On March 7, 2017, 1891868 Alberta Ltd., a wholly-owned indirect subsidiary of Sprott Inc. (Sprott, and together with its wholly-owned subsidiaries, Sprott Group), filed an originating application (Application) in the Court of Queen’s Bench of Alberta (Court) for an order approving a proposed plan of arrangement (Arrangement) with Central Fund of Canada Limited (Target), Sprott Physical Gold and Silver Trust (to be formed and managed by Sprott Asset Management LP (Trust)), the holders of class A non-voting shares (Class A Shares) of the Target and, as applicable, the holders of common shares (Common Shares) of the Target pursuant to Section 193(2) of the Business Corporations Act (Alberta) (Act). The Application has been scheduled to be heard by the Court on September 7, 2017.
The Application
The Application seeks an interim order for the calling and holding of a meeting of shareholders (Target Shareholders) of the Target to approve the Arrangement proposed by the Sprott Group. It should be noted that applications for court orders approving arrangements are typically made by target companies. Accordingly, this application, which is not supported by the Target, could be characterized as a “hostile” plan of arrangement. At an application held in April, the Court agreed to set a date in September for the interim application.
According to the Sprott Group, there are a number of qualitative and quantitative benefits to the Target Shareholders which are anticipated to result from the Arrangement and the transactions contemplated thereby, including eliminating the dual-class share structure, continued exposure to the future growth of the Target’s portfolio of assets, the availability of a physical redemption feature, and the potential for the Class A Shares to trade at, near or above their net asset value (instead of at a discount to net asset value, which is currently the case).
According to the Target, the Application is one of numerous steps already taken by the Sprott Group to seek control of the Target. Among other measures taken, the Sprott Group has previously attempted to requisition a meeting of the Target to, among other things, elect a slate of directors (Requisition), commenced a derivative action against the Target and appealed to the Court of Appeal the Court’s finding that the Requisition was invalid. All of these attempts were unsuccessful.
In this context, a take-over bid made directly to the holders of Common Shares and Class A Shares would likely be ineffective since, according to Sprott, at least 75% of the Common Shares are held by directors and officer of the Target and such persons are not expected to tender to the bid.
Proposed Structure of Arrangement
The Target has a dual class share structure which consists of Class A Shares and Common Shares. The Target is authorized to issue 50,000 Common Shares, of which 40,000 Common Shares have been issued and are outstanding, and an unlimited number of Class A Shares, of which approximately 252,116,003 Class A Shares have been issued and are outstanding. The Class A Shares are publicly held, while the Common Shares are held largely by the Spicer family. Holders of Class A Shares (Class A Shareholders) are not entitled to vote at any meeting of shareholders, other than on specific matters set forth in the articles of the Target and pursuant to applicable law. The holders of Common Shares (Common Shareholders) are entitled to one vote in respect of each common share held at meetings of shareholders of the Target.
The Class A Shareholders own 99.984% of the Target’s equity, with the remaining 0.016% owned by the Common Shareholders. Class A Shareholders have contributed approximately US$2.4 billion to the Target for the Class A Shares and the Class A Shares have a market capitalization on the Toronto Stock Exchange of approximately $4,268,323,931. In contrast, the Common Shareholders have contributed US$19,458 to the Target for their Common Shares. Under the Arrangement, each Class A Share and each Common Share would entitle the holder to one vote at the meeting of Target Shareholders.
The Sprott Group has proposed that in order to proceed, the Arrangement must be approved by at least two-thirds of the votes cast by holders of Class A Shares and Common Shares, voting together as a single class (Required Vote). Although a separate vote of the holders of Common Shares (Common Shareholders) is proposed to approve their participation in the Arrangement (Common Share Resolution), approval of the Common Shareholders as a separate class is not required in order for the Arrangement to proceed. If, under the separate vote of Common Shares, the Arrangement is not approved by two-thirds of the Common Shareholders, the Common Shares will not participate in the Arrangement and will not be entitled to exercise dissent rights with respect to the Common Shares. In this case, the Common Shares will remain outstanding in the Target following completion of the Arrangement and the Target will retain proportionate net assets (which may be in the form of cash) in respect of the Common Shares.
If the Arrangement is approved by the Required Vote, the Target will transfer its assets to the Sprott Group in consideration for the issue to Class A Shareholders of that number of trust units of the Trust (Units) equal to the number of issued and outstanding Class A Shares. If the Arrangement is approved by the separate vote of Common Shareholders, cash in an amount equal to the number of outstanding Common Shares multiplied by the net asset value per Class A Share will also be transferred under the Arrangement in consideration for that number of fully paid and non-assessable Units equal to the number of issued and outstanding Common Shares.
