COURT FILE NO.: CV-23-00692991-00CL DATE: 20230303 SUPERIOR COURT OF JUSTICE – ONTARIO COMMERCIAL LIST
IN THE MATTER OF AN APPLICATION UNDER SECTION 182 OF THE BUSINESS CORPORATIONS ACT, R.S.O. 1990 c. B. 16, AS AMENDED, AND SECTION 60 OF THE TRUSTEE ACT, R.S.O. 1990, c. T. 23, AS AMENDED
AND IN THE MATTER OF A PROPOSED PLAN OF ARRANGEMENT INVOLVING NORANDA INCOME FUND, 1884699 ONTARIO INC. AND GLENCORE CANADA CORPORATION
BEFORE: Penny J.
COUNSEL: Andrew Gray, Karrin Powys-Lybbe and Pat Chapman for the Applicants Shane D’Souza for the purchaser – Glencore Canada Corporation
HEARD: March 2, 2023
Reasons
Background
[1] This is an application by Noranda Income Fund and 1884699 Ontario Inc. (“188”) for an order approving a plan of arrangement under the Business Corporations Act (Ontario) and under the Trustee Act. Under the terms of the arrangement, Glencore Canada Corporation (“purchaser”) will acquire all the issued and outstanding priority units of the Fund for $1.98 per unit in cash.
[2] On March 2, 2023, I approved the arrangement and issued the requested order, with written reasons to follow. These are the reasons.
[3] The background to this application and the plan of arrangement are detailed in the Circular and well summarized in the applicants’ factum.
[4] In brief, the Fund is an unincorporated open-ended trust, established under the laws of Ontario, with its head office in Toronto. The Fund is an income trust whose priority units trade on the TSX. The Fund owns an electrolytic zinc processing facility, the second largest in North America, located in Salaberry-de-Valleyfield, Quebec.
[5] 188 is incorporated under the provisions of the OBCA, with its head office in Toronto. 188 is an indirect wholly owned subsidiary of the Fund.
[6] The purchaser is a wholly owned subsidiary of Glencore plc. The purchaser is the manager of the zinc processing facility and currently holds special units issued by the Fund which represent 25% of all issued and outstanding units (that is, priority and special units together) of the Fund.
[7] The past few years have been difficult for the resource industry, with supply chain disruptions and labour shortages presenting challenges to the sector globally. In January 2017, in light of negative market conditions facing the Fund, the board of trustees of the Fund announced the suspension of monthly distributions to the priority unitholders, which to date have not recommenced.
[8] Given the suspension of monthly distributions and other financial challenges, in early 2021 the independent committee of the board of trustees began to question the sustainability of the Fund’s business model and began a strategic review. The independent committee of the board, with the benefit of its own legal and financial advice, ultimately came to the view that a going private transaction with the purchaser held out the most promise for the benefit of the Fund and the priority unitholders. Lengthy negotiations with the purchaser were pursued. During this process, the independent committee obtained an independent valuation which determined that, as at December 31, 2022, the fair market value of the priority units ranged from $1.24 to $1.94 per unit. The independent committee also obtained fairness opinions to the effect that, as at January 8, 2023, the original consideration proposed by the purchaser of $1.42 per priority unit was fair, from a financial point of view, to the unitholders.
[9] Ultimately, the independent committee, after careful consideration of all matters it considered relevant, and with the benefit of external legal and financial advice, unanimously determined that the proposed arrangement was in the best interests of the Fund and fair to priority unitholders. Accordingly, the committee unanimously recommended that the board: a) approve the arrangement; b) enter into the arrangement agreement with the purchaser; and, c) recommend that the priority unitholders vote in favour of the arrangement.
[10] Likewise, after careful consideration and taking into account, among other things, the recommendation of the independent committee, and after receiving external legal and financial advice, the board unanimously (with those members of the board who are related to the purchaser abstaining) determined that the arrangement was in the best interests of the Fund and the consideration was fair to priority unitholders. Accordingly, the board unanimously approved the arrangement and recommended that the priority unitholders vote in favour of the arrangement.
