A plan of arrangement is a legal process governed by the Canada Business Corporations Act that allows corporations to reorganize and restructure their affairs. A plan of arrangement involves the corporation putting forth a proposal for the restructuring, which the corporation’s shareholders, and subsequently a court, are then asked to approve. The proposal will outline the corporation’s desired changes and the terms and conditions under which the arrangement will be implemented. These terms usually address issues such as share exchange, consideration, and any other necessary changes.
Once approved by the shareholders, the corporation will ask the court to determine whether the proposal is fair, reasonable, and in the best interests of the corporation and its stakeholders. However, the shareholders may disagree with the proposal or the court’s decision to approve the proposal, as was recently the case in NexJ Systems Inc. (Re).
Plan of Arrangement Approved by Application Judge
In the case of NexJ Systems Inc. (Re), the appellants were 36 former employees and shareholders of NexJ Systems Inc. and NexJ Health Holdings Inc., who held 3.2% of the common shares of NexJ Systems. The appellants first became shareholders in 2011 according to loan and pledge agreements (the “2011 agreements”) with NexJ Systems.
The appellants appealed the Application Judge’s decision and order to approve the proposed plan of arrangement, which NexJ Systems Inc. presented under s. 192(4) of the Canada Business Corporations Act.
Under the approved plan of arrangement, the appellants were required to sell their shares in NexJ Systems and NexJ Health to third party N. Harris Computer Corporation. In return, the appellants received 55 cents per NexJ Systems share and 25 cents per NexJ Health share. In addition, the appellants were given forgiveness with respect to the balance of the interest-free employee loans, which were provided in 2011 to allow the appellants to purchase their shares. Finally, the plan of arrangement provided for a broad release of all claims the appellants may have regarding any matter.
Decision to Approve Plan Appealed by Shareholders
On appeal, the appellants argued that the Application Judge erred by making a decision on the merits of their claims without a full trial, exceeded their jurisdiction under the Canada Business Corporations Act by approving the “forced sale” of their shares, and incorrectly applied the “fair and reasonable” test.
The Court first addressed the issue of whether a trial is required. Upon finding that there was no procedural unfairness and the appellants “participated fully” in the application, the Court held that the Application Judge may determine whether “fair adjudication of the issues requires a trial” concerning “the required cultural shift in the civil process promulgated by the Supreme Court,” as was set out in Hryniak v. Mauldin.
2011 Agreements Permitted a Forced Sale of Shares
The Court confirmed that the Application Judge correctly adverted to the criterion set out in BCE Inc. v. 1976 Debentureholders. The Application Judge found that the plan of arrangement was fair and reasonable and had a valid business purpose. This conclusion was derived from his interpretation of the 2011 agreements and other evidence presented by NexJ Systems Inc., which the Application Judge was entitled to accept.
The Application Judge accepted NexJ Systems Inc.’s evidence that there was “no alternative transaction waiting in the wings” and found that the appellants did not provide evidence that “any transaction is possible which would solve their personal tax planning problems to their satisfaction.”
In this case, the Application Judge rejected the appellants’ argument that the 2011 agreements prohibited the forced sale of their shares and that the interest-free employee loans were repayable only on a voluntary sale of their shares. The Application Judge instead found that the 2011 agreements permitted the forced sale of shares and call of the loans under a plan of arrangement. In support of this finding, the Application Judge highlighted a provision in section 1.1 of the 2011 agreements, which specified that loan repayment could be triggered by “the sale of the Shares by or on behalf of the Employee.”
Releasing All Claims by Shareholders if Fair and Reasonable
Finally, the Application Judge found that the proposed release of all claims from shareholders was, in fact, fair and reasonable. The Court noted that the appellants had acknowledged that entering into the 2011 agreements resulted in tax implications, and the appellants obtained professional advice before signing such contracts, which resulted in amendments to the 2011 agreements.
The Court did not find that the Application Judge exceeded his jurisdiction by approving the plan of arrangement and the sale of the appellants’ shares in NexJ Health. This sale was required as a part of the financing arrangements as it provided additional paydown of the appellants’ loans.
Court of Appeal Upholds Application Judge’s Decision
The Court confirmed that a plan of arrangement prepared under s.192 of the Canada Business Corporations Act is a way corporate debt can be restructured outside of insolvency law. The Court found that despite the shareholders’ procedural rights set out in s.192, a trial is not always required, particularly in matters regarding a plan of arrangement, as the Application Judge may determine whether a trial is necessary.
The Court of Appeal concluded that there was no reason to interfere with the Application Judge’s decision and there was no reason to “defer the determination of any issue at trial.”
The Corporate Litigation Lawyers at Milosevic & Associates in Toronto Provide Advice on Contract Disputes and Shareholder Rights
The trusted commercial litigation lawyers at Milosevic & Associates in Toronto regularly advise clients on complex commercial disputes, including contract disputes, commercial fraud, and shareholder disputes. Our team helps parties understand their rights and responsibilities concerning any contract they enter into and protects our clients’ rights when a dispute arises. In cases where litigation is necessary, our lawyers provide clients unparalleled representation before all courts across Ontario, including appellate litigation. Contact our office at 416-916-1387 or contact us online to schedule a confidential consultation and learn how we can assist you.