Marquee Energy Ltd (Re), 2016 ABQB 563

Court of Queen’s Bench of Alberta Citation: Marquee Energy Ltd (Re), 2016 ABQB 563 Date: 20161007 Docket: 1601 11071 Registry: Calgary Between: In the Matter of the

Section 193 of the Business Corporations Act , RSA 2000, c. B-9, as Amended And In the Matter of a Proposed Arrangement Involving Marquee Energy Ltd., its Shareholders and the Alberta Oilsands Inc. Corrected judgment: A corrigendum was issued on October 11, 2016; the corrections have been made to the text and the corrigendum is appended to this judgment. _______________________________________________________ Oral Reasons for Judgment of the Honourable Mr. Justice A.D.

Macleod _______________________________________________________ [ 1 ] This is an application by Smoothwater Capital Corporation, and I will refer to it as "Smoothwater," and I will refer to Alberta Oilsands Inc. as "AOS," and Marquee Energy as "Marquee." [ 2 ] The application raises important issues regarding the

interpretation of

section 193 of the Business Corporations Act , RSA 2000, c B-9 [ ABCA or the “ Act ”] and the relationship between it and other sections of the Act , and, as well, the effect of section 193(3) . That provision provides that if an arrangement can be effected under any other provision of the ABCA ,

section 193 may only be resorted to if it is impracticable to effect the arrangement under the other provisions. [ 3 ] By way of background, the business of AOS was primarily related to the Oilsands licences which it held in the vicinity of Fort McMurray, Alberta. It had received notice from the Government of Alberta [the “ Government ”] that all of the Oilsands licences in the urban development region of Fort McMurray were being cancelled. As a result of that loss, AOS received from the Government approximately $35 million in 2015. At that time, that essentially was the only asset of AOS. Subsequently, it began talking with Marquee,

which had conventional oil and gas assets but needed better capitalization. [ 4 ] Smoothwater had become a shareholder of AOS and, at a point prior to the application, it held somewhere in the area of 14 percent of the common shares, and perhaps slightly more, if you take into account other shareholders with whom it was acting. Smoothwater was well known to AOS and had urged AOS to distribute the money it had received from the Government to the shareholders.

Smoothwater was also seeking to change the board representation to reflect more of Smoothwater's nominees. [ 5 ] As recently as July 2016, the CEO of AOS, Mr. Metcalfe, told Mr. Griggs, the CEO of Smoothwater, that AOS and Marquee had entered into a letter of intent regarding a merger and both the shareholders of Marquee and AOS would be required to vote on the proposal. Indeed, because both AOS and Marquee are corporations under the Act , the ABCA does provide, in

section 183 , that an amalgamation agreement between arm's length parties would have to be approved by a special resolution of both corporations. Section191 also provides dissent rights.

Section 184 of the Act does provide for the amalgamation of a holding company with one or more of its wholly owned subsidiaries, but that does not apply to arm's length parties. [ 6 ] It was well known by AOS and Marquee that Smoothwater was against the proposed merger. On August 19, 2016, AOS and Marquee issued a press release to the effect that the merger would be effected by way of a plan of arrangement.

The press release was entitled: "[Marquee Energy and AOS] Announce [a] Strategic Business Combination to Create a Well Capitalized Company . . ." [ 7 ] Thus began the process which occurs before this Court when parties are proposing an arrangement, and I should say that this is traditionally done under a two-step process under

section 193 . The initial application is brought ex parte before a judge on the commercial list of this Court. We used to try to ensure that the judge hearing the preliminary interim application was also the judge on the final application. That has been made much more difficult by a volume of commercial work and the increasing number of judges, and so, as it happened anyway, the original application was brought ex parte on August 22, 2016. [ 8 ] The application was brought by Marquee and it was in the matter of a proposed arrangement involving Marquee, its Shareholders, and AOS.

The matter went before Justice Graesser on that day and, although it was ex parte , it was made known to Justice Graesser that Smoothwater had certain objections. They made it known to the Court that Smoothwater had issued a press release against the transaction and that it intended to apply to the Court to seek the right to vote on the arrangement, and that is discussed and it is suggested to the Court that nothing was being done that day that would prevent them from doing that.

