In the Matter of a Proposed Plan of Arrangement of Magna International Inc. [Indexed as: Magna International Inc. (Re)]
101 O.R. (3d) 721
2010 ONSC 4685
Ontario Superior Court of Justice,
Divisional Court,
Cumming, Morawetz and Strathy JJ.
August 30, 2010
Corporations -- Arrangements -- Corporation not required to demonstrate with certainty that benefits of proposed arrangement will offset costs in order to satisfy "valid business purpose" test -- Corporation only required to demonstrate prospect of clearly identified benefits to corporation that have reasonable prospect of being realized if arrangement is implemented -- Court's inability to make precise determination of relative financial costs and benefits of arrangement not precluding finding that plan of arrangement is fair and reasonable -- Positive shareholders' vote constituting important evidence in support of finding that proposed arrangement is fair and reasonable.
The corporation sought an order approving a proposed arrangement pursuant to s. 182(5) of the Business Corporations Act, R.S.O. 1990, c. B.16. One of the elements of the proposed transaction was the corporation's purchase for cancellation of all of the outstanding Class B shares for consideration comprising 9 million newly issued Class A shares and US$300 million in cash. The application judge approved the arrangement. The opposing shareholders appealed.
Held, the appeal should be dismissed.
In seeking approval of an arrangement, a 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. An arrangement will be fair and reasonable if (a) it 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. Requirements (1) and (2) were met in this case. The application judge did not err in finding that the proposed plan of arrangement was fair and reasonable. In order to meet the "valid business purpose" test, the corporation was not required to demonstrate with certainty that the benefits of the proposed arrangement would offset the costs. It was only required to demonstrate the prospect of clearly identified benefits to the corporation that had a reasonable prospect of being realized if the arrangement was implemented. The potential benefits to the corporation of the pro posed arrangement satisfied that test. The application judge did not err in finding that, despite the absence of such traditional indicia of fairness as a fairness opinion and rights of dissent and appraisal, the objections of the Class A shareholders were resolved in a fair and balanced manner. A fairness opinion is not a prerequisite in every instance of a proposed arrangement where the analysis of the financial benefits to be received is at all complex. The affirmative vote of Class A shareholders was important evidence in support of a finding that the arrangement was fair and reasonable. The application judge did not arrive at his conclusion solely on the basis of the shareholder vote. After a careful review of the evidence, he concluded that the market reaction to the arrangement, and the recommendations of market participants, did not demonstrate a perception that the arrangement was inherently unfair and unreasonable. The fact that the court was unable to make a precise determination [page722] of the relative financial costs and benefits of the arrangement did not preclude a finding that the plan was fair and reasonable.
APPEAL from an order approving a plan of arrangement.
Cases referred to BCE Inc. v. 1976 Debentureholders, [2008] 3 S.C.R. 560, [2008] S.C.J. No. 37, 2008 SCC 69, 52 B.L.R. (4th) 1, EYB 2008-151755, J.E. 2009-43, 301 D.L.R. (4th) 80, 71 C.P.R. (4th) 303, 383 N.R. 119, apld Other cases referred to ATB Financial v. Metcalfe & Mansfield Alternative Investments II Corp. (2008), 92 O.R. (3d) 513, [2008] O.J. No. 3164, 2008 ONCA 587, 45 C.B.R. (5th) 163, 296 D.L.R. (4th) 135, 168 A.C.W.S. (3d) 698, 240 O.A.C. 245, 47 B.L.R. (4th) 123; Canada (Director of Investigation and Research, Competition Act) v. Southam Inc., 1997 385 (SCC), [1997] 1 S.C.R. 748, [1996] S.C.J. No. 116, 144 D.L.R. (4th) 1, 209 N.R. 20, J.E. 97-632, 50 Admin. L.R. (2d) 199, 71 C.P.R. (3d) 417, 69 A.C.W.S. (3d) 586, REJB 1997-00386; Chrusz v. Cheadle Johnson Shanks MacIvor, [2010] O.J. No. 3441, 2010 ONCA 553; Housen v. Nikolaisen, [2002] 2 S.C.R. 235, [2002] S.C.J. No. 31, 2002 SCC 33, 211 D.L.R. (4th) 577, 286 N.R. 1, [2002] 7 