HEAL Global Holdings Corp (Re), 2023 ABKB 451

Court of King’s Bench of Alberta Citation: HEAL Global Holdings Corp (Re), 2023 ABKB 451 Date: 20230731 Docket: 2301 05183 Registry: Calgary In the matter of

Section 193 of the Business Corporations Act , RSA 2000, C B-9 And in the matter of a proposed arrangement involving HEAL Global Holdings Corp., Pathway Health Corp., The Newly Institute Inc., the shareholders of HEAL Global Holdings Corp., the shareholders of Pathway Health Corp. and the security holders of The Newly Institute Inc. _______________________________________________________ Reasons for Decision of the Honourable Justice EJ Sidnell _______________________________________________________ [ 1 ] This decision was delivered orally on July 10, 2023.

Only minor editorial edits for readability have been made, together with the inclusion of citations and quotations. There have been no changes made to the substance of my oral decision.

Introduction [ 2 ] On April 25, 2023, an Interim Order was granted setting a procedure for a proposed Plan of Arrangement (the Arrangement) under s 193 of the Business Corporations Act , RSA 2000, c B-9 ( ABCA ). [ 3 ] On June 30, 2023, HEAL Global Holdings Corp (HEAL), Pathway Health Corp (Pathway) and The Newly Institute Inc (Newly) (collectively, the Proponents) brought an application for a final order approving the Arrangement (the Final Approval Application). [ 4 ] The Arrangement and this Final Approval Application is opposed by six Newly shareholders: 10981 Newfoundland Limited (10981), Jon Spencer, Dino DeLuca, Jeff Belford, Dave Connolly and Mick MacBean (collectively, the Opposing Shareholders). [ 5 ] If the Arrangement is approved, Pathway, a publicly traded corporation, will acquire all of the issued and outstanding Class A common shares of privately-held HEAL (the HEAL Shares) and all of the issued and outstanding Class A common voting shares of

privately-held Newly (the Newly Shares), other than Newly Shares held by HEAL. [ 6 ] The package of materials provided to security holders, dated April 26, 2023 (the Information Circular), contained a Notice of Special Meeting to security holders of Newly, which states, without emphasis in the original, as follows: Notice is hereby given that a special meeting ... on May 30, 2023 for the following purposes: 1. to consider and, if thought advisable, to approve ... a special resolution (the “Continuance Resolution”) ... approving the continuance of Newly out of the federal jurisdiction of Canada under the

Canada Business Corporations Act (the “CBCA”) and into the jurisdiction of Alberta under the ... ABCA ... 2. to consider pursuant to the [Interim Order] and, if thought advisable, to approve ... a special resolution (the “Newly Arrangement Resolution”) ... approving [the Arrangement] involving ... Newly, Pathway, [HEAL] ... and their respective shareholders or security holders, as applicable, under

Section 193 of the [ ABCA ], in respect of the acquisition by Pathway of all of the issued and outstanding Class “A” common shares of HEAL ... and all of the issued and outstanding Newly Shares (other than Newly Shares held by HEAL) (the “Arrangement”) ... . . . Registered Newly Shareholders have the right to dissent with respect to the Continuance Resolution and, if the Continuance Resolution becomes effective, to be paid the fair value of their Newly Shares in accordance with

Section 190 of the CBCA. In addition, pursuant to the Interim Order, registered Newly Shareholders have the right to dissent with respect to the Newly Arrangement Resolution and, if the Newly Arrangement Resolution becomes effective, to be paid the fair value of their Newly Shares in accordance with the provisions of

Section 191 of the ABCA , as modified by the Interim Order and the Arrangement. A registered Newly Shareholder's right to dissent is more particularly described in the Information Circular and the text of

Section 190 of the CBCA and

Section 191 of the ABCA ... [ 7 ] A letter to Newly security holders, also included in the Information Circular, explained: Pursuant to the Arrangement Agreement and the Plan of Arrangement, Pathway will acquire all of the issued and outstanding Newly Shares, other than the Newly Shares held by HEAL, on the basis of 4.846154 common shares of Pathway ... for each Newly Share and all of the issued and outstanding HEAL Shares on the basis of 2.769231 Pathway Shares for each HEAL Share.

The Pathway Shares to be issued in connection with the Arrangement will be issued at a deemed price per share of $0.13 per Pathway Share. [ 8 ] Step one of the two-step process was to continue Newly, a federally incorporated corporation under the CBCA , as an Alberta corporation under the ABCA . The Continuance Resolution was passed and does not require Court approval.

Although the Arrangement Resolution was also passed, it is the Arrangement that requires Court approval and since Newly is now continued under the ABCA , the ABCA applies to this Final Approval Application. [ 9 ] For the reasons which follow, I find that the Arrangement is not fair and reasonable and that this Final Approval Application should be dismissed. Results of the Newly special meeting [ 10 ]

Schedule H to the Arrangement Agreement, contained in the Information Circular, states that there are 27,233,747 issued and outstanding Class “A” Common voting shares of Newly and no other shares are issued and outstanding. [ 11 ] Prior to the special meeting, dissent notices were received from 10.5% of the Newly shareholders (the Dissenting Shareholders) representing 2,860,556 Newly shares. By virtue of their dissent, none of the Dissenting Shareholders were able to vote at the special meeting and none were represented at this Final Approval Application. [ 12 ] The special meeting was held in Calgary on May 30, 2023. In attendance in-person or by proxy were: (

a) Newly shareholders representing 14,802,479 Newly shares, or 54.4% of Newly shareholders; and (

b) Newly option holders representing 2,536,500 newly options, or 63.1% of the Newly option holders. [ 13 ] Of the 14,802,479 Newly Shares represented at the special meeting, 60.4% were held by the following parties: (

a) HEAL held 6,030,000 Newly Shares, or 40.7%, which it had bought from Arthur Kwan, the CEO and a director of Newly, on December 16, 2022; and (

b) Directors and Officers of Newly who had agreed to approve the Arrangement prior to the Newly special meeting held 2,916,667 shares, or 19.7%. [ 14 ] The Continuance Resolution and the Arrangement Resolution required a majority of at least 66 2/3% of the votes cast to pass. The actual count was 100% of the votes cast by the shares and options represented at the special meeting. [ 15 ] Newly was notified that the Opposing Shareholders, representing approximately 3% of the total Newly Shares, would be opposing this Final Approval Application. [ 16 ] In

summary: (

a) Of the total number of Newly Shares:

(i) 54.4% were represented at the special meeting and 100% approved both the Continuance Resolution and the Arrangement Resolution; and (ii) 45.6% were not represented at the special meeting and can be split into the following categories, together with associated percentages of the total number of Newly Shares: (A) 32.1% were not represented at the special meeting or this Final Approval Application and there is no information about those shares; (B) 10.5% had exercised dissent rights and had no right to vote at the special meeting; and (C) 3% cast no vote and the Opposing Shareholders advised Newly that they opposed this Final Approval Application. (

b) Of the total Newly options: (i) 63.1% were represented at the special meeting and 100% approved both the Continuance Resolution and the Arrangement Resolution; and (ii) 36.9% were not represented at the special meeting or this Final Approval Application and there is no information about those options. Commercial context [ 17 ] On behalf of the Proponents and in connection with the application for the Interim Order and this Final Approval Application, Mr.

