The appeal by shareholders, British Columbia Investment Management Corporation and others, from Magna International’s successful application for an order approving a proposed arrangement pursuant to s. 182(5) of the Business Corporations Act has been dismissed. Magna designed, developed and manufactured automotive systems.
The opposing shareholders were the only Class A shareholders who opposed approval of the proposed arrangement. Collectively, they owned less than three per cent of all of the Class A Shares.
Magna had a dual class share capital structure comprising Class A subordinate voting shares (the “Class A Shares”) and multiple voting Class B shares (the “Class B Shares”). The company’s controlling shareholder, the Stronach Trust, owned, outright and through other corporations, all of the 726,829 outstanding Class B Shares.
One component of the proposed arrangement was that the Stronach Trust would return all of its Class B shares to the company to be cancelled in exchange for U.S. $300 million in cash and 9,000,000 Class A Shares issued from the company’s treasury (representing a total value of U.S. $863 million). This would consolidate Mangna’s voting equity securities into a single class, to be renamed “common shares”, of which the Stronach Trust would indirectly hold 7.44 per cent.
The Class A shareholders approved the proposed arrangement by a three-to-one majority. The application judge held that Magna satisfied the test of demonstrating a valid business purpose for the proposed arrangement, and also satisfied the “fair and reasonable” test, notwithstanding that the court was unable to make its own factual determination regarding the financial costs and benefits of the proposed arrangement. At issue on appeal was whether the proposed arrangement was fair and reasonable.
The Appeal was dismissed and it was held that the application judge correctly concluded that the “valid business purpose” inquiry required only the demonstration of the prospect of clearly identified benefits to the corporation that had a reasonable prospect of being realized if the proposed arrangement was implemented.
The court also held that the application judge correctly concluded that the primary cost of the arrangement fell on the Class A shareholders and not on Magna. The reasonable inference from the favourable vote of the Class A shareholders was that they had concluded there was a reasonable possibility that the potential benefits to them exceeded the certain costs of the transaction.
The application judge was required to consider whether the arrangement was fair and reasonable. The difficulty was that the court was unable to make an exact determination of the relative financial costs and benefits of the intended arrangement. The judge relied heavily on the vote of informed shareholders, acting in their self-interest, as evidence that the proposed arrangement was fair and reasonable.
The court held that the application judge correctly concluded that Magna satisfied the requirements of the “fair and reasonable” test. In other words, there were no palpable or overriding errors in his findings of fact or in his approval of the proposed arrangement.
Food for thought: if, after they lose a vote, the minority of shareholders in a single class have the right to ask the court if a proposed arrangement was fair, doesn’t it defeat the purpose if the judge can rely on the fact that they lost that vote to say that it was fair?