[11] The Interim Order in this matter was issued by Steele J. on January 25, 2023 [^1]. At that time, there were known to be priority unitholders who intended to oppose the arrangement. In subsequent discussions leading up to the date of the unitholder meeting, however, the purchaser agreed to offer increased compensation to the priority units of $1.98 per unit. This increased compensation was conveyed to the priority unitholders by means of a press release issued on February 23, 2023. The purchaser also announced that it had entered into lock up arrangements with persons holding, in aggregate, 22% of the priority units.
[12] The Fund held the meeting of unitholders on February 28, 2023. At the meeting, 34 persons entitled to vote were present in person or by proxy representing 64.55% of the votes attached to the priority units. 35 persons were present in person or by proxy representing 73.41% of all outstanding units (that is, including the units held by the purchaser). The required quorum was clearly met.
[13] The arrangement was approved. 87.28% of the votes cast by all the unitholders present or represented by proxy were in favour of the arrangement. 80.71% of the votes cast by priority unitholders present or represented by proxy (excluding votes in respect of units which were required to be excluded by Multilateral Instrument 61-101 - Protection of Minority Security Holders in Special Transactions, i.e., the votes of units held by the purchaser) were in favour of the arrangement. The required 66 2/3% threshold of unitholder support was clearly met, regardless of the class of unitholder.
[14] In addition, the arrangement was approved by the sole shareholder of 188 by way of written resolution.
[15] No unitholder exercised dissent rights. No unitholder opposed approval of the plan of arrangement.
Analysis
Jurisdiction
[16] The application for approval of this arrangement raises an unusual, but by no means unprecedented, issue. This is because the proposed arrangement involves both a corporation and shareholder (188) and a trust and unitholders (the Fund). The interests being “arranged”, therefore, include the interest of the shareholder of a corporation and the interests of unitholders of a publicly traded income trust.
[17] Section 182 of the OBCA applies, by its terms, to a “corporation”. However, the applicants apply for relief not only under s. 182 of the OBCA but for the advice and direction of the court under s. 60 of the Trustee Act. Section 60 provides that a trustee may apply to the Superior Court of Justice for the opinion, advice or direction of the court on any question respecting the management or administration of trust property.
[18] This raises a threshold question of the jurisdiction of the court to approve an arrangement involving the unitholders of a trust.
[19] I conclude that the court has this jurisdiction, which has been recognized and applied in several cases preceding this one. The jurisdiction arises from s. 60 of the Trustee Act applied in conjunction with the broad and remedial nature of the arrangement provisions of the OBCA.
[20] With respect to business trusts in particular, Ontario courts have taken an approach to arrangements which is analogous to corporate law requirements when exercising jurisdiction under s. 60 of the Trustee Act. This approach gives effect to the observations of Justice Farley on the purpose of the arrangement regime, which is to solve “difficult and awkward situations”, and his observations on the scope of the Court’s jurisdiction in respect of arrangements. In Re Fairmont Hotels & Resorts Inc., 2006 ONSC 40900 at para. 1, Farley J. said:
I think it an error to forget that the very flexibility of the arrangement provision was designed to allow the solution of difficult and awkward situations. It would also be helpful to recall that this is a common law jurisdiction and that statute codification is not the answer to all problems. Codification if necessary, but not necessarily codification. The flexibility of the arrangement approach is well demonstrated.
[21] In Re InnVest Real Estate Investment Trust, 2010 ONSC 4292, the parties sought to arrange a trust by splitting off some of its holdings into a second trust. Justice Hoy (as she then was) heard the motion for an initial order. She noted that certain steps set out in the plan of arrangement involved corporations and others did not. With respect to the “non-corporate steps” (which involved business trusts), she considered the court’s jurisdiction under s. 60 of the Trustee Act as it relates to arrangements. In approving the arrangement, Justice Hoy stated (at para. 41):
Section 60 of the Trustee Act confirms that a trustee may apply to the Court for its opinion, advice or direction on any question respecting the management or administration of trust property. The Application, in addition to being made pursuant to s. 192 of the CBCA, is made pursuant to section 60 of the Trustee Act. I have applied a test analogous to that applicable in approving an arrangement in approving the non-Corporate Steps in the Plan of Arrangement, and the Plan of Arrangement as a whole.