Kwan, on behalf of Newly, swore three affidavits; Michael Steele, on behalf of HEAL, swore two affidavits; and Ken Yoon, on behalf of Pathway, swore three affidavits. [ 18 ] Daniel Williams, KC, on behalf of 10981, one of the Opposing Shareholders, swore one affidavit. [ 19 ] I have drawn the following information from the affidavits filed in this action for the purpose of providing some context for the Arrangement: (

a) On January 5, 2021, Newly was founded under another name. It opened its first clinic in Calgary in October 2021, its second clinic in Fredericton in March 2022 and its third clinic in Edmonton in July 2022. Its core business consists of building and operating a network of medically-managed intensive outpatient clinics providing medical services for mental health, treatment resistant depression, anxiety, trauma, addiction treatment, and psychedelic-assisted psychotherapy. (

b) As of June 30, 2021, its fiscal year end, Newly had a total net operating loss of $1,274,901. This loss was incurred before the first clinic opened in October 2021. (

c) As of June 30, 2022, its fiscal year end, Newly had incurred a total net operating loss of $5,886,809. (

d) Mr. Kwan explained how Newly was able to continue in light of the 2022 fiscal year end loss and is ability to raise capital in the following six months: Newly has been able to incur significant net operating losses in the past thanks to its success in raising capital. During the fiscal year ending June 30, 2022, Newly successfully raised $6,317,789 in share capital. However, for the six-month period between July 1, 2022, and December 31, 2022, Newly raised only $272,500 in share capital. (

e) In August 2022, Pathway and Newly entered into discussions. In September 2022, HEAL presented an initial letter of intent to Pathway for a “three-corner amalgamation”. An attachment to Mr. Kwan’s affidavit indicates that this transaction did not come to fruition but provided “an outline for a transaction involving Pathway, HEAL and a targeted acquiree”. (

f) On December 16, 2022, after further discussions and negotiations, Newly entered into a non-binding letter of intent with Pathway and HEAL (the LOI) whereby Pathway would acquire all of the HEAL Shares and Newly Shares, except for the Newly shares owned by HEAL, in exchange for Pathway shares pursuant to a plan of arrangement. Further, Pathway would be recapitalized and would restructure its outstanding debt owed to Avonlea-Drewry Holdings Inc (ADH). Mr. Steele said that ADH, through HEAL, proposed that Pathway consider the LOI. (

g) On December 16, 2022, Newly, HEAL, and Pathway also entered into a non-disclosure agreement. (

h) Also on December 16, 2022, Mr. Kwan sold all of his 6,030,000 shares in Newly to HEAL for cash and share consideration totalling $3,630,000, being: (i) 4,200,000 Newly Shares for cash consideration of $1,800,000; and (ii) 1,830,000 Newly Shares in exchange for 1,830,000 HEAL preferred shares at a deemed issue price of $1.00 per share (

i) On June 20, 2023, Mr. Kwan said: ... This transaction occurred at a time when I anticipated that the share value for Newly in the contemplated transaction with Pathway would equal $1.00 per share, which was the initial price targeted for Newly Shares in a non-binding confidential [LOI] concluded between Newly, HEAL and Pathway. Additionally, as of the time of the conclusion of my agreement to sell Newly Shares to HEAL,

Newly had recently closed a private placement for the sale of 100,000 shares in Newly at the price of $1.00 per share on November 29, 2022. Consequently, it was my understanding that I was disposing of my shares at a material discount in my December 2022 transaction with HEAL compared to the consideration that I then anticipated I would receive for those same shares upon the closing of the transaction contemplated in the LOI. (

j) In Newly’s Management Discussion and Analysis for the period ended December 31, 2022 (MDA 2022), included in the Information Circular, start-up challenges, Newly’s business risks and its credit facility with the Canadian Western Bank (CWB) were described as follows: The Company has incurred losses to date. The net operating loss for the six months ended December 31, 2022 totalled $2.7 million and as at December 31, 2022 the Company had a deficit of $9.8 million.

The Company has a negative cash flow from operating activities of $119 thousand for the six-month period ended December 31, 2022 (December 31, 2021 - $2.4 million). The Company has not yet achieved profitable operations and expects to incur further losses in the development of its businesses, prior to becoming profitable. These balances and the changes period over period indicate that there are material uncertainties that may cast significant doubt about the Company's ability to continue as a going concern.

Historically, management has been able to finance operations through private placements and will continue, as appropriate, to seek financing from this and other sources; however, there are no assurances that any such financings can be obtained on favourable terms, if at all. In view of these conditions, the ability of the Company to continue as a going concern is dependent upon its continued ability to obtain financing, generate sufficient cash flows and, ultimately, achieve profitable operations. There can be no assurance that the steps management is taking will be successful. . . .

On September 19, 2022, the Company received funding for an operating line of credit up to $1 million with [CWB]. . . . The Company has incurred lower net losses in the period ending December 31, 2022, compared to the prior year ending December 31, 2021, due to increased revenues in the current year. Although, expenses also increased from increased operations, the Company was able to generate $2.5 million in revenue for the six-month period ended December 31, 2022 with the addition of the Fredericton and the Edmonton Clinic.

The Company is committed to the expansion of its operations by developing and opening more clinics, which will increase both expenses and revenues of the Company. As well as a need for increased revenues, costs of such expansion will require the Company to obtain additional funds through equity and debt financings. It is uncertain whether the Company will be able to increase its revenues or to obtain additional working capital through financings.

In the six-month period ending December 31, 2022, the Company generated revenue of $2.5 million through the provision of therapeutic services from its clinics, compared to the same period ended December 31, 2021 where it only generated revenue of $261,233 as it was the first six months of operations of the first clinic in Calgary. . . . As the 2022 fiscal year was the first year of operations for the Company, increased costs from an increase in employees and consulting services and start-up of operations, exceeded the initial revenues generated.

The Company also incurred additional capital costs in the acquisition of property and equipment to expand its operations into Fredericton and Edmonton for which the revenue generation from these new locations started being realized in the first six months ended December 31, 2022. . . . The Company is currently exploring several near-term expansion opportunities in British Columbia, Ontario and Nova Scotia. . . . Susbequent [ sic ] to December 31, 2022, the Company issued 249,000 shares for gross proceeds of $249,000 between January 31 and February 28, 2023.

Additionally, the Corporation issued an addition [ sic ] 200,000 shares to the Chief Executive Officer, to settle a $100,000 shareholder loan. Lastly, in February of 2023, 1,477,777 founder shares returned to the corporation during the six-month period ending December 31, 2022 were re-issued to a returning executive, for no gross proceeds. (

k) On January 18, 2023, Newly granted a convertible, secured promissory grid note to HEAL (the Newly Grid Note), which is dated January 27, 2023, in relation to which the following is pertinent: (

i) face value of $2,500,000, fully drawn down in accordance with the

schedule set out in the Newly Grid Note: (

A) January 27, 2023, $500,000; (

B) February 15, 2023, $1,000,000; and (

C) March 15, 2023, $1,000,000; (ii) a structuring fee equal to $28,000 per $100,000 advanced is charged by HEAL and added to the principal amount at the time of a drawdown; (iii) all or any portion of the outstanding indebtedness owing to HEAL under the Newly Grid Note may be converted into Newly shares at any time or before it matures at the lower of $0.42 per Newly Share or the lowest price per Newly Share offered to investors in the most recently completed equity financing; and

(iv) if the indebtedness is not repaid on or before the maturity date, it will bear interest at the highest rate permitted by law from the date of issuance until repaid in full. (

l) On January 31, 2023, the LOI was amended to extend the LOI deadlines. On February 28, 2023, the LOI was further amended to extend the LOI deadlines. (

m) On March 31, 2023, the Arrangement was approved by the Newly Board. The Board said that it considered that: (

i) the Arrangement requires an approval of not less than 66 2/3% of the aggregate votes cast by both the Newly shareholders and the class of Newly option holders and Newly warrant holders; (ii) it had explored multiple options to obtain financing to raise new share capital and could not find an opportunity superior to the Arrangement; (iii) each of the directors and officers intends to vote at the special meeting in favour of the Arrangement, in the aggregate 2,916,667 shares, 11% of the Newly Shares; (iv) Newly shareholders who are opposed to the Arrangement, upon compliance with certain conditions, are able to dissent from the approval of the Arrangement in accordance with the Interim Order, and to be paid fair value for their Newly Shares; and (

v) each Newly shareholder (except dissenters) will participate in the Arrangement and receive the same consideration in the form of Pathway shares on a pro rata basis. (

n) On April 19, 2023, Mr. Steele said: In my role as a director, officer and shareholder of ADH, the largest indirect beneficial shareholder and most financially exposed creditor of Pathway, I am aware of the circumstances surrounding Pathway’s current financial distress and risk of insolvency. ...

