Canadian corporate legislation permits registered shareholders to dissent from significant corporate transactions (such as changing articles in some ways, disposing of substantially all the company’s undertaking, amalgamating and changing jurisdiction), and to require their company to purchase their shares for their “payout value” — fair market value. Dissent rights are also commonly given to registered shareholders by agreement or court order in plan of arrangement transactions. The legal theory behind dissent rights is that some kinds of transactions so significantly change the fundamental nature of the company in which the shareholder invested that they should have the option of exiting and liquidating their investment.
In Matre v. Crew Gold Corp., the Supreme Court of Yukon extended dissent rights in a plan of arrangement to beneficial shareholders. The company was pursuing a business combination through an arrangement that gave registered shareholders dissent rights. Several individual shareholders, believing they were registered, delivered dissent notices. However, they were only beneficial shareholders, their shares being registered in the name of an intermediary bank. The company therefore rejected their notices.
The court held that the company’s management owed a duty of fairness to the dissenters. It held that the company itself had largely caused the shareholders’ confusion about their status. It ordered that shareholders have the right to dissent, notwithstanding they were not registered.
Some of the factors that led the court to that conclusion were:
• The company had posted on its web site a list of its 50 largest shareholders, including two of the dissenters and not distinguishing between registered and beneficial shareholders.
• While the company’s information circular about the arrangement was clear that only registered shareholders could dissent, it said “nothing meaningful” about how beneficial shareholders could become registered and so exercise their dissent rights.
• One of the dissenters had contacted the company’s counsel and asked whether his dissent notice was valid. He was told counsel could not advise him about that. He was not told he was not a registered shareholder.
The court acknowledged this was an exceptional case. However, in-house counsel should take care not to repeat this company’s mistakes, and so lose control over which shareholders can dissent from transactions. They should ensure that publicly available information about their company clearly distinguishes between registered and beneficial shareholders. They should consider including in information circulars for transactions giving rise to dissent rights, if not information about how beneficial shareholders can become registered to exercise those rights, at least information about who they should contact to obtain that information.
If they are contacted by beneficial shareholders, while they obviously have to be careful about giving legal advice to them, they should not (in the words of the court) “evade” the issue. They should tell the shareholder whether they appear as a registered shareholder on the company’s central securities register. They should, at least, tell the shareholder whom to contact for advice about how to become a registered shareholder.
In Nixon v. Trace, the British Columbia Court of Appeal considered how to value the shares of shareholders who had dissented from a transaction in which their company would sell substantially all of its assets. The parties could not agree on the fair market value of the dissenters’ shares, so that was determined by the court. As a result of tax considerations, which need not concern us here, the dissenters argued the fair market value of their shares should be “grossed up” to compensate for the tax they would have to pay on the amounts they received.
The Court of Appeal rejected that argument. It clearly stated the issue was simply the en bloc value of the dissenters’ shares. The tax consequences of the shareholders exercising their dissent rights were irrelevant to that determination.
Often whether shareholders are likely to dissent from a transaction and what the fair market value of any dissenters’ shares might be are important business considerations in deciding whether to proceed with the transaction. When shareholders do dissent, the situation is often resolved by negotiation of an agreed payout value for their shares. This decision is useful for in-house counsel in estimating the likely “dissent cost” of a transaction. It will also be helpful in such negotiations, making it clear that the dissenters’ tax consequences are their own concern, not the company’s, and therefore not a legitimate factor in that negotiation.
Shareholders can become entitled to dissent from corporate transactions in a variety of situations. These two recent decisions provide useful information to in-house counsel about how to control which shareholders are entitled to dissent, and how to estimate and negotiate the fair market value of any dissenters’ shares, and so to control the cost of those dissent rights to their company. These can be important factors in the business decisions about whether and how to proceed with transactions giving rise to dissent rights.
Stephen Antle is a partner in the Vancouver office of Borden Ladner Gervais LLP, where his practice includes shareholder and securities dispute resolution.