Justice Graesser said they can presumably initiate other proceedings if that is what they feel they need to do, there is lots of time between now and the meeting date. And that is where it is left. And the application that came before me yesterday was that application, which, we all agree, is an unusual application. [ 9 ] Smoothwater, at the same time it issued the application which is before me, also filed a notice of intention to appear at the final application. That, again, is the normal process.

At the final application, those who are opposed are given an opportunity to argue and, normally, because most of these arrangements are effected without opposition, when there is opposition, the final application is adjourned to a time when the Court can hear full some arguments from all parties, similar to the way in which argument was heard in this courtroom yesterday. [ 10 ] However, rather than wait until the final application, which was scheduled for September 21, 2016 at 1:30 PM, Smoothwater did want to address the appropriateness of having the transaction approved under

section 193 without there being a shareholder vote, not just of the Marquee shareholders but also of the AOS shareholders. The application was scheduled before me and briefs were filed. In the briefs no one took issue with the right of Smoothwater to bring the application, and I find that Smoothwater has standing to make the application it has brought. [ 11 ] A lot of material was placed before me on Friday and during the weekend. And I spent considerable time reviewing affidavits, case law, briefs, and other material in preparation for the application.

So, in light of that, I also directed that the final application, whenever it is held, will be held before me.

There is no point in bringing another judge up to speed by requiring that she or he read all of the material that I have spent days reading. [ 12 ] The main relief sought is the calling and conducting of a special meeting of the shareholders of AOS to consider and vote upon the proposed arrangement on substantially the same terms as provided to shareholders of Marquee in the interim order, and adjourning the final order application currently scheduled for September 21, 2016 to a date to be fixed in order to permit the calling and holding of an AOS shareholders meeting to consider a vote upon the proposed arrangement. [ 13 ] There were also other matters relating to the annual meeting that had been scheduled and the ex parte application to defer that, but for now I am parking that issue. [ 14 ] Smoothwater, significantly, does not seek an order putting an end to this proposal because it does not constitute an arrangement or it is one that cannot be approved under

section 193 . In essence it is saying that in order for this Court to approve those transactions, there needs to be a vote by AOS shareholders, as would be the case if it proceeded by way of an amalgamation, and it proposes a vote on the same terms as the vote to be held of the Marquee shareholders. [ 15 ] Marquee and AOS do not take issue with the fact that I can vary an ex parte order, but they say that the proposed arrangement does not affect the legal rights of AOS shareholders and it cannot to be said to be oppressive within the meaning of the oppression sections of the ABCA .

They say that the arrangement as proposed does not require a vote of the AOS shareholders. [ 16 ] It is important to bear in mind the test set out by our Supreme Court in BCE Inc v 1976 Debentureholders , 2008 SCC 69 [ BCE ] . In that case, it was an arrangement under the

Canada Business Corporations Act , RSC 1985, c C-44 [ CBCA ], but the provisions of the CBCA and the ABCA as it relates to arrangements are very similar. In any event, the Supreme Court of Canada said the following, commencing at paragraph 136: Section 192(3) specifies that the corporation must obtain court approval of the plan. In determining whether a plan of arrangement should be approved, the court must focus on the terms and impact of the arrangement itself, rather than on the process by which it was

reached. What is required is that the arrangement itself, viewed substantively and objectively, be suitable for approval. In seeking approval of an arrangement, the corporation bears the onus of satisfying the court that: ( 1) the statutory procedures have been met; (2) the application has been put forward in good faith; and (3) the arrangement is fair and reasonable . . . [ 17 ] And in paragraph 138, the Court says: In reviewing the directors' decision on the proposed arrangement to determine if it is fair and reasonable under s. 192, courts must be satisfied that (

a) the arrangement has a valid business purpose, and (

b) the objections of those whose legal rights are being arranged are being resolved in a fair and balanced way. [ 18 ] Upon reading the affidavits and the material provided, and hearing counsel, I am satisfied that the essence of the proposed transaction before us is a merger of AOS and Marquee. This is abundantly clear from all the evidence. For example, Mr.

Thompson, the CEO of Marquee, in his affidavit in support of the interim order, he says: (as read) The purpose of the arrangement is to result in a larger, better capitalized and more competitive organization with greater exploration development capacity, as well as operation synergies and reduction of expenses as compared to AOS and Marquee separately. [ 19 ] That is consistent with everything I have read. That point resonates throughout the material placed before me, including information circulars and analyst reports.