Pathway ... commenced a strategic review to address its financial challenges including engaging directly and indirectly with ADH to explore and evaluate alternatives for the future of Pathway, including to effectuate a significant reduction in its debt position and improving its liquidity, working capital and financial position.

ADH through HEAL identified certain opportunities available to Pathway, including acquiring revenue generating business units benefiting from a combined cost structure, business synergies and (or) economies of scale, a privatization transaction, sale of the revenue generating assets or a renegotiation of its contractual arrangements with its creditors. ADH through HEAL proposed Pathway consider the non-binding [LOI] providing for the proposed Arrangement, which would be supported financially through ADH’s majority owned subsidiary, HEAL. ... (

o) On April 20, 2023, Mr. Yoon said: “In considering approval of the Arrangement the Pathway Board, and the independent members of the Pathway Board, acting in good faith determined that (

i) Pathway is in serious financial difficulty; (ii) the transactions contemplated in the Arrangement Agreement are designed to improve the financial position of Pathway; and (iii) the terms of the transactions contemplated in the Arrangement Agreement are reasonable in the circumstances of Pathway.” (

p) On April 21, 2023, Mr. Kwan said: “While Newly remains solvent at this time and is not, for any reason known to me, in jeopardy of becoming insolvent imminently, its fiscal position is deteriorating.” (

q) As of April 26, 2023: (

i) The directors and executive officers of HEAL and their associates and affiliates, as a group, beneficially owned, directly or indirectly, or exercised control or direction over, an aggregate of 55,000,000 HEAL Shares, representing 100% of the HEAL Shares (on a non-diluted basis); (ii) HEAL beneficially owned, controlled or directed, directly or indirectly, 6,030,000 Newly Shares and did not beneficially own, control or direct, directly or indirectly, any Pathway Shares; and (iii) ADH beneficially owned, controlled or directed, directly or indirectly, 51,638,710 Pathway Shares, 6,030,000 Newly Shares, and 50,000,000 HEAL Shares. (

r) On May 18, 2023, the three shareholders of HEAL, Mr. Steele, Mr. Kwan and ADH, signed a special resolution approving the Arrangement. (

s) On May 22, 2023, 10981 received the Information Circular and Mr. Williams said it was on that date that 10981 first became aware of the proposed Arrangement. (

t) On May 29, 2023, Mr. Williams wrote to Newly’s auditor and lawyer expressing his concerns about the Arrangement but received no substantive reply. (

u) As of May 29, 2023, Newly ascribed the value of each share held by the Dissenting Shareholders at $0.0496 and thereby equating a liability of $141,884 to the Dissenting Shareholders. (

v) On May 30, 2023, the Newly special meeting was held, and the results are described in paragraph [12]. (

w) On May 30, 2023, Mr. Williams wrote to Newly’s Chief Financial Officer expressing his concerns about the Arrangement but received no substantive reply.

(

x) By May 31, 2023, Newly continued to generate significant revenues from its operations, but was still operating at a loss, which from January 1 to May 31, 2023 amounted to $2,308,389. (

y) On June 15, 2023, Newly obtained a Letter of Satisfaction from the Director noting that he was satisfied that the continuance would not adversely affect creditors or shareholders of Newly: s 188(1)(

b) of the CBCA . (

z) On June 20, 2023, Mr. Kwan said: (i) “conversion of Newly Shares to Pathway Shares at a $0.045 Pathway Share price represents an exceptionally good value for the Newly Shareholders in light of the absence of any other viable alternatives and Newly’s pending insolvency”; and (ii) “Newly anticipates that one of three outcomes will occur in the event that the Arrangement is not concluded:

(1) Newly will enter into creditor protection by filing a notice of intention to make a proposal pursuant to

section 50.4 of the Bankruptcy and Insolvency Act ... ; (2) one of Newly’s secured creditors will seek to appoint a receiver manager over Newly; or (3), Newly will make an assignment into bankruptcy. Concluding the Arrangement will: enable Newly to avoid any [of] these outcomes; prevent the layoff of Newly’s employees; ensure that Newly’s patients can continue to access care; and allow the Newly Shareholders to realize on the value of the Newly Shares”.

Applicable test [ 20 ] The Proponents and the Opposing Shareholders agree that the test set out in BCE Inc v 1976 Debentureholders , 2008 SCC 69 , is applicable to this Final Approval Application. [ 21 ] In BCE , the Supreme Court of Canada considered a proposed plan of arrangement under s 192 of the CBCA , which is similar to s 193 of the ABCA .

At paras 128 and 129, the Court articulated the purpose of plan of arrangement provisions as follows: The purpose of s. 192, as we have seen, is to permit major changes in corporate structure to be made, while ensuring that individuals and groups whose rights may be affected are treated fairly. In conducting the s. 192 inquiry, the judge must keep in mind the spirit of s. 192, which is to achieve a fair balance between conflicting interests. ...

Although s. 192 was initially conceived as permitting and has principally been used to permit useful restructuring while protecting minority shareholders against adverse effects, the goal of ensuring a fair balance between different constituencies applies with equal force when considering the interests of non-shareholder security holders recognized under s.

Section 192 recognizes that major changes may be appropriate, even where they have an adverse impact on the rights of particular individuals or groups. It seeks to ensure that the interests of these rights holders are considered and treated fairly, and that in the end the arrangement is one that should proceed. [ 22 ] The BCE test to determine whether a final order for a plan of arrangement should be granted was discussed, at para 137, and requires a consideration of whether the corporation has satisfied the Court that: (

a) the statutory procedures have been met; (

b) the application has been put forward in good faith; and (

c) the arrangement is fair and reasonable. [ 23 ] As set out in BCE , at para 138, to determine whether a proposed arrangement is fair and reasonable, the Court 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. [ 24 ] The Opposing Shareholders took issue with the statutory procedures relating to rights for the Dissenting Shareholders. I will deal with this issue in the context of whether the Arrangement is fair and reasonable.

No other concern was raised regarding the statutory procedures set out in s 193 of the ABCA : this Final Approval Application deals with an arrangement; the Arrangement cannot be effected under any other provision of the ABCA ; and the Registrar was notified. [ 25 ] The Opposing Shareholders did not raise any issue with the Arrangement not being put forward in good faith.

This leaves the focus on whether the Arrangement is fair and reasonable. [ 26 ] At the hearing, for the first time, it was submitted by counsel for Pathway that the BCE test ought to be applied to the security holders of Pathway, and the impact of not approving the Arrangement on Pathway’s employees and clients. If approved, the Arrangement will change the name of Pathway to “Global Healthcare Holdings Corp” and, relying on this name change, Pathway asserts that it is being “arranged”. This is not correct.

The definition of “arrangement” in s 193(1) of the ABCA does not include a name change and, in any event, Court approval is not required for a corporate name change. This submission puts the form of the proposed Arrangement so far ahead of its substance that the purpose of this Final Approval Application appears to have been lost.

As the Court said in BCE , at para 126, speaking of s 192 of the CBCA : The s. 192 process is generally applicable to change of control transactions that share two characteristics: the arrangement is sponsored by the directors of the target company; and the goal of the arrangement is to require some or all of the shareholders to surrender their shares to either the purchaser or the target company. [ 27 ] Further, in Smoothwater Capital Corporation v Marquee Energy Ltd , 2016 ABCA 360 , the Alberta Court of Appeal made it

clear that the BCE test for fairness and reasonableness is only applicable from the perspective of the corporation being arranged. I find that it would be inappropriate to apply the BCE test to Pathway. Moreover, I am of the view that when the Court in BCE used the term “stakeholders” it was referring to parties such as security holders and did not extend the analysis to employees and clients of the corporation; however, I do not have to decide this point since Pathway is not being arranged. [ 28 ] The corporations being arranged are Newly and HEAL. The Opposing Shareholders hold shares in Newly.