[22] In a subsequent iteration of the InnVest saga, D.M. Brown J. (as he then was) likewise approved an initial order involving another application for approval of an arrangement involving a business trust. In InnVest Real Estate Investment Trust, 2011 ONSC 769. D.M. Brown J. held:
I concur with Hoy J. that an inquiry into the fairness and reasonableness of the trust-related steps in the proposed plan of arrangement falls within the Court’s jurisdiction under section 60(1) of the Trustee Act. The hesitation I expressed at the hearing related to the danger of the Court opening its door to applications by trustees for orders approving that which arguably they possess the power to do in any event. However, on a review of the evidence filed, I appreciate that the present case is exceptional in its nature, given the overall complexity of the proposed transaction.
[23] These same principles were applied in the context of a final order under the OBCA by Pattillo J. in Canadian Real Estate Investment Trust (Re), 2018 ONSC 2519.
[24] In this case, as in the InnVest and Canadian Real Estate cases, the arrangement is required to effect a complex transaction involving multiple parties and different business entities. The complexity of the arrangement makes it appropriate to have in place procedural safeguards typical of an arrangement under the OBCA, such as court supervision and approval, the exercise of voting rights and dissent rights.
[25] Based on my reading of the provisions of the OBCA and the Trustee Act in combination with the authorities cited above, and having regard to the processes prescribed by the OBCA and the Fund Trust Indenture (discussed below), I find the court has jurisdiction under s. 60 of the Trustee Act to apply the substance of the provisions of s. 182 of the OBCA to the arrangement of a business trust in appropriate circumstances. I further find it is appropriate to exercise that jurisdiction in the circumstances of this case. To paraphrase Hoy J. from InnVest, I will, therefore, in assessing the Fund components of the plan of arrangement as a whole, apply a test analogous to that applicable in approving an arrangement under the OBCA.
The Test for Approval of a Plan of Arrangement
[26] An arrangement is a catch-all mechanism for accomplishing complex fundamental changes in corporations (or business trusts), free of statutory constraints or limitations on particular types of fundamental changes. The purpose of arrangements is to provide a flexible mechanism that can be adapted to the needs of the particular case for accomplishing complex restructuring objectives while protecting securityholders, through Court supervision, from unfair prejudice: BCE Inc. v. 1976 Debentureholders, 2008 SCC 69 at paras. 123-125.
[27] The arrangement regime prescribes minimal procedural requirements in relation to arrangements and leaves it to the court, on application by the corporation or business trust: (i) to give advice and directions with respect to the conduct of obtaining securityholder approval of the arrangement; and (ii) to have the final say on the approval of the arrangement.
[28] There are three requirements for approval of a plan of arrangement:
(1) compliance with statutory and court ordered requirements; (2) the application is brought in good faith; and, (3) the arrangement is fair and reasonable, in the sense that: (i) it has a valid business purpose; and (ii) it resolves the objections of those whose rights are being arranged in a fair and balanced way.
Statutory and court-ordered requirements
[29] For reasons outlined above, the Trustee Act confers jurisdiction to apply the arrangement provisions under s. 182, by analogy, to a business trust in appropriate circumstances.
[30] Further, the arrangement is an “arrangement” within the meaning of s. 182(1) of the OBCA because it includes, among other things, a reorganization or scheme involving the business or affairs of 188. To the extent that the effect of the arrangement of the Fund on unitholders is considered, relative to the OBCA definition of an “arrangement”, the arrangement involves the acquisition of priority units for cash but is not a takeover bid. It is not a takeover bid because the arrangement involves the acquisition of units through a voting transaction. All the provisions of the Interim Order, relating to notice, conduct of the meeting etc., have been followed.