Standing to make Application
Under the Act, an application for an arrangement of a corporation may be made to the court by the corporation or a securityholder or creditor of the corporation. As the Sprott Group owns approximately 0.6% of the Class A Shares, it has standing as a securityholder of the Target to bring the Application in Alberta. Interestingly, although the Sprott Group has standing in Alberta, it would not have standing to bring the Application in respect of a corporation incorporated under the Business Corporations Act (Ontario) (OBCA) or the Canada Business Corporations Act (CBCA). Both of these acts are narrower in this regard and provide that the corporation must be the entity to bring an application in connection with an arrangement.
Voting Entitlements and Dissent Rights
Although the Act provides that a majority of at least two-thirds of the votes cast by shareholders is required for an arrangement, it is silent on whether shareholders holding different classes of shares are entitled to separate class votes. The OBCA provides for class votes in certain circumstances; the CBCA is silent as to class voting requirements.
It should also be noted that although the Act does not specifically require dissent rights in connection with an arrangement, they are almost universally provided to shareholders. In this case, the Class A Shareholders will receive dissent rights but the Common Shareholders will not receive dissent rights if the Common Share Resolution is not approved.
Court Approval Process
For the arrangement to proceed, the Sprott Group will need to obtain interim and final orders approving the Arrangement. The test for the final approval of a plan of arrangement is set out in the Supreme Court of Canada’s decision in Re BCE, which provides that the court must be satisfied that:
- there has been compliance with all statutory and Court-mandated requirements;
- the application has been put forward in good faith; and
- the arrangement is fair and reasonable.
At the interim order stage, the court is not concerned with the fairness and reasonableness elements of the test. Rather, the interim order would typically provide for, among other things, the calling and holding of a meeting of the Target Shareholders to approve the Arrangement proposed by the Sprott Group and would set out the voting entitlements and dissent requirements for the Arrangement. The purpose of the interim order is 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.”[1]
If the Arrangement is approved by the Target Shareholders in accordance with the interim order, Sprott would seek a final order from the Court. At this stage the Court will determine whether the proposed arrangement is procedurally and substantively fair and reasonable and meets all applicable statutory requirements for the approval of the final order. In assessing the fairness and reasonableness of the proposal, a 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. Importantly, the Court does not need to find that the proposed arrangement is the “most fair” or “best” possible proposal, only that it is fair and reasonable in the circumstances.
Courts are typically reluctant to interfere with the approval of shareholder-approved plans of arrangement. However, the recent decision of the Yukon Court of Appeal in InterOil Corporation v. Mulacek suggests that courts may conduct a closer analysis into whether a transaction is fair and reasonable. In that case, the court identified certain deficiencies or “red flags” that required the court to do more than simply accept the vote of the majority of the shareholders as a proxy for fairness.[2]
In the present case, the Sprott Group will likely argue that the Target has been poorly managed, as evidenced by the fact that the Common Shares and Class A Shares trade at a discount to their net asset value. The Sprott Group may argue that the actions of management of the Target have been oppressive, are in breach of the duties owed to the Target and the personal interests of the Spicer family in the Target represent a conflict of interest with rights of the Class A Shareholders, thereby requiring the intervention of the Court. The proposed transaction is likely to be supported by the majority of Class A Shareholders. It will be interesting to see how the court achieves “a fair balance”[3] between the potential competing interests of the Class A Shareholders and the Common Shareholders. Although the Arrangement, if it proceeds, would likely be approved by a majority of Class A Shareholders, the Court will have to reconcile the non-voting nature of the Class A Shares.
In contrast, the Common Shareholders will likely argue that the Arrangement is coercive to their interests. As described above, if the Common Shareholders do not separately approve the Arrangement, they lose their dissent rights and are left with shares in a company with only a small fraction of its previous assets. The Common Shareholders may advance the argument that their position before and after the Arrangement will be disproportionately (and adversely) impacted by the Arrangement as compared to Class A Shareholders.[4] The Common Shareholders may also argue that the Arrangement does not further the interests of the Target. The Supreme Court of Canada stated in Re BCE that “the proposed arrangement must further the interests of the corporation as an ongoing concern.”[5] If the Common Shareholders do not approve the Arrangement and the Target continues with fewer assets than before the Arrangement, the interests of the Target may not necessarily be furthered.
Looking Ahead
It remains to be seen if the Court will grant the interim order or any final order for the Arrangement without the support of the Target. Given that the Application is novel, the Court will likely review the Arrangement with more scrutiny than it otherwise would with a routine plan of arrangement. The Sprott Group and the Spicer family are no strangers to conflict. In 2015, the Trust was successful in an unsolicited take-over of Central Gold Trust which was also run and controlled by the Spicer Family. This resulted in a lengthy battle which lasted a year. Given the Sprott Group’s previous measures to seek control of the Target, the Application could mark the beginning of a similarly long battle for control of the Target.