The HEAL resolution relating to the arrangement was approved by 100% of its shareholders, in writing. HEAL was represented at the hearing and made submissions related to HEAL’s loan to Newly and the Newly Grid Note, as discussed below. HEAL made no submissions on the application of the BCE test to HEAL and it was not raised by any of the other parties. [ 29 ] The issue raised in this Final Approval Application is whether the Arrangement is fair and reasonable from the perspective of Newly, which requires a consideration of the following: (

a) Does the Arrangement have a valid business purpose? (

b) Were the objections of those whose legal rights are being arranged resolved in a fair and balanced way? Does the Arrangement have a valid business purpose? [ 30 ] The determination of whether the Arrangement has a valid business purpose is an important consideration in this case. In BCE , at paras 145 to 146, the Court said: The valid business purpose prong of the fair and reasonable analysis recognizes the fact that there must be a positive value to the corporation to offset the fact that rights are being altered.

In other words, courts must be satisfied that the burden imposed by the arrangement on security holders is justified by the interests of the corporation. The proposed plan of arrangement must further the interests of the corporation as an ongoing concern. In this sense, it may be narrower than the “best interests of the corporation” test that defines the fiduciary duty of directors under s. 122 of the CBCA ... The valid purpose inquiry is invariably fact-specific. Thus, the nature and extent of evidence needed to satisfy this requirement will depend on the circumstances.

An important factor for courts to consider when determining if the plan of arrangement serves a valid business purpose is the necessity of the arrangement to the continued operations of the corporation. Necessity is driven by the market conditions that a corporation faces, including technological, regulatory and competitive conditions. Indicia of necessity include the existence of alternatives and market reaction to the plan. The degree of necessity of the arrangement has a direct impact on the court’s level of scrutiny. ...

If the plan of arrangement is necessary for the corporation’s continued existence, courts will more willingly approve it despite its prejudicial effect on some security holders. Conversely, if the arrangement is not mandated by the corporation’s financial or commercial situation, courts are more cautious and will undertake a careful analysis to ensure that it was not in the sole interest of a particular stakeholder. Thus, the relative necessity of the arrangement may justify negative impact on the interests of affected security holders. [ 31 ] Mr.

Kwan said in his June 20, 2023 Affidavit that Newly is on the brink of insolvency. There is no evidence to dispute Newly’s dire financial circumstances as described by Mr. Kwan. But to be clear, when considered holistically, Mr. Kwan’s evidence is that Newly has suffered from declining financial health. Mr. Kwan said on April 21, 2023 that Newly was solvent, and was not in jeopardy of becoming insolvent imminently, but noted that its fiscal position was deteriorating. It was not until June 20, 2023 that Mr.

Kwan said that insolvency was pending for Newly. [ 32 ] The Information Circular describes some of the market conditions applicable to Newly’s and Pathway’s clinics. Both Newly and Pathway face uncertain financial futures. However, in 2022, Newly’s business expanded, its revenues increased, and the description in the Information Circular of its successes are positive. I have no evidence of market reaction to the Arrangement and as Newly is privately held, this is of no surprise. [ 33 ] As to the existence of alternatives, the only evidence on point is given by Mr.

Kwan who said in his June 20, 2023 Affidavit: No better option than the one presented by the Arrangement Agreement was identified by the Newly Board as of late March 2023 -- indeed, at the time, the alternative appeared to be Newly’s inevitable insolvency. To be clear ... the Newly Board did pursue multiple alternatives in late 2022 and early-2023 prior to concluding the Arrangement Agreement.

To this end, I personally made unsuccessful overtures to dozens of lenders, high-net-worth individuals, and institutional investors to attempt to secure financing, additional private placements, or possible alternative transactions. My efforts in this regard included the solicitation of additional investment from Williams and [10981], albeit to no avail. Newly even sought and obtained advice from restructuring lawyers regarding creditor protection options. I reiterate that no viable alternative to the Arrangement Agreement was identified at any point, despite efforts.

Newly also sought to ensure that it was able to return value to the Newly Shareholders. Using the current TSXV trading of $0.05 per Pathway Share, the Arrangement will return a total of approximately $6,596,000 to Newly Shareholders. In the face of a probable insolvency proceeding as an alternative, in which the potential forced liquidation of Newly’s assets may not yield sufficient proceeds to retire its indebtedness, the Newly Board determined that the Arrangement Agreement was in the best interests of Newly’s Shareholders.

The juncture at which Newly finds itself as it approaches the Final Order application is, regrettably, a life-or-death crossroads. At paragraph 35 of the First Kwan Affidavit, I stated that I was unaware of any reason that could imminently cause Newly to become insolvent. While that fact was true as of April 21, 2023, I am unfortunately no longer able to make that representation. Newly continues to operate at a loss and, as of May 31, 2023, Newly held only $195,915 in cash reserves.

As it stands, both the immediate payment of $141,884 to the Dissenting Shareholders or payment of the amounts owed to HEAL under the Newly Grid Note (which matures on June 30, 2023), would render Newly incapable of paying its financial obligations as they come due in the ordinary course.

[ 34 ] The Opposing Shareholders took issue with what they saw as being an unfair, or at least imprudent, transaction between Newly and HEAL in relation to the Newly Grid Note which provides for, among other things, a structuring fee of $28,000 per $100,000 of funds advanced. The Opposing Shareholders described the Newly Grid Note as being a loaded gun aimed at Newly’s head. A similar transaction for a smaller loan was also entered into between Pathway and HEAL. [ 35 ] The Opposing Shareholders provided no evidence to show that the Newly Grid Note was not necessary, was not fair or was not prudent.

The only evidence that the Opposing Shareholders could rely on was the comment in the 2022 MDA that, as of December 31, 2022, two weeks and a day after the Newly Grid Note was entered into, Newly’s debt under the CWB operating line of credit was $453,000. The Opposing Shareholders submit that the Court could make the inference that a further $547,000 was available at a more competitive rate.

However, there is much more complexity to the Newly Grid Note and this Arrangement than the availability of potentially $547,000 of operating credit from a conventional lending institution as of December 31, 2022. [ 36 ] The Opposing Shareholders submit that the Newly Grid Note might be challenged and found to be null and void based on its terms. HEAL submits that the Newly Grid Note is commercially viable, and a challenge would be fruitless. All parties agreed that there is no application before the Court to determine the legality of the Newly Grid Note.

Furthermore, this Final Approval Application, which had been placed on the Commercial List as an urgent half-day matter significantly overran its allotted time and there was no time scheduled for another application. I make no determination on the legality of the Newly Grid Note. Based on how this Final Approval Application was argued, and the fact that there was no cross-application challenging the Newly Grid Note, I am of the view that I must accept Mr. Kwan’s evidence about Newly’s dire financial situation and accept that the Newly Grid Note is valid. [ 37 ] Based on the evidence of Mr.

Kwan, I find that the Arrangement is necessary to the continued operations of Newly and has a valid business purpose. [ 38 ] Based on Newly’s dire financial situation, and in accordance with para 146 of BCE , this Court must be more willing to approve the Arrangement despite its prejudicial effect on some security holders, as opposed to an arrangement which is not necessitated by the financial circumstances of the corporation. However, being more willing to approve a financially necessary transaction does not mean that it will be approved regardless of the negative effect on some of the security holders.

There is no rubber stamp that guarantees that a corporation will be financially rescued through an arrangement at the expense of the rights of minority security holders.