Good faith
[31] I find on the evidence that the application for approval of the arrangement has been brought in good faith in order to effect the acquisition of all the priority units of the Fund.
Fair and reasonable
[32] The valid business purpose for the arrangement is for the purchaser to acquire all the issued and outstanding priority units of the Fund.
[33] The Supreme Court of Canada has identified a number of factors that may be relevant to the consideration of the effect of an arrangement on interested parties, including: the process followed in approving the arrangement, voting, the presence of financial advice, and the offering of dissent rights: BCE Inc. v. 1976 Debentureholders, 2008 SCC 69 at paras. 150-152.
[34] In this case, the arrangement was unanimously recommended by the independent committee and unanimously approved and recommended by the board of trustees following a lengthy and involved strategic assessment and negotiation with the purchaser. The committee and the board had the benefit of independent legal and financial advice as well as an independent valuation and fairness opinions.
[35] Subsequent to the Interim Order, the consideration offered by the purchaser for priority units was increased (from $1.42) to $1.98 per unit. This amount is greater that the range provided by the independent financial advisor and represents a 102% premium over the pre-announcement trading price of the priority units. After a unitholder approval process conducted in compliance with the OBCA and the Interim Order, the arrangement was approved by 87.28% of votes cast by all unitholders and 80.71% of votes cast by priority unitholders. This vote, which significantly exceeds the required threshold of 66 2/3%, is particularly strong evidence of the fairness and reasonableness of the arrangement.
[36] In addition, no person has exercised the dissent rights provided in the arrangement and there is no opposition to this application for approval of the arrangement. These are further indicia of the fairness and reasonableness of the arrangement.
[37] Finally, as both Hoy J. and Steele J. have observed, the nature of this type of application, involving the “arrangement” of interests of shareholders of a corporation and unitholders of a trust, requires careful scrutiny of the applicable trust indenture as well as applicable corporate statutory provisions and constating documents.
[38] The Noranda Income Fund Trust Indenture is a lengthy, sophisticated and comprehensive document. It covers topics such as, the establishment and nature of the Fund, the creation, issue and sale of units (both priority and special) including rights and obligations of unitholders, the purpose and investments of the Fund, distributions, redemptions, takeover bids, the trustee (which is the board of trustees of the Fund) and its powers and duties, amendments, meetings of unitholders, termination of the Fund, liability of the trustee, unitholders and others, and the delegation of powers. In many ways, this document confers on unitholders rights and obligations comparable to those of a shareholder, and on the board of trustees rights and obligations comparable to those of directors, of an OBCA corporation. There is no material conflict between the provisions of the Trust Indenture and the terms of the plan of arrangement.
[39] Specifically, Schedule B to the Trust Indenture addresses matters requiring prior approval of unitholders by “special resolution”. It requires the Fund trustee to obtain the approval of unitholders by way of special resolution prior to taking certain prescribed actions. These prescribed actions include a combination, merger or similar transaction with any other person, if the transaction results in the other person holding more than 25% of the outstanding priority units. “Special resolution” is defined to mean a resolution passed by more than 66 2/3% of the votes cast at a duly constituted meeting of unitholders for which a quorum was present.
[40] Under the terms of the arrangement, the purchaser will acquire all the outstanding priority units of the Fund. The meeting of February 28, 2023 constituted a valid meeting of the unitholders, duly called. The votes cast in favour of the arrangement resolution presented at the meeting, at which a quorum was present, approved the arrangement by more than 80% of the votes cast (regardless of the class of unitholder). Thus, the process followed in seeking and obtaining support for the plan of arrangement complied with, and indeed exceeded, the requirements of the Trust Indenture regarding the rights of unitholders.
[41] All three requirements for approval of a plan of arrangement are, therefore, satisfied.
Conclusion
[42] For these reasons, the application for approval of the plan of arrangement is granted.
Penny J.
Date: March 3, 2023
[^1]: The jurisdiction issue was raised at the time of the motion for the Interim Order before Steele J. With agreement of the parties, the issue of the court’s jurisdiction was reserved to the judge hearing the application for final approval of the arrangement.