However, the legal structure proposed in the interim application does not accomplish this intended purpose of combining the two entities. This does not occur until the amalgamation is effected. In the shareholder information circular it is made clear that immediately following the completion of the arrangement, Marquee and AOS will merge and the amalgamated entity will continue.

It is only then that the business purpose is achieved, along with all of the commercial benefits referred to in the information circulars and press releases. [ 20 ] It is clear that the combining of AOS and Marquee constitutes the valid business purpose. That purpose is not achieved until the amalgamation is achieved. The legally proposed arrangement involves the tendering of Marquee shares for newly issued AOS shares, but it is only after the amalgamation occurs through the use of

section 184 that the business objective is achieved. [ 21 ] I am further satisfied on all the evidence that the primary, if not the only, reason for the proposed arrangement of the acquisition by AOS of all of the Marquee shares is so that the subsequent vertical amalgamation can take place under

section 184 without an AOS shareholder vote. There is ample evidence that Smoothwater and others oppose the transaction, and I am satisfied that the directors of both companies wanted to avoid any risk of a special resolution failing or that the transaction would attract the exercise of dissent rights on the part of AOS shareholders. [ 22 ] Accordingly, I am not at all satisfied that the arrangement as proposed by Marquee and AOS has a valid business purpose because its only purpose is to deprive AOS shareholders of what otherwise they would be entitled to under

section 183, i.e. a shareholder vote on the amalgamation. In other words, I agree that the combining of AOS and Marquee does have a valid business purpose, but the proposed arrangement is a type of step which does not accomplish that end; rather, it accomplishes only the ability to achieve the business purpose without a shareholder vote on the part of AOS. [ 23 ] I agree with paragraph 71 of Smoothwater's brief, and I will read it: (as read) The flexibility afforded by the arrangement procedure in

section 193 of the ARCA to facilitate creative solutions to complex situations should not be turned on its head and used as a means of avoiding shareholder choice or restricting shareholder's rights. Instead, the arrangement procedures typically involving a shareholder vote and rights of dissent are intended as a shareholder rights protection. The court’s supervisory role in the procedure is consistent with this idea.

As noted by the Supreme Court of Canada in BCE , the requirement for court approval of a proposed arrangement is remedial in nature, similar to other remedial provisions of the CBCA , or ABCA in this case, such as derivative action or the oppression remedy. The court approval process provides opposing security holders with the opportunity to argue against the proposed change if a corporation fails to discharge its burden of establishing that the arrangement is fair and reasonable. [ 24 ] So, going back to the test set out by the Supreme Court of Canada in BCE , the first one is: are the statutory procedures met?

I note that subsection 193(3) states: If an arrangement can be effected under any other provision of this Act , an application may not be made under this

section unless it is impracticable to effect the arrangement under that other provision. [ 25 ] I also note that the Chief Justice of this Court, in Enbridge Income Fund Holdings Inc , 2010 ABQB 274 , pointed out that the threshold to establish this impracticability is low (at para 8). Smoothwater has argued in its brief that there is no evidence of any such impracticability. It may be that there is some. There is a suggestion that there is the issue of the United States Securities Act of 1933 and there may very well be other issues that will be raised in a final application.

But I do note that it is vigorously argued by Smoothwater that subsection 193(3) cannot be satisfied. I make no ruling on that point at this time. It may be more appropriate to rule on that in the final application. [ 26 ] But more importantly for the purpose of this application, what I do take from subsection 193(3) is that the safeguards that are provided by the other provisions of the ABCA must be respected, and before we rubber-stamp another process, which doesn't provide for the same kinds of safeguards which other provisions do provide for, we ought to look at the proposed arrangement very carefully.

And furthermore, I think it is entirely appropriate to balance the alleged impracticability of using those other provisions against the value of the rights that would be sacrificed if one uses the arrangement process rather than the other provisions which provide for the approval of the shareholders of both amalgamating companies. And when looked at it in that way, I conclude that it would be appropriate and it would be fair and it would be reasonable to give a final order only if the opportunity is given to the AOS shareholders to vote on the same basis as the Marquee shareholders.