W.W.R. 1, J.E. 2002-617, 219 Sask. R. 1, 10 C.C.L.T. (3d) 157, 30 M.P.L.R. (3d) 1, 112 A.C.W.S. (3d) 991; Magna International Inc. (Re) (2010), 101 O.R. (3d) 736, [2010] O.J. No. 3454, 2010 ONSC 4123; St. Lawrence & Hudson Railway Co. (Re), [1998] O.J. No. 3934, 76 O.T @@.C. 115, 82 A.C.W.S. (3d) 895 (Gen. Div.); Trizec Corp. (Re), 1994 9001 (AB KB), [1994] A.J. No. 577, [1994] 10 W.W.R. 127, 21 Alta. L.R. (3d) 435, 158 A.R. 33, 20 B.L.R. (2d) 202, 49 A.C.W.S. (3d) 498 (Q.B.) Statutes referred to Canada Business Corporations Act, R.S.C. 1985, c. C-44, s. 192 [as am.] Business Corporations Act, R.S.O. 1990, c. B.16 [as am.], s. 182 [as am.], (3), (5) Authorities referred to Peterson, Dennis H., and Matthew J. Cumming, Shareholder Remedies in Canada, 2nd ed., looseleaf (Markham, Ont.: LexisNexis Canada, 2009)
Mark A. Gelowitz and Craig T. Lockwood, for applicant respondent. Peter F.C. Howard and Ellen M. Snow, for Stronach Trust. Samuel R. Rickett and Murray J. Braithwaite, for Special Committee of board of directors. Benjamin Zarnett, Tom Friedland, Julie Rosenthal and Rebecca Burrows, for appellant Canada Pension Plan Investment Board. Kelley M. McKinnon and James Camp, for Mason Capital Management LLC, Goodman & Company Investment Counsel Limited. James D.G. Douglas and Caitlin Sainsbury, for appellants Alberta Investment Management Corporation, Ontario Teachers' Pension Plan Board and OMERS Administration Corporation. Linda L. Fuerst, for appellant British Columbia Investment Management Corp. [page723]
Endorsement BY THE COURT: -- The Appeal
[1] The respondent applicant, Magna International Inc. ("Magna"), is governed by the Ontario Business Corporations Act, R.S.O. 1990, c. B.16, as amended ("OBCA").
[2] The British Columbia Investment Management Corporation, the Ontario Teachers' Pension Plan Board, the Canada Pension Plan Investment Board, OMERS Administration Corporation and the Alberta Investment Management Corporation (the "Opposing Shareholders"), who collectively own less than 3 per cent of the Class A shares of Magna, appeal the order dated August 17, 2010 of Mr. Justice H.J. Wilton-Siegel (the "application judge") approving a proposed Arrangement in respect of Magna pursuant to s. 182(5) of the OBCA (the "Arrangement"): Magna International Inc. (Re) (2010), 101 O.R. (3d) 736, 2010 ONSC 4123 (the "Endorsement"). Standard of Review
[3] The parties disagree as to the applicable standard of review in this appeal. The appellants argue that the appropriate standard is one of correctness; the respondent argues that the lower standard as to whether there is a palpable and overriding error is applicable.
[4] On an appeal from a judge deciding an application, the standard of review of questions of law is that of correctness. The standard of review of questions of fact and questions of mixed fact and law is that of deference, absent a palpable and overriding error or an error in principle: Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, [2002] S.C.J. No. 31, at paras. 8, 10 and 37 ("Housen").
[5] The discretionary decision of a judge, applying the correct legal test, as to whether a proposed arrangement is fair and reasonable is a question of mixed fact and law: Housen, at para. 37; ATB Financial v. Metcalfe & Mansfield Alternative Investments II Corp. (2008), 2008 ONCA 587, 92 O.R. (3d) 513, [2008] O.J. No. 3164, 296 D.L.R. (4th) 135 (C.A.), at para. 107; see, also, Chrusz v. Cheadle Johnson Shanks MacIvor, 2010 ONCA 553, [2010] O.J. No. 3441, ONCA 553, at paras. 13 and 30. Where the application judge applies a legal test requiring the balancing of multiple factors, and considers all of the relevant factors, the application judge's decision as to the weight to be accorded to each factor is entitled to deference, absent a palpable and overriding error or an error in principle: Housen, at para. 28, citing Canada (Director of Investigation and Research, Competition Act) v. Southam Inc., 1997 385 (SCC), [1997] 1 S.C.R. 748, [1996] S.C.J. No. 116, at para. 37. [page724]
[6] In our view, the appeal involves issues that raise questions of mixed fact and law. Background
[7] Magna is a diversified global automotive supplier with some 240 manufacturing operations, some 76 product development, engineering and sales centres in 25 countries on five continents and annual sales exceeding $25 billion.
