net assets approach uses the liquidation value of the subject company to determine fair value. This method may be useful where the subject company is a holding company. The investment value method attempts to determine share value on the basis of the anticipated future earnings of the subject company. The theory behind this method of valuation is that the value of a company today is directly related to its earnings expectations. The combination method utilizes a combination of the foregoing 3 methods. Its usefulness lies in its recognition that any method of appraisal is inherently subjective. This method may be the most preferable if the subject company has different assets which are sui ted to different valuation techniques or if different techniques result in significantly different valuations for the same asset. A number of other factors may be relevant to the court in determining fair value. Debate continues as to whether or not allowances in value should be made for a minor i ty discount (a reduction in value because the acquired shares do not constitute

19 a controlling interest) or an expropriation premium (an increase in value to compensate the minority for being forced out). Other factors which may impact on a court's determination of value include changes in share value that have occurred since the triggering event; the relative good or bad faith in the conduct of the parties and increases in value resulting from anticipated future events or momentum. In all cases, the court has the discretion pursuant to Section 2 (18) to award a reasonable rate of interest, on the amount determined by the court to be payable, from the effective date of the triggering event until the amount is actually paid by the company. Unlike under the CBCA, there is no specific provision in the Third Schedule relating to the award costs, although the Third Schedule expressly provides that a dissenting shareholder is not required to give security for costs (Section 2(18». In Re Domglas Inc., the court stated the following at page 234 with respect to the award of costs in connection with an application to determine fair value: "The Court is of the opinion that one of the functions of the awarding of taxable court costs in proceedings under the provisions of s.184 C.B.C.A., should be to encourage other

20 corporations and their holders, on the one hand offers and, on the other reasonable expectations." dissenting shareto make realistic hand, to entertain The proposed extension of the application of the Third Schedule to all Nova Scotia companies will undoubtedly afford significant new avenues of recourse to minority shareholders. It will be interesting to see in the months to come whether Nova Scotia courts will apply the new provisions with the same degree of flexibility and concern for shareholder protection as the courts in other jurisdictions. One further point of interest is whether the courts will permit shareholders to enter into agreements among themselves which have the effect of sidestepping, in whole or in part, the dissent and appraisal provisions of the Third Schedule. In MICA Management Centre Inc. v. Lockett (1986), 37 B.L.R. 209, the Ontario High Court considered the question of whether it was the intention of Section 184 of the Business Corporations Act (Ontario) to override a contract between shareholders dealing with the very situation contemplated by the Section. The Court observed that no provision is contained in the Ontar io Act preventing shareholders from contracting out of the statutory provisions and concluded at page 217:

21 "The sanctity of contracts freely entered into by business people has always been accepted by judges as fundamental to business life. There is reason to think that legislators hold the same view. The courts are reluctant to interfere and do so only in the cause of justice. Legislators have as well been traditionally reluctant to interfere. Given that, it is difficult for me to read into s.184 an intention to override a contract which dealt, in effect, wi th the very situation contemplated by the section and which appears on its face to be otherwise valid." Whether or not at the end of the day the courts will permi t shareholders of Nova Scotia companies to opt out of the Third Schedule right of dissent and appraisal it is clear that the rules of the game are changing for shareholders of all Nova Scotia companies, both present and future. It is also evident that lawyers in Nova Scotia need to focus now on the new statutory rights that will be available and to advise their clients accordingly. [FS/FS /#8rr]