Section 193 of the ABCA is not the appropriate legislative mechanism dealing for with corporate insolvency as this is the purview of the Bankruptcy and Insolvency Act , RSC 1985, c B-3 ( BIA ) and the Companies’ Creditors Arrangement Act , RSC 1985, c C-36 ( CCAA ). Where the corporation is facing insolvency, an arrangement must still be fair and reasonable enough that the Court finds that it is appropriate to approve the transaction.

This is so even where Court should be more willing to approve the arrangement despite its prejudicial effect on some security holders. [ 39 ] The reality of the situation must be acknowledged: if the arrangement, which could be the corporation’s financial lifeboat, is not fair and reasonable, and is not approved, the corporation could go under. If the corporation fails, assets remaining after payment of the creditors, if any, would be shared among the security holders in accordance with their respective entitlements.

In such dire circumstances, the balance between necessity, on the one hand, and fairness and reasonableness, on the other, must be very carefully considered. W ere the objections of those whose legal rights are being arranged resolved in a fair and balanced way? [ 40 ] In BCE , at para 148, the Court noted that the judge hearing a plan of arrangement application must be satisfied that the arrangement strikes a fair balance, having regard to the ongoing interests of the corporation and the circumstances of the case.

Here, the ongoing interests of the corporation include Newly’s ability, or inability, to carry on in business. The circumstances of the case include, but are not limited to, commercial context discussed above. [ 41 ] Also, at para 148 in BCE , the Court noted that complex balancing is required, whereby the judge must determine whether appropriate accommodations and protections have been afforded to the concerned parties.

Assessing the accommodations and protections does not mean catering to the special needs of one particular group but must strive to be fair to all involved in the transaction depending on the circumstances that exist. The overall fairness of any arrangement must be considered together with its fairness to various individual stakeholders. [ 42 ] In BCE , at para 155, the Court noted that what is required is a reasonable decision in light of the specific circumstances of each case, not a perfect decision. However, the reviewing court should not surrender its duty to scrutinize a plan of arrangement.

Because of the nature of the transaction and its potential to alter legal rights, the Court must conduct a careful review of the proposed transactions. [ 43 ] At paras 150 to 153, the Court in BCE identified a non-exclusive list of factors for guidance in the determination of whether a plan of arrangement has reasonably addressed the objections and conflicts between the different constituencies.

The factors pertinent to the Arrangement, in the order most applicable to this case, are as follows: #1 Did a majority of security holders vote to approve the arrangement? #2 What is the proportionality of the compromise between various security holders? #3 Can the shareholders access dissent and appraisal remedies? #4 What are security holders’ positions before and after the arrangement? #5 Has the Arrangement been approved by a special committee of independent directors?

#6 Is there a fairness opinion from a reputable expert? #7 What is the impact on various security holders’ rights? [ 44 ] None of the factors alone is conclusive and the determination of whether the Arrangement is fair and reasonable must be based on a holistic view of all of the pertinent factors. #1 Did a majority of security holders vote to approve the arrangement? [ 45 ] In BCE , at para 150, the Court referred to this factor as being “important” and went on to note that where the majority is absent or slim, doubts may arise as to whether the arrangement is fair and reasonable, on the other hand, a large majority suggests the converse.

Voting results offer a key indication of whether those affected by the plan consider it to be fair and reasonable. [ 46 ] As noted in paragraph [12], 100% of the shares and options represented voted for the Arrangement Resolution. [ 47 ] HEAL owns 22.1% of the Newly Shares and cast 40.7% of the votes in favour of the Arrangement Resolution even though the Newly Shares held by HEAL are not subject to the Arrangement.

Given that its shareholdings would not be affected by the Arrangement, allowing HEAL an equal say on the effect of the Arrangement on the other shareholders does not strike a fair balance. [ 48 ] Removing HEAL’s votes from the special meeting tally would still mean that 100% of votes cast were in favour of the Arrangement Resolution. However, it would also mean that the Arrangement Resolution was passed by 32.3% of the Newly Shares. On the other hand, 13.5% of the Newly Shares were against the Arrangement Resolution, as represented by Dissenting Shareholders (10.5%) and the Opposing Shareholders (3%).

I assume that there would be no difference in the votes cast by the option holders. [ 49 ] A further consideration is that on April 21, 2023, four days before the Interim Order was granted, Mr. Kwan said that “Newly remains solvent at this time and is not, for any reason known to me, in jeopardy of becoming insolvent imminently, its fiscal position is deteriorating.” On May 30, 2023, the Arrangement Resolution was voted on at the special meeting. However, on the following day the situation was far more dire, as Mr.

Kwan said in his June 20, 2023 affidavit, quoted at paragraph [33]. [ 50 ] By not having the updated financial information, the shareholders who cast a vote on May 30, 2023, may not have had the requisite information with which to make a considered vote. On the other hand, Newly’s directors and officers may have had the full financial information on which to base their votes. [ 51 ] In addition, Newly did not respond to Mr. Williams’ request for information related to the benefits that would accrue to Mr. Kwan as a result of the Arrangement. While Mr.

Williams communications were sent late in the process to Newly’s auditors, on May 29, 2023, and directly to Newly on May 30, 2023, Newly’s Information Circular was only delivered to 10981 on May 22, 2023. Even if the response came after the special meeting, Newly should have made an effort to reply to Mr. Williams.

In Lay v Genevest Inc , 2005 ABQB 140 , at para 31 , in relation to a shareholder who sought information on how to exercise dissent rights for shares beneficially held, Romaine J said: Corporations must be scrupulously fair in ensuring shareholders are properly advised, and this duty extends to circumstances where an individual shareholder contacts the corporation for further clarification and direction. [ 52 ] Although the Arrangement Resolution was passed by 100% of the Newly Shares which cast votes, and easily passed the 66 2/3% threshold, it is not possible to consider the shareholder opposition to the Arrangement Resolution to be negligible or insignificant. #2 What is the proportionality of the compromise between various security holders? [ 53 ] The Arrangement, if approved, will result in all Newly shareholders, except for HEAL, becoming shareholders of Pathway.

In that case, Pathway and HEAL will be the only remaining shareholders of Newly and will own 100% of Newly. [ 54 ] The Arrangement does not treat the Newly shareholders as a class with the same rights, privileges, restrictions and conditions. The Arrangement creates two groups of Newly shareholders: (1) all shareholders, except for HEAL, will receive 4.846154 common shares of Pathway for each Newly Share; and

(2) HEAL will not be obligated to surrender its shares or become a shareholder of Pathway. By splitting the Newly shareholders into two groups with different rights and privileges, the Arrangement runs afoul of the spirit and intent of s 26 of the ABCA . [ 55 ] HEAL submits that it could not be required to convert its Newly Shares to Pathway Shares because under the Arrangement it will become a subsidiary of Pathway and is prohibited from holding its parent corporation’s shares by s 32 of the ABCA . However, under s 32(2.1) of the ABCA , it is possible for a subsidiary to hold shares in a parent corporation for 30 days. Under that

section it would be possible for HEAL to have its Newly Shares converted to Pathway shares under the Arrangement and it would have had 30 days to sell the Pathway shares which are publicly traded. More to the point, if the Arrangement causes issues for subsidiaries, that reflects a flaw in the design of the Arrangement as opposed to a reason to impose different rights and privileges on two groups of the same class of shareholders. [ 56 ] In my view, the Arrangement treats a single class of shareholders as two groups who do not share the same rights, privileges, restrictions and conditions.

This different treatment of shareholders of the same class is an indicator that the Arrangement is neither fair nor reasonable. However, this factor alone is not conclusive and the determination of whether the Arrangement is fair and reasonable must be based on a holistic view of all of the pertinent factors. #3 Can the shareholders access dissent and appraisal remedies?