[8] Magna has a dual class share structure comprised of Class A subordinate voting shares ("Class A shares"), publically traded on the Toronto Stock Exchange and the New York Stock Exchange ("NYSE"), and multiple voting Class B shares ("Class B shares"). As at May 6, 2010, there were a total of 112,037,893 Class A shares and 726,829 Class B shares issued and outstanding.
[9] The Class B shares carry 300 votes per share, representing approximately 66 per cent of the votes attached to Magna's voting securities, but represent less than 1 per cent of its total equity. The Class B shares do not contain "coattail" protections for holders of Class A shares in the event of a change of control. Nor do the Class B shares contain any "sunset" provisions by which the Class B shares would either terminate or convert into another class as of any specified date. The terms of the respective classes of shares have been fully disclosed in Magna's Annual Information Forms to prospective investors.
[10] The Stronach Trust, through a tier of corporations, directly or indirectly owns all the Class B shares and, hence, is the ultimate controlling shareholder of Magna. The trustees of the Stronach Trust are Frank Stronach and family members. Mr. Stronach is the chairman of the Magna board of directors. The Transaction Agreement, Involvement of the OSC and Subsequent Events
[11] Magna's board of directors established a Special Committee on April 8, 2010, to review and consider a proposal by Magna's executive management to reorganize the capital structure of Magna.
[12] The Stronach Trust and its corporate entities which hold the Class B shares then entered into a transaction agreement dated May 6, 2010 ("Transaction Agreement") pertaining to the proposed Arrangement which ultimately came before the application judge.
[13] The Transaction Agreement has three principal components.
[14] First, it provides that the Class B shares will be cancelled for consideration comprised of US$300 million in cash and 9 million Class A shares issued from treasury having a total value of [page725] some US$863 million based on the closing price of the Class A shares on the NYSE on May 5, 2010, the day immediately preceding the announcement of the Transaction Agreement. Magna would then have a single class of voting equity securities, to be renamed "common shares", of which the Stronach Trust would hold 7.44 per cent.
[15] Second, existing consulting agreements between Magna and its affiliates and Mr. Stronach and his affiliated entities are to be amended as to length of term and as to fees payable. On the basis of management's current business plans and forecasts, the estimated fees payable pursuant to the amended consulting agreements are expected to aggregate about $120 million over the four-year term.
[16] Third, Magna and the Stronach Trust are to establish an "E-Car Partnership" in respect of Magna's vehicle electrification business. Magna is to invest cash and assets with a value of $220 million for a 73.33 per cent partnership interest and the Stronach Trust is to indirectly invest $80 million for a 26.67 per cent partnership interest. The Stronach Trust will have effective control of the E-Car Partnership through the right to appoint three of the five members of the management committee, with Magna having the right to appoint only the two remaining members. Magna would, however, have veto rights in respect of certain fundamental changes and specified business decisions, including transactions with the Stronach Trust or any related party to it.
[17] The application judge sets forth the background to the development of the proposed Arrangement, at paras. 12 to 19 of his Endorsement.
[18] Magna obtained an interim order on May 31, 2010 from Pepall J. on a motion for advice and directions in respect of various matters pertaining to the intended special meeting of Magna shareholders to be held to consider the proposed Arrangement Resolution. On June 2, 2010, Magna mailed to Magna shareholders a management proxy circular/proxy statement dated May 31, 2010 (the "Circular") in respect of the special meeting.
[19] The Ontario Securities Commission ("OSC") commenced an application on June 15, 2010, seeking an order to cease trade the issuance of securities pursuant to the Arrangement on the basis that the Arrangement was contrary to the public interest.
[20] A hearing was held on June 23 and 24, 2010 before a three-member panel of the OSC. The OSC Panel concluded that the Circular did not provide sufficient disclosure to the Class A shareholders to permit them to make an informed decision and ordered additional disclosure. A supplement to the Circular (the [page726] "Supplement"), addressing the OSC's concerns, was reviewed by OSC staff before being mailed to shareholders.
