Venture Companies: Spin-outs by Arrangement

By Linas Antanavicius

August 20, 2015

Meaning of Arrangement

The Business Corporations Act (British Columbia) (the “Act”) does not define the term “arrangement”.  However, section 288 (1) of the Act permits a company to propose an arrangement which may include but is not limited to an alteration of its charter documents or rights and restrictions attached to its shares, an amalgamation with one or more corporations, a division of the business carried on by the corporation, a transfer of money, securities or property, rights or interests to another corporation in exchange for money, securities or other property of the other corporation, a transfer of liabilities, an exchange of securities, a dissolution without liquidation and a compromise with creditors.

Arrangements are often used by venture companies to “spin out” assets into subsidiaries.  As a result of the spin-out, the shareholders of the company often retain their shares in the parent company and become the shareholders of the subsidiary.  If the parent company is a reporting issuer and the plan of arrangement involves an exchange of securities, the subsidiary also becomes a reporting issuer in the same jurisdictions where the parent company is a reporting issuer.  The reporting issuer status is one of several prerequisites for listing the shares of a company on a stock exchange in Canada.

Approval Process

Under the Act, in order to become effective, the plan of arrangement involving the shareholders of the company has to be approved by a special shareholders’ resolution and the court, and has to be accepted by and filed with the corporate registrar.

Arrangement Agreement and Information Circular

The arrangement has to be finalized in an arrangement agreement that includes a plan of arrangement as a schedule.  The arrangement has to be approved by the boards of directors of the companies involved in the plan of arrangement before submitting it for approval by the shareholders and the court.

After the arrangement is finalized and approved by the board of directors, the company prepares an information circular