[ 57 ] In the context of arrangements, s 192(4)(

d) of the ABCA permits an interim order to provide for a shareholder to dissent under s 191. [ 58 ] The Interim Order, granted April 25, 2023, contains an error in paragraph 15 in that it states that should Newly shareholders choose to dissent, they will be paid fair value of their Newly Shares in accordance with s 190 of the CBCA . Mr. Kwan’s April 21, 2023 affidavit also states that Newly shareholders could dissent from either the Arrangement Resolution or the Continuation Resolution under the CBCA .

The Information Circular also contained a notice of the special meeting which referred to s 190 of the CBCA , together with a copy of that section. It was conceded by Newly at the hearing that this should have been a reference to s 191 of the ABCA . However, paragraph 16 of the Interim Order contains the correct reference to the ABCA . There was no evidence that any shareholder was confused by this error. [ 59 ] The Information Circular contained the following: (

a) Addressing Newly security holders’ questions and answers: Registered holders of Newly Shares may exercise dissent rights in respect of each of the Newly Arrangement Resolution and the Continuance Resolution. A registered holder of Newly Shares who dissents in respect of the Continuance Resolution and (or) the Newly Arrangement Resolution has the right to be paid the fair value of its Newly Shares, determined as of the close of business on the day before the respective resolution is adopted. . . . See “ The Continuance – Dissent Rights of Newly Shareholders to the Continuance” and “ The Arrangement – Dissent Rights of Newly Shareholders to the Arrangement ” in the Information Circular. (

b) Detailing the steps of the Arrangement: ... each Newly Share held by a Dissenting Newly Shareholder who has validly exercised such shareholder's Dissent Rights pursuant to

Article 4 of the Plan of Arrangement and which Dissent Rights remain valid immediately prior to the Effective Time shall be transferred to, and acquired by Newly and cancelled and the Dissenting Newly Shareholder shall cease to have any rights as a Newly Shareholder other than the right to be paid the fair value of such Newly Share by Pathway in accordance with

Article 4 of the Plan of Arrangement; (

c) On “Dissent Rights of Newly Shareholders to the Arrangement”: On the Arrangement becoming effective, or upon the making of an agreement between Newly and the Dissenting Newly Shareholder as to the payment to be made to the Dissenting Newly Shareholder, or upon the pronouncement of a Court order, whichever first occurs, the Dissenting Newly Shareholder will cease to have any rights as a Newly Shareholder other than the right to be paid the fair value of such holder's Newly Shares in the amount agreed to or in the amount of the judgment, as the case may be.

Until one of these events occurs, the Dissenting Newly Shareholder may withdraw the Dissenting Newly Shareholder's dissent, or if the Arrangement has not yet become effective, Newly may rescind the Newly Arrangement Resolution, and in either event, the dissent and appraisal proceedings in respect of that Dissenting Newly Shareholder will be discontinued. Newly shall not make a payment to a Dissenting Newly Shareholder under

Section 191 of the ABCA if there are reasonable grounds for believing that it is or would after the payment be unable to pay its liabilities as they become due, or that the realizable value of its assets would thereby be less than the aggregate of its liabilities.

In such event, it shall notify each Dissenting Newly Shareholder that it is unable lawfully to pay Dissenting Newly Shareholders for their Newly Shares, in which case the Dissenting Newly Shareholder may, by written notice to Newly within 30 days after receipt of such notice, withdraw such holder's written objection, in which case the holder shall be deemed to have participated in the Arrangement as a Newly Shareholder.

If the Dissenting Newly Shareholder does not withdraw such holder's written objection, such Dissenting Newly Shareholder retains status as a claimant against Newly to be paid as soon as Newly is lawfully entitled to do so or, in a liquidation, to be ranked subordinate to the rights of creditors of Newly but in priority to its shareholders.

All Newly Shares held by Dissenting Newly Shareholders who exercise their Newly Dissent Rights will, if the holders do not otherwise withdraw such holder's written objection, be deemed to be transferred to Newly under the Arrangement, and cancelled in exchange for the fair value thereof or will, if such Dissenting Newly Shareholders ultimately are not so entitled to be paid the fair value thereof, be treated as if the holder had participated in the Arrangement on the same basis as a non-dissenting holder of Newly Shares and such Newly Shareholder's Newly Shares will be deemed to be exchanged Pathway Shares on the same basis as all other Newly Shareholders. [ 60 ] Notwithstanding the Interim Order provisions and the various statements in the Information Circular, at the hearing, on June 30, 2023, counsel for Newly advised that there would be no immediate payment to the Dissenting Shareholders and that it was unknown if a future payment would be made. [ 61 ] Newly relies on s 191(20) of the ABCA as the reason for its inability to it make the proposed payment of $141,884 to the Dissenting Shareholders. [ 62 ] In Proposals for a New Alberta Business Corporations Act , Report No 36 (Edmonton: Institute of Law Research and Reform, 1980), Volume 2 ( ABCA Proposals Report ) , at page 265, the authors commented on these provisions which were then proposed to be in s 184: S. 184(18) to (20) would make rather elaborate provision to preclude payment to a dissenting shareholder if either a liquidity or a solvency test is not met, and to allow the dissenting shareholder in such a case to elect between his rights as a shareholder and a position as a deferred creditor.

[ 63 ] It is helpful to read s 191(18) to (20) of the ABCA together:

(18) If subsection (20) applies, the corporation shall, within 10 days after (

a) the pronouncement of an order under subsection (13), or (

b) the making of an agreement between the shareholder and the corporation as to the payment to be made for the shareholder’s shares, notify each dissenting shareholder that it is unable lawfully to pay dissenting shareholders for their shares.

(19) Notwithstanding that a judgment has been given in favour of a dissenting shareholder under subsection (13)(b), if subsection (20) applies, the dissenting shareholder, by written notice delivered to the corporation within 30 days after receiving the notice under subsection (18), may withdraw the shareholder’s notice of objection, in which case the corporation is deemed to consent to the withdrawal and the shareholder is reinstated to the shareholder’s full rights as a shareholder, failing which the shareholder retains a status as a claimant against the corporation, to be paid as soon as the corporation is lawfully able to do so or, in a liquidation, to be ranked subordinate to the rights of creditors of the corporation but in priority to its shareholders.

(20) A corporation shall not make a payment to a dissenting shareholder under this

section if there are reasonable grounds for believing that (

a) the corporation is or would after the payment be unable to pay its liabilities as they become due, or (

b) the realizable value of the corporation’s assets would by reason of the payment be less than the aggregate of its liabilities. [ 64 ] In the case of the Dissenting Shareholders, I am not aware of any application under s 191(6) of the ABCA to fix the fair value and no resulting determination by the Court under s 191(13). However, if that were to occur and then Newly relied on s 191(20), under s 191(19) the Dissenting Shareholders could presumably elect to have their full rights as a shareholder restored.

Under the ABCA , if the Arrangement is approved, the Dissenting Shareholders, once all of the required steps were taken, could elect to revert to being Newly shareholders, now along with HEAL and Pathway, or become deferred creditors of Newly. [ 65 ] However, the Arrangement stipulates otherwise.

As noted in the quote from the Information Circular, at paragraph [59], the Dissenting Shareholders would, when notified after they had dissented that they would not be paid the fair market value of their Newly Shares as a result of the insolvency of Newly, be deemed to have agreed to the conversion of their shares to Pathway. These provisions of the Arrangement, together with Newly’s financial deterioration, have effectively removed any right to dissent to the Arrangement. In my view, that is neither fair nor reasonable.

However, this factor alone is not conclusive and the determination of whether the Arrangement is fair and reasonable must be based on a holistic view of all of the pertinent factors. #4 What are security holders’ positions before and after the arrangement? [ 66 ] Before the Arrangement, the Newly shareholders held shares in a start-up corporation which had expenses which exceeded its revenue, but its revenue position was improving while its expenses increased.

As discussed above, I accept that Newly had a valid business purpose for the Arrangement and clearly needed to be concerned about its continued ability to operate. [ 67 ] In considering this factor, I am mindful of the difference between legal interests and economic interests. At para 30, the Court of Appeal in Smoothwater said: While BCE says that it is legal interests, and not economic interests that are primarily to be considered, it is not always consistent on that point.