[21] The application judge sets forth, at paras. 29 to 37 of his Endorsement, the findings of the OSC Panel and consequential events. The overall impact of the OSC scrutiny has been to ensure full disclosure and transparency through the Circular and Supplement for the benefit of shareholders in their decision-making with respect to the proposed Arrangement. There is no suggestion that Magna failed to satisfy the requirements mandated by the OSC.
[22] The record establishes that the position of the Stronach Trust is that it would not be prepared to agree to the transactions contemplated by the proposed Arrangement at a lower price than that provided by the Transaction Agreement. There is common ground that the Stronach Trust, the sole Class B shareholder, is lawfully entitled to take this position.
[23] The cost-benefit analysis of the Special Committee indicates significant benefits to Magna resulting from a single class structure, such that there is a foundation for the belief of the Special Committee that the proposed Arrangement is fair and reasonable to Magna on its own account.
[24] It is, however, problematic to assess the cost-benefit to the Class A shareholders, who would suffer the cost of an 11.44 per cent dilution of the Class A shares upon implementation of the proposed Arrangement. The benefits are seen by the Special Committee as potentially substantial, but quantifiably indeterminate, and it is uncertain as to whether the benefits would outweigh the costs. Hence, the Class A shareholders were required to make their own decision based upon the Circular and Supplement, together with the publicly available information concerning Magna.
[25] The Supplement contains a section which addresses the Special Committee's considerations and conclusions regarding the requirement that the proposed transaction is "fair and reasonable". The underlying core issue is whether the benefits (in particular, an anticipated significant positive impact on Magna's trading multiple and trading price for its shares by removal of the dual class structure) of the proposed Arrangement for the Class A shareholders are worth the cost (the dilution by reason of the issuance of 9 million shares and the cash payment of $300 million by Magna) to them.
[26] Opinions amongst Class A shareholders were seen by the Special Committee as possibly differing on this issue and hindsight has proven this to be the case, as seen by the litigation at hand. The Special Committee determined to have this issue [page727] resolved by the separate vote of the Class A shareholders who were unrelated to the Class B shareholders.
[27] Given the unique circumstances, CIBC World Markets ("CIBC"), the independent financial advisor engaged by the Special Committee, did not provide a fairness opinion, adequacy opinion or formal valuation. The absence of a fairness opinion is inherent in the nature of the transaction contemplated by the proposed Arrangement under consideration. Moreover, given the absence of a fairness opinion, the Special Committee was not in a position to give a recommendation itself, other than that the Class A shareholders consider the ongoing market reaction to the announcement of the proposed Arrangement in terms of the trading price and the trading multiple of the Class A shares and the opinion that such increase could in the main be attributed to the proposed Arrangement. It is noted that the OSC was of the view that a fairness opinion was not required.
[28] The CIBC Final Report, dated May 5, 2010, included its findings that the dilution level of 11.44 per cent was considerably higher than seen in any of the 15 precedent transactions. CIBC opined that the dual class structure of Magna appeared to be a significant contributor to the trading discount of Magna's shares when compared to Magna's peers in the industry and that on average the share price of companies following this type of reorganization increased by 8.8 per cent in the ten-day period following the announcement.
[29] The CIBC Update Report to the Special Committee on May 25, 2010 assessed the market reaction to the proposed Arrangement after it was publicly announced on May 6, 2010. It noted a one-day share trading price increase of 11.9 per cent, an average ten-day increase of 11.9 per cent and the quantified improvement with respect to the historical trading discount for the Class A shares relative to Magna's key U.S. peer companies. In particular, the CIBC Update Report set forth that the analysis established an improvement in the trading multiple of the Class A shares that was greater than the 0.5 times improvement required, in CIBC's opinion, to offset the dilution of the Class A shares through the implementation of the proposed Arrangement.
[30] At the Special Meeting of shareholders held on July 28, 2010, 75.28 per cent of the votes cast in person or by proxy by the so-called "minority" Class A shareholders (i.e., those Class A shareholders who are not also Class B shareholders or related parties thereto) approved the proposed Arrangement Resolution. The holders of 80.4 per cent of the issued and outstanding Class A [page728] shares voted. Some 92.79 per cent of the votes cast of the Class A and Class B shares, voting together, were in favour. The Law
[31] The application judge relied upon the recent Supreme Court of Canada decision in BCE Inc. v. 1976 Debentureholders, [2008] 3 S.C.R. 560, [2008] S.C.J. No. 37, 2008 SCC 69 ("BCE"), which sets forth the legal principles governing consideration of a proposed plan of arrangement. Although BCE dealt with s. 192 of the Canada Business Corporations Act, R.S.C. 1985, c. C-44, as amended, the enunciated principles are equally applicable to the case at hand, involving the comparable provision of s. 182 of the OBCA.