[ 27 ] The second test which is set out by the BCE case is that the application must be put forward in good faith. I have already found that the technical plan of arrangement put forward in the interim application (which does not include the amalgamation) was put forward primarily to avoid a vote under the amalgamation provisions of the ABCA . In addition, Smoothwater has made numerous other allegations surrounding the requisition of a meeting by Marquee and the subsequent ex parte application to defer the annual meeting called as a result of their requisition.

It was brought ex parte without notice to Smoothwater knowing that Smoothwater would object. [ 28 ] On all the evidence, I am not satisfied that the technical proposed arrangement, which does not include the amalgamation, was put forward in good faith because it was done primarily to avoid a vote of AOS shareholders. But I am satisfied that the overall proposal of uniting the AOS and Marquee businesses was put forward by both boards of AOS and Marquee in good faith, in their own belief that it is a good thing to do.

And so, I think this aspect of the test would also be satisfied if the AOS shareholders are given the right to vote, similar to the rights they would have had under

section 183 of the ABCA . [ 29 ] Dealing with the third prong of the test: whether it is fair and reasonable. In terms of whether there is a valid business purpose and whether the conflict between Smoothwater and the other interests are being resolved in a fair and reasonable way, I have already said that the business objective and purpose to achieve a merger between AOS and Marquee is a valid one, but the technical proposal that is labelled the "plan of arrangement" doesn't achieve that end.

So, I think it is reasonable, and I think I am complying with the spirit of the legislation and the decision of the Supreme Court of Canada in BCE if I look at the transaction as a whole, and when I view it in that way, fairness and reasonableness demands that AOS should be entitled to vote and have the same rights they would have if it were proceeded with under

section 183 , which I understand is the same as the rights accorded to the Marquee shareholders. [ 30 ] As to the submission that no legal rights of AOS shareholders are being affected, I understand the argument regarding the dilution of the shares and, as I understand it, they have been diluted to almost a hundred percent because of the huge number of shares issued by AOS to accomplish this transaction. To say they are not affected, I don't agree with that.

But more importantly, to achieve an amalgamation of arm's length entities, they were entitled to expect that they would have the right to dissent and the right to vote. [ 31 ] I appreciate the point made yesterday by Mr. Theroux that the arrangement is what it is, in other words, it is as proposed by his client - and it is not for me to change it. I also note, however, that Smoothwater is not asking that I dismiss the application and, obviously, there has been a fair amount of interest and work put into this transaction. So, I am not going to impose any change on either Marquee, who is the applicant, or on AOS.

I say only, and I direct only, that before proceeding to the final order, which will be heard before me, the interim order is amended to include a provision that AOS shareholders will have a vote in the same way that the Marquee shareholders have a vote, which includes dissent rights, and that provision will be complied with prior to any application for a final order.

There is no requirement that AOS or Marquee proceed any further at all, but if they want to proceed to the final order, that needs to be done. [ 32 ] And similarly, if after collecting the results, including the vote and the exercise of dissent rights, the parties don't wish to proceed further with it, that is fine. If that is not what they bargained for and they don't want to pursue it, that is fine too.

But if they wish to proceed to the final stage, that will have to be done. [ 33 ] Now, I am totally flexible as to the timing of the meeting, the form of the notices, and I am assuming the parties can work that out, as well as the issues to be put before the meeting of AOS, whenever it is called. But I am prepared to, and will, resolve those issues if they cannot be resolved amongst the parties. Heard on the 13 th day of September, 2016. Dated at the City of Calgary, Alberta this 7 th day of October, 2016 . Given Orally on the 14 th day of September, 2016 A.D. Macleod J.C.Q.B.A. Appearances: T. J. Mallett C.

Hamill for the Applicant Smoothwater Capital Corporation

D.B. Foster, Q.C. for Mr. Walied Soliman A.J. McConnell for the Respondent Alberta Oilsands M.P. Theroux C. Chisholm for Respondent Marquee Energy _______________________________________________________ Corrigendum of the Oral Reasons for Judgment of The Honourable Mr. Justice A.D. Macleod _______________________________________________________ Appearances have been changed to reflect Mr. D.B. Foster, Q.C. acts for Mr. Walied Soliman who is not named as a Respondent to this matter.