For example, at para. 151 the approving court is invited to consider whether “an intelligent and honest business person might reasonably approve of the plan”. However, such a hypothetical reasonable business person would be primarily concerned with the economic implications of the plan, not its strictly legal characteristics. The same observation could be made about the recommendation of a “fairness opinion from a reputable expert”.

Further, BCE finds that while it would be unfair for the debenture holders to veto the transaction, “it remained open to the trial judge to consider the debentureholders’ economic interests in his assessment of whether the arrangement was fair and reasonable” (para. 161).

BCE should not be read as holding that economic interests are irrelevant. [ 68 ] Newly submits that the Arrangement is necessary and is “good value for the Newly Shareholders”, saying in its Brief: Not only is the Arrangement necessary for Newly’s continued existence, it also represents a good value for the Newly Shareholders , even when viewed considering the recent trading history of the Pathway Shares that the Newly Shareholders will receive in exchange for the Newly Shares.

Given a $0.05 or a $0.045 per Pathway Share price and a conversion ratio at 4.846154, Newly Shareholders will receive value of approximately $0.22 to $0.24 per Newly Share. At the $0.05 per Pathway Share price, the Arrangement will return approximately $6,600,000 to Newly Shareholders. These figures are significantly higher than Newly’s net asset value (i.e. asset value less value of aggregate liabilities) divided by the number of issued and outstanding Newly Shares taken at any point between December 31, 2022, and May 31, 2023.

As of May 31, 2023, Newly’s net asset value stood at only approximately $1,350,000, leading to an imputed value of $0.0496 per Newly Share.

As of December 31, 2023, prior to Newly taking on considerable indebtedness to fund its operations, Newly’s imputed per share value stood at only $0.12. [ 69 ] As will be discussed in relation to factor #7, there is no fairness opinion and without that foundation there is no basis on which I can consider that the outcome of the Arrangement “represents a good value for Newly Shareholders”. [ 70 ] In terms of Newly’s submission that the “imputed per share value” of Newly Shares was $0.12, as of December 31, 2022, I

note that diverges significantly from: (

a) Mr. Kwan’s evidence that he sold his shares for $0.60 each on December 16, 2022 “at a material discount”; (

b) Mr. Kwan’s receipt of 200,000 Newly Shares on December 31, 2022 in payment of a $100,000 shareholder loan (with an effective value of $0.50); and (

c) the private placement of Newly Shares on January 30, 2023 and February 15 and 21, 2023, at an issue price of $1.00. [ 71 ] Newly also refers to a “$0.05 or a $0.045 per Pathway Share price” which diverges significantly from the “deemed price per share of $0.13 per Pathway Share” noted in the Information Circular. [ 72 ] As I have already found, at paragraph [65], the Dissenting Shareholders have effectively had their dissent rights excoriated. As I have already found, at paragraph [56], the Newly shareholders, although all of one class, are treated differently.

I have found these outcomes to be neither fair nor reasonable. There is no evidence on which I could objectively find that the Arrangement “represents a good value for the Newly Shareholders”. However, this factor alone is not conclusive and the determination of whether the Arrangement is fair and reasonable must be based on a holistic view of all of the pertinent factors. #5 Has the Arrangement been approved by a special committee of independent directors? [ 73 ] Mr.

Kwan’s conflict of interest in relation to the Arrangement was acknowledged in “Information Concerning The Newly Institute Inc.” attached as Appendix I to the Information Circular: To the best of Newly's knowledge, apart from Arthur H. Kwan's interest as a shareholder of HEAL, a party to the proposed Arrangement, as well as the potential employment of Arthur H. Kwan in the resulting issuer as an executive officer, there are no other existing or potential material conflicts of interest between Newly and any of its directors or executive officers as of the date hereof.

However, certain of Newly's directors and officers are, or may become, directors or officers of other companies with businesses which may conflict with its business. Accordingly, conflicts of interest may arise which could influence these individuals in evaluating possible acquisitions or in generally acting on Newly's behalf. . . . Generally, as a matter of practice, directors who have disclosed a material interest in any contract or transaction that the Board is considering will not take

part in any Board discussion respecting that contract or transaction. If on occasion such directors do participate in the discussions, they will refrain from voting on any matters relating to matters in which they have disclosed a material interest. In appropriate cases, Newly will establish a special committee of independent directors to review a matter in which directors or officers may have a conflict. [ 74 ] The Newly Board had three directors: Mr. Kwan, and two outside directors: Tyler Boake and Wayne Young.

No special committee of independent directors was formed to review the Arrangement. [ 75 ] In light of Mr. Kwan’s conflict, he “declared [his] interest in [the Arrangement] and abstained from voting. The Arrangement Agreement was thus approved by the Outside Directors, independent of [Mr. Kwan]”. [ 76 ] The Information Circular describes Mr. Boake as a physiotherapist with extensive knowledge of “stakeholder relationships, new start operations, and acquisitions”. The Information Circular describes Mr.

Young as a dentist who has opened numerous successful dental practices and is the current director of a group of dental practices. Both Mr. Boake and Mr. Young were appointed as Newly directors on August 8, 2022, the same day the Mr. Kwan shared an initial data room with Pathway.

There is no information as to the support provided to the independent directors in their consideration of the Arrangement. [ 77 ] There is no requirement that an arranged corporation must create a committee of independent directors and this, on its own, would not raise a concern as to whether the Arrangement is fair and reasonable, especially in a small start-up corporation like Newly. However, Newly’s independent directors who approved the Arrangement on March 31, 2023, had only been appointed eight months previously and after negotiations had already begun.

This factor alone is not conclusive and the determination of whether the Arrangement is fair and reasonable must be based on a holistic view of all of the pertinent factors. #6 Is there a fairness opinion from a reputable expert? [ 78 ] Newly did not obtain any fairness opinion and this is not required for approval of an arrangement. However, many courts have considered the availability of an independent fairness opinion as one of the constellation of factors to be considered on a final approval application. Newly submits that the cost of a fairness opinion would be excessive considering its financial position.

Newly Grid Note [ 79 ] Unlike in InterOil Corporation v Mulacek , 2016 YKCA 14 , the Opposing Shareholders did not provide any fairness opinion. However, the Opposing Shareholders point to the Newly Grid Note and suggest that the Court should infer that it was an imprudent financing arrangement with an excessive structuring fee and, though it currently does not have interest accruing, a future egregious interest rate.

Without knowing all of the exigencies of Newly at the time of entering into the Newly Grid Note, or a fairness opinion or some other expert advice, I do not think it is possible for this Court make a finding that Newly Grid Note’s structure fees, or future interest obligations, are inappropriate, even with the possibility of CWB extending an operating line for a further $547,000.

[ 80 ] At the hearing, Newly pointed out that the use of the Newly Grid Note proceeds is expressly set out in its

Schedule C. That

schedule notes that a total of $1,240,000 will be used for working capital. This far exceeds the amount possibly available under the CWB operating line. However,

Schedule C also refers to transaction costs in the amount of $360,000. Even if those transaction costs are limited to audit, legal and other professional fees relating to the Newly Grid Note and not the Arrangement, they are considerable, especially in light of Newly asserting that it could not afford a fairness opinion. [ 81 ] Further,

Schedule C refers to $900,000 of the Newly Grid Note proceeds being spent on “Growth/ Expansion/ Integration Projects”, specifically: “Ottawa Retrofit: IRP Affiliate Clinic”; “Toronto New Clinic (Silver Relocation)”; “Halifax New Clinic”, “BC Retrofit: IRP Affiliate Clinic”; and “BC Retrofit: IRP Affiliate Clinic”. Newly, does not have clinics in Ottawa, Toronto, Halifax or British Columbia. The Information Circular states that Newly has three clinics open and operating: Calgary, Edmonton and Fredericton.