[32] D. Peterson and M. Cumming, Shareholder Remedies in Canada, 2nd ed., looseleaf (Markham, Ont.: LexisNexis Canada, 2009) at para. 18.2 deal with plans of arrangement under Canadian legislation. Citing para. 128 of BCE, the authors state that the purpose of arrangement provisions is twofold: to provide corporations with flexibility to undertake significant changes in their corporate structure while ensuring at the same time that security holders whose rights are affected by such changes are treated fairly.
[33] Where a corporate transaction will alter the rights of security holders, this impact takes the decision out of the hands of the directors. An important feature of the process for approval generally will be a vote by the security holders and in all events, the plan of arrangement will require court approval after a hearing in which parties whose rights are affected can participate: see BCE, at para. 127.
[34] In considering the question of approval, the judge must keep in mind the spirit of s. 182 of the OBCA"which is to achieve a fair balance between conflicting interests . . ." because legal rights are being affected: see BCE, at paras. 128 and 133.
[35] The applicant corporation, in seeking approval of an arrangement by the court, bears the onus of establishing 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: see Trizec Corp. (Re), 1994 9001 (AB KB), [1994] A.J. No. 577, 21 Alta. L.R. (3d) 435 (Q.B.), at p. 444 Alta. L.R. (BCE, at para. 137).
[36] The reviewing court must be satisfied in determining whether the proposed arrangement is fair and reasonable by applying a two-prong test, namely, that (1) the arrangement has [page729] a valid business purpose, and (2) the objections of those security holders whose legal rights are affected are being resolved in a fair and balanced way: see BCE, at para. 138.
[37] In applying this two-prong test, the reviewing judge does not look simply to a business judgment test through considering the favourable vote of security holders but "must delve beyond whether a reasonable business person would approve of a plan to determine whether an arrangement is fair and reasonable": BCE, at para. 141.
[38] The Supreme Court in BCE said that in determining whether the plan is fair and reasonable, courts consider a variety of factors, none of which is conclusive and the relevance of which varies from case to case: see BCE, at para. 149. It singled out the importance of a vote, when a vote has been held, noting that while the outcome of a vote is not determinative, it is a factor that has received considerable weight in the cases. It is a key indication of whether those affected by the plan consider it fair and reasonable: see BCE, at para. 150.
[39] Other "indicia of fairness" identified by the Supreme Court include the proportionality of the compromise between security holders, their position before and after the arrangement, and the impact on their rights. Courts may also consider the repute of the directors and advisors who endorse the plan, the approval of a special committee of independent directors, the presence of a fairness opinion from a reputable expert and the access of shareholders to dissent and appraisal remedies: see BCE, at para. 152.
[40] The Supreme Court in BCE stated, at para. 153, that these factors were not exhaustive and were simply an overview of some of the factors considered by the courts in determining whether a plan has reasonably addressed the objections and conflicts between different constituencies. It concluded that "[t]he overall determination as to whether an arrangement is fair and reasonable is fact-specific and may require the assessment of different factors in different situations".
[41] We turn now to the application of the BCE principles to the application at hand. Analysis
Were the statutory requirements met?
[42] There is common ground that Magna has complied with the applicable statutory procedures set forth in s. 182 of the OBCA, the requirements of the OSC, the stipulations set forth in the interim order and that the proposed Arrangement has been approved by the requisite majorities of Magna shareholders. [page730]
Was the application for approval of the proposed Arrangement put forward in good faith?
[43] The application judge found that the application was put forward in good faith and this is not challenged on appeal.
[44] The only real contentious issue before the application judge and on this appeal is the third requirement for approval, that is, whether the proposed Arrangement is fair and reasonable.
Is the proposed plan of Arrangement fair and reasonable?
[45] As noted above, the court is required to apply a two- prong test in making its determination as to whether or not a proposed plan of arrangement is fair and reasonable.
