CITATION: In Re: Canopy Rivers Inc. 2021 ONSC 355
ONTARIO
SUPERIOR COURT OF JUSTICE
(COMMERCIAL LIST)
RE: IN THE MATTER OF AN APPLICATION UNDER SECTION 182 OF THE BUSINESS CORPORATIONS ACT, R.S.O. 1990, c. B.16, AS AMENDED, AND RULES 14.05(2) AND 14.05(3) OF THE RULES OF CIVIL PROCEDURE;
AND IN THE MATTER OF A PROPOSED ARRANGEMENT OF CANOPY RIVERS INC.
CANOPY RIVERS INC.
Applicant / Moving Party
BEFORE: KOEHNEN J.
COUNSEL: Derek Ricci, Aaron Atkinson, Rui Gao Counsel, for the Applicant, Canopy Rivers Inc
John Picone Counsel, for Canopy Growth
HEARD: January 14, 2021
ENDORSEMENT
1This endorsement aims to give directions to the bar about the information helpful to a court on an ex parte initial application relating to a plan of arrangement.
2The leading authority on the issue is the decision of R.A. Blair J. (as he then was) in Re First Marathon Inc., 1999 CarswellOnt 2295; [1999] O. J. No. 2805 (S.C.J. Comm. List). It is commonly cited for two propositions:
i. That the purpose of the interim order is simply “to set the wheels in motion for the application process relating to the arrangement and to establish the parameters for the holding of shareholder meetings to consider approval of the arrangement in accordance with the statute”: First Marathon at para. 9.
ii. That the purpose of the court on an interim motion is not to assess the fairness of the plan of arrangement but simply to set the terms of service and the terms on which the meeting to approve the plan of arrangement will be held.
3That remains the case. However, the formulaic repetition of these propositions often leads to the absence of adequate information about fairness in factums delivered on the interim application.
4As Blair J. pointed out in First Marathon, the purpose of the interim motion is not to assess fairness but to set the terms of service and the terms on which the meeting to approve the plan. What those terms are may, however, depend a judge’s view of the transaction.
5At the interim hearing, the applicant is asking the court to waive ordinary rules of service and ordinary litigation timetables. In most cases, the time between delivery of the information circular and the meeting to approve the plan is something in the range of 21 to 30 days. The final hearing follows within days of that. Little if any litigation operates on that sort of timetable.
6While abbreviated timetables good sense when dealing with most plans of arrangement, the court should have some basic information to allow it to determine what the terms of service and the terms of the meeting will be. That turns on, among other things, the details of the transaction and the amount of time people may need to respond to it and the conditions under which they should be given that time. The most direct way to give the court information of that sort is to explain to the court why the transaction is fair from the point of view of the applicant. This will highlight for the court the issues in respect of which security holders may require time to assess the transaction or obtain advice about it.
7Details about fairness should be in the factum, not just buried in a motion record because interim applications are usually scheduled for a short hearing. Today’s for example was 20 minutes. A judge preparing for a 20 minute hearing does not have the time to unearth details hidden in motion records, especially when the factum does not provide pin point references to them.
Examples of Helpful Information
8Without intending to in any way limit the information that is helpful on an interim hearing, three core forms of information are helpful.
9The first concerns the nature of the security holders. It is helpful to know whether there are significant institutional security holders or whether security holders are widely dispersed among retail securityholders.
10Second, it is helpful to understand the genesis of the transaction. Why is the applicant proposing the plan of arrangement at all? What are the issues it is designed to address? What is the end it is designed to achieve? Why are those issues or ends being pursued at this time?
11Third and most important is an explanation for why the applicant believes the proposed plan is fair. Here, the court requires more than bald assertions to the effect that the plan is fair. It also requires more than simple assertions that fairness opinions say the plan is fair or that an independent committee held many meetings and concluded the plan was fair. Judges are skeptical readers. We need to be persuaded with concrete reasons, not bald assertions. The absence of information about fairness leads a judge to be concerned that the transaction may be unfair.
12Simply referring to the presence of a fairness opinion is of little help. Fairness opinions vary widely in quality. Some, like the Echelon opinion filed on this application, take the form of a reasoned opinion. They contain a detailed description of what the author(s) did, what competing considerations they took into account, and why they balanced those considerations as they did to arrive at their opinion. Others are merely assertions that the authors(s) took certain steps followed by a bald conclusion that the plan is fair: see for example see Champion Iron Mines Limited (Re) 2014 ONSC 1988. Still others merely perform a numerical calculation based on numbers provided by management without independent assessment: see for example Re Sherritt International Corporation 2020 ONSC 5822. The first type are useful. The latter two do not allow a judge to form any view of fairness.
13Similarly, the presence of an independent committee might be useful, but its mere presence or the fact that they had many meetings does not help a judge assess fairness.
14More helpful is some sort of qualitative and/or quantitative explanation of fairness.
15Quantitative fairness is the easiest to address. By way of example if the transaction involves a share exchange or share cancellation, comparing the transaction pricing to the weighted average trading prices in the period leading up to the plan of arrangement is helpful to include in the factum even on the interim application. Plans involving asset exchanges become a little more difficult because the valuation exercises they entail are more complex. Nevertheless, the factum should contain an explanation for why the plan is quantitatively fair, not just a bald assertion to that effect.
16In some cases, quantitative fairness may not jump off the page or may not even be on the page. In those situations, an explanation of why the transaction is nevertheless fair will help in giving a judge comfort that the terms of service and on which the meeting is held are appropriate.
17It bears repeating that the judge on an interim hearing is not assessing fairness of the plan but fairness of the terms of service or the meeting. The nature of the proposed plan does, however have an effect on the terms sought on the interim hearing.
18For example, are 21 or 30 days between receipt of a circular and a meeting to approve the plan appropriate? In a plan where the share price offered is at a significant premium to the weighted average trading price, 21 days may be ample time. In a complex share exchange transaction where valuation is highly disputed, 21 days may be inadequate. Similarly, in a corporation dominated by institutional security holders, 21 days may be adequate because such investors have easy access to financial and legal advice. Where security holders are widely held retail investors with small holdings, the analysis might differ. In some circumstances, the interplay between the nature of the proposed plan, the nature of security holdings and the terms sought might lead a judge to appoint amicus curiae for the final hearing.
19In setting out these factors I am not suggesting that shorter service is not appropriate where the security holders are small, retail investors. All I am saying is give the court the information it needs to decide whether the terms the applicant seeks are appropriate.
20In setting out these comments in connection with this particular plan, I am in no way being critical of counsel in this matter. The observations set out above respond to an emerging pattern in materials delivered on interim applications. I am concerned that the increasing time pressures on judges and the absence of information about plan fairness in factums on interim applications will at some point lead a court to reject an interim application not, because the transaction is so unfair that it ought not to proceed but because the factum contains inadequate information about fairness.
21On this hearing I was fortunate to have excellent counsel who were able to address my concerns within the 20 minutes allocated. In the absence of more detailed discussions about fairness in interim factums, that may not always be the case. As a result, I thought it more helpful to raise the issue pre-emptively when it has no detrimental effect than to raise it for the first time when the absence of information is fatal.
Koehnen J.
Date: January 18, 2021