The 2022 MDA notes that Newly “is currently exploring several near-term expansion opportunities in British Columbia, Ontario and Nova Scotia”. [ 82 ] According to the Information Circular, Pathway owns eleven clinics in Alberta, British Columbia, Manitoba, Ontario and Quebec.

The Information Circular also describes Newly’s growth plans after the Arrangement as follows: Newly anticipates that, following completion of the Arrangement in the first half of 2023, it will begin to integrate with Pathway and create a network of clinics, such plans including the launch and integration of clinics in Kelowna, Toronto, and Halifax beginning in the fourth quarter of 2023. [ 83 ] There is not enough evidence to understand what growth, expansion and integration projects Newly spent $900,000 on between January and March 2023 when those funds were advanced under the Newly Grid Note.

However, given Newly’s objective to integrate with Pathway after the approval of the Arrangement, spending $900,000 on growth, expansion and integration projects before approval of the Arrangement in some locations where Pathway was already operating, while having none of its own integration projects, raises questions, but no answers have been provided. Newly Share valuations [ 84 ] At paragraph [70], some Newly Share valuations are noted and those valuations ranged between $0.12 and $1.00 per share.

In addition, as of May 29, 2023, Newly ascribed the value of each share held by Dissenting Shareholders at $0.0496. With such a wide variety of share valuations in a period of approximately 5 months, a fairness opinion may have been useful to the Newly shareholders and this Court. No requirement to obtain an independent fairness opinion [ 85 ] Newly correctly points out that there is no requirement that an arranged corporation must obtain an independent fairness opinion.

Whether there is a fairness opinion, and if there is, its contents, is not conclusive and the determination of whether the Arrangement is fair and reasonable must be based on a holistic view of all of the pertinent factors. [ 86 ] In Bear Lake Gold Ltd (Re) , 2014 ONSC 3428 , a corporate fairness opinion was contrasted to the procedure for qualifying an expert to opine on fairness.

At para 15, Wilton-Siegel J commented on the relevance to the Court of a corporate fairness opinion obtained for approval of a statutory arrangement where it is not intended to constitute expert evidence: ... the fairness opinion is of relevance to the court in two respects. First, it is evidence that the special committee or board of directors has considered the fairness and reasonableness of the proposed transaction on the basis of objective criteria to the extent possible.

Second, the publication of the fairness opinion in the information circular allows the shareholders to reach their own conclusions regarding the integrity of the directors' recommendations and regarding the fairness of the transaction to them from a market perspective. ... [T]he absence of any shareholder objections to a proposed transaction can be relied upon by a court as an implicit shareholder endorsement of the directors' view of the fairness and reasonableness of the transaction and the applicant's good faith in proposing the transaction. [ 87 ] Newly submits that it could not afford an independent, or presumably any, fairness opinion.

There was no requirement for Newly to obtain a fairness opinion, regardless of its considerable expenditures on professional fees in this fiscal year. However, in light of the independent directors’ short history with Newly, the fact that the negotiations were already underway on the day that the independent directors were appointed, and the wide variation in Newly share valuation, a fairness opinion may have been helpful to the independent directors, the Newly shareholders and for this Court.

I note that this case is distinguishable from Bear Lake Gold in that there were both Dissenting Shareholders and Opposing Shareholders to the Arrangement, so this Court was aware of some disenchantment with the directors' view of the fairness and reasonableness of the transaction. #7 What is the impact on various security holders’ rights? [ 88 ] Under s 192(3) of the CBCA , a corporation must be “not insolvent” to effect an arrangement.

That same requirement is not contained in the ABCA . [ 89 ] In the ABCA Proposals Report , at page 271, the authors discuss the proposed arrangements provision, which at the time was s 186, and the omission of the requirement that the arranged corporation be solvent, which had appeared in the Alberta Companies Act , RSA 1970 c 60 , referred to as “ ACA ”: S. 186 includes the list of things included in "arrangements" by CBCA s. 185.1. In addition it includes compromises with creditors ...

The usefulness of ACA s. 154 is somewhat limited because it constitutionally cannot encroach upon Parliament's legislative jurisdiction over insolvency, but we think that there are still cases to which it can apply, and we do not think that the specific exclusion of insolvent corporations in CBCA s. 185.1(3) needs to be made in the draft Act.

[ 90 ] While there may be no requirement that an arranged corporation be solvent under the ABCA , in my view, the corporation’s solvency can be considered in light of the fair and reasonable test. [ 91 ] In the case of Newly, it was solvent on April 21, 2023, which information was before the Court in support of the application for the Interim Order. However, by May 31, 2023, if Newly was to pay the Dissenting Shareholders, or pay the debt under the Newly Grid Note, it would be incapable of paying its financial obligations as they come due in the ordinary course. [ 92 ] This change of circumstances impacted the various security holders’ rights in the following manner: (

a) as at the date of the special meeting, it caused the financial information available to the security holders to be out-of-date, thereby affecting the ability of the security holders to exercise their rights and I find such lack of information was prejudicial; (

b) it rendered Newly unable to pay the Dissenting Shareholders the fair value of their shares, effectively excoriating their dissent rights; and (

c) it transformed the arrangement of a solvent corporation into the arrangement of an insolvent corporation. [ 93 ] As alluded to by the (then) Institute of Law Research and Reform, Parliament legislates insolvency under the BIA and the CCAA . [ 94 ] In addition, the Arrangement treats members of the same class of shares differently, such that their rights, privileges, restrictions and conditions are not the same as among the class. [ 95 ] The Arrangement and the change in Newly’s circumstances both have some negative impact on various security holders’ rights.

These negative impacts must be considered in light of Newly’s ability to avoid insolvency if the Arrangement is approved. This is another factor to be balanced and it alone is not conclusive. Conclusion [ 96 ] Determining whether a plan of arrangement serves a valid business purpose and adequately responds to the objections and conflicts between the different affected parties requires taking into account a variety of relevant factors.

Given Newly’s circumstances and impending insolvency, I must be more willing to approve the Arrangement, despite its prejudicial effect on some security holders, than would be the case where Newly’s continuance is not held in the balance. [ 97 ] Given the circumstances relating to Newly, the Arrangement, if approved, would provide for Newly’s continued existence, but in doing so would treat members of the same class of Newly Shares differently, such that their rights, privileges, restrictions and conditions were not the same. It would also excoriate the Dissenting Shareholders dissent rights.

The information available to the security holders at the date of the special meeting was prejudicially out-of-date. Since the Interim Order, the Arrangement has been transformed from one relating to a solvent corporation into one relating to an insolvent corporation. Newly has not shown that the Arrangement will result in good value for security holders.

While not a requirement, the Newly Board did not constitute a special committee to consider the Arrangement and did not support is recently appointed independent directors with a fairness opinion. [ 98 ] Having considered, and having undertaken a holistic review of all of the applicable factors, recognizing that I must be willing to approve the Arrangement despite its prejudicial effect on some security holders because the Arrangement would provide for the continued existence of Newly, I cannot find that the Arrangement is fair and reasonable.

As a result, the Arrangement should not be approved, and the Final Approval Application is dismissed. [ 99 ] The parties may speak to costs. Heard on the 30 th day of June, 2023. Delivered orally on the 10 th day of July, 2023. Dated at the City of Calgary, Alberta this 31 st day of July, 2023. EJ Sidnell J.C.K.B.A. Appearances: K Hoy and W Van Horne

for the applicant The Newly Institute Inc K Osaka and T Shaygan for the for the applicant HEAL Global Holdings Corp SL Wray and JL Gagner for the applicant Pathway Health Corp D Tupper, M Dixon and S Mansfield for the respondent 10981 Newfoundland Limited J Lambert for the respondents Jon Spencer, Dino DeLuca, Jeff Bedford, Dave Connolly and Mick MacBean