Is there a valid business purpose by the corporation in respect of the proposed Arrangement?
[46] The Supreme Court in BCE stated, at para. 145, that the first prong of the test requires the court to be "satisfied that the burden imposed by the arrangement on security holders is justified by the interests of the corporation".
[47] The Opposing Shareholders assert that the application judge was expressly unable to determine that the Class A shareholders would ultimately realize the benefits of the Arrangement and that he failed to quantify the value of the Arrangement to Magna in comparison to the price being paid.
[48] The application judge correctly applied the test in BCE on this issue. He noted (at paras. 48-50, 66 of the Endorsement) that the Special Committee understood and identified the costs to be borne by Magna and the benefits to it and that it concluded that the Arrangement was in the best interests of Magna. He also noted, at paras. 67-68 of the Endorsement, that the independent directors came to the same conclusion.
[49] The application judge found that the elimination of the dual class structure would benefit Magna, from a corporate governance perspective and from a financial perspective, a proposition accepted by the Opposing Shareholders. Magna's board of directors would be elected by all the shareholders rather than simply a control bloc and this, in principle, would arguably improve responsibility and accountability to shareholders and, hence, improve corporate governance. With the elimination of the dual share classes and the prospect of an increase in trading multiples, there should be a benefit in terms of the cost of capital and, hence, in the financial well- being of Magna.
[50] The Opposing Shareholders submit however, as they did before the application judge, that Magna has been unable to [page731] establish that the benefits of the Arrangement to the Class A shareholders will offset the costs. We agree with the conclusion of the application judge that the "valid business purpose" inquiry requires only the demonstration of the prospect of clearly identified benefits to the corporation that have a reasonable prospect of being realized if the proposed Arrangement is implemented. We also agree with his conclusion that the primary cost of the Arrangement falls on the Class A shareholders and not on Magna.
Are the objections of those security holders whose legal rights are affected through the proposed Arrangement being resolved in a fair and balanced way?
[51] The Opposing Shareholders assert that there is not a fair and balanced resolution of the conflicting interests of the parties. They argue that, because of the uncertain and unquantifiable nature of the potential benefits of the contemplated Arrangement, the court cannot make an objective and substantive determination of fairness.
[52] The issue in respect of the "fair and balanced" test is whether the costs and benefits of the proposed Arrangement to the Class A shareholders are fairly balanced in the circumstances of the case at hand.
[53] It is recognized that an unassailable fact is that the price being paid, howsoever measured in the instant situation, is beyond the price paid in any precedent transactions.
[54] The principal means of balancing the cost to the Class A shareholders is the market-driven factor of a possible increase in the trading multiple and trading price of the Class A shares consequential to the implementation of an approved Arrangement. Such a possible increase in both the short and the long term is uncertain and somewhat speculative. There is a risk as to both the realization of an increase and as to the quantum of any increase. At best, it is a matter of reasoned judgment in advance of putting the Arrangement into effect, which judgment will be put to the scrutiny afforded by the wisdom of hindsight.
[55] The reasonable inference from the favourable vote of the Class A shareholders is that they concluded that there was a reasonable possibility that the potential benefits to them exceeded the certain costs of the transaction.
[56] The outcome of the vote of informed shareholders, acting in their self-interest, is in itself a very significant indicator as to whether or not a plan of arrangement is fair and reasonable: see the decision of Blair J. (as he then was) in St. Lawrence & Hudson Railway Co. (Re), [1998] O.J. No. 3934, 76 O.T.C. 115 (Gen. Div.), at para. 27, cited by the application judge, at para. 161. [page732]
[57] There is no suggestion of procedural unfairness with respect to the vote. On the contrary, there was a fair balancing of the rights of the "minority" Class A shareholders by giving them an effective veto on the transaction, a vote that was not required by law. Nor is there any evidence that the Class A shareholders were unable to make an informed decision on the issue of balancing the potential benefits with the known costs. The application judge found, at para. 168, that the Circular made it abundantly clear that this was the core issue for the Class A shareholders to decide. There is no suggestion of inadequate or misleading disclosure. All material information was before the shareholders. There was much publicity given to the conflicting views as to the merits of the proposed Arrangement. These circumstances suggest that the vote can be regarded as a reasonable indication of the substantive fairness and reasonableness of the Arrangement.
[58] All Class A shareholders have, of course, the same economic interest in respect of the bundle of rights which attach to their Class A shares. All "minority" Class A shareholders do not have any conflict of interest in voting.
[59] As well, there was no coercive element inherent in the voting requirement or in the structure of the proposed Arrangement. The Stronach Trust is lawfully entitled to take the position that the proposed Arrangement is on a "take it or leave it" basis from the standpoint of the Class A shareholders. The alternative to approval is a continuation of the status quo.
[60] The application judge stated, at para. 185, that the court cannot make a determination on a balance of probabilities standard whether the trading history of the Class A shares after May 6, 2010 to date actually reflects an increase in the trading multiple due to the proposed Arrangement nor, of course, whether there will be a sustained multiple expansion. However, the reports of CIBC and Morgan Stanley (providing an expert report in support of the Opposing Shareholders' position), and other analyst reports, are consistent with a view that there could well be an increased trading multiple that would at least offset the cost of the transaction to the Class A shareholders. The market reaction to the announcement of the proposed Arrangement provides evidence that market participants believe there is a reasonable possibility of achieving the potential benefits upon which the proposed Arrangement is premised. Thus, it is not arguable that the proposed arrangement is inherently unfair.
[61] The appellant Opposing Shareholders' submission implies that the court must make an objective determination of its own regarding the financial costs and benefits of the proposed plan of [page733] Arrangement. The Opposing Shareholders imply, in effect, that a fairness opinion or a valuation is a prerequisite in every instance of a proposed Arrangement where the analysis of the financial benefits to be received is at all complex. The Opposing Shareholders argue that the court is no more able than the Special Committee to address the cost- benefit analysis of the proposed Arrangement, and therefore, the court cannot find that the proposed Arrangement is fair and reasonable.
[62] We agree with the application judge's findings, at paras. 201 and 202, that fairness opinions and valuations are useful references but cannot provide any guarantee of future market prices. Ultimately, shareholders must make their own judgment as to the future market value of their shares after the implementation of an arrangement.
[63] The application judge was cognizant of the requirement, in applying the two-prong test, that the reviewing judge does not look simply to a business judgment test through considering the favourable vote of security holders but "must delve beyond whether a reasonable business person would approve of a plan to determine whether an arrangement is fair and reasonable": BCE, at para. 141.
[64] In our view, a court may find a plan of arrangement to be fair and reasonable in the circumstances notwithstanding the court is unable to make an exact determination of the relative financial costs and benefits of the intended arrangement. It is enough if there is credible evidence that shareholders could reasonably conclude that the perceived benefits equal or outweigh the costs of the arrangement.
[65] A court, as seen in the application judge's consideration of the situation at hand, can reach the conclusion that a plan of arrangement is fair and reasonable based upon a determination of the relative probable substantive costs and benefits of the proposed arrangement coupled with a favourable vote by informed shareholders resulting from a procedurally fair and reasonable process.
[66] We agree with his finding, at para. 209, that "BCE requires that the Court treat the competing interests [of different shareholder classes] to be balanced as packages of rights and attendant risks". Given fair and adequate disclosure of risks in an assessment of potential costs and benefits, the vote of the shareholders is important evidence in support of a finding that the proposed arrangement is fair and reasonable.
[67] In our view, the Class B shareholders and the "minority" Class A shareholders are in a position analogous to two arm's-length contracting parties with respect to the proposed Arrangement. [page734]
[68] Opposite parties to a contract or bargain subjectively place different values on what is being exchanged. That is why an arm's length bargain is necessarily a win-win exchange and is a foundation of commercial activity in a free market to the benefit of collective society.
[69] Turning to the situation at hand, the Class B shareholders as putative sellers have fixed a price of x dollars for, in effect, the sale by way of the proposed Arrangement of the bundle of rights (in particular, control of the corporation through the right of multiple votes) inherent to their shares.
[70] A majority favourable vote within the group of arm's length Class A shareholders determines its position with respect to what, in reality, is the offer to sell by the Class B shareholders. Given the favourable vote of the Class A shareholders, the agreed-upon transaction implicitly means that the Class A shareholders are of the view that the value of what they are to receive (diluted common shares in a single class of shares) through implementation of the Arrangement is greater than the cost to them through what they are giving up pursuant to the exchange.
[71] In our view, the application judge in his analysis delved beyond considering simply that a reasonable business person would approve of the proposed Arrangement because this was evidenced by a favourable vote. He went further and determined that there was credible evidence that was before the shareholders in voting as to the possibilities and risks in respect of the impact of the implementation of the Arrangement and as to the possible consequential benefits to weigh against the certain costs. Moreover, he concluded that the evidence before the shareholders indicated that there was a reasonable possibility, on an objective analysis, that the benefits might exceed the costs.
[72] As we noted earlier, the inquiry on an application of this kind is fact-specific. Factors that are relevant to one case may not be relevant in others and the weight to be attached to particular factors will vary from case to case. This case is unique for a number of reasons, including (a) the nature of the bargain being offered to the Class A shareholders -- i.e., the opportunity to acquire control of the corporation; (b) the effective veto on the transaction being afforded to the "minority" Class A shareholders whose legal rights are being arranged; (c) the fact that the value of the bargain, and its underlying rationale, will fall to be determined in the future by market forces; (d) the unprecedented level of disclosure made to the shareholders; and (e) the sophistication of the majority of the Class A shareholders, some 80 per cent of which are large institutional investors. [page735]
[73] The Opposing Shareholders submit that although the application judge articulated the correct test, he essentially departed from the test in arriving at his conclusion. This departure, they submit, was an error as it led him away from an objective and substantive consideration of the fairness of the proposed Arrangement. The Opposing Shareholders submit that the application judge essentially treated the shareholder vote as determinative, thus changing the focus of his inquiry from whether the court would conclude that the proposal was fair and reasonable, viewed objectively and substantively, to whether others "believe" that there was a "reasonable possibility" that the benefits of the proposal would be achieved.
[74] In our view, this submission does not take into account the full nature of the inquiry conducted by the application judge.
[75] The application judge took into account: (i) that the Special Committee identified nine matters they would consider in reaching the conclusion that the proposed Arrangement and the potential attendant benefits were attractive enough to Magna and the holders of the Class A shares to warrant submission of the Arrangement Resolution to the Magna shareholders (Endorsement, at para. 42); (ii) the disclosure and additional disclosure made to the Class A shareholders, which included statements that the Special Committee had taken note of the market reaction to the proposal following its announcement as reflected in the trading price and the trading multiples of the Class A shares and that it had received an analysis from CIBC concerning the impact of the announcement of the proposed Arrangement on the trading prices and trading multiples of the Class A shares (Endorsement, at paras. 53-61); and (iii) the evidence before the court with respect to the assessment of the financial advisors to the parties and of certain third parties as to the proposed Arrangement regarding the likelihood that such an increase in the trading price of the Class A shares will occur on a sustained basis (Endorsement, at paras. 72-98).
[76] BCE and the authorities preceding it make it clear that the outcome of a shareholder vote is frequently a very important factor. The application judge gave thorough, clear and cogent reasons for his conclusion that the vote in this case deserved considerable weight: see Endorsement, at paras. 166-82. He considered the other indicia of fairness mentioned in BCE and made a careful analysis of why, in the particular circumstances of this [page736] case, the absence of those factors did not impact the fairness of the Arrangement. There is nothing in BCE to suggest that the absence of any of these indicia means that the arrangement is unfair. Finally, after a careful review of the evidence, he concluded the market reaction to the Arrangement, and the recommendations of market participants, did not demonstrate a perception that the Arrangement was inherently unfair and unreasonable: see Endorsement, at paras. 183-84.
[77] Although the application judge may not have explicitly referenced the above statements in arriving at his conclusion, we are satisfied that he did take these factors into account in arriving at his ultimate finding.
[78] We, therefore, reject the submissions of the appellants that the application judge arrived at his conclusion solely on the basis of the shareholder vote. He dealt further in his review and, in doing so, complied with the required test as set out in BCE. Conclusion
[79] We agree with the conclusion of the application judge that Magna has satisfied the requirements of the "fair and reasonable" test under the criteria stipulated by BCE. We find that his findings and decision were correct in terms of his application of the law. We find that there were no palpable or overriding errors in his findings of fact and, indeed, we agree with those findings of fact on the basis of the record before us. We find no error in the reasoning or findings of the application judge and find that the proposed Arrangement was properly approved pursuant to s. 182(3) and (5) of the OBCA.
[80] For the reasons given, we dismiss the appeal.
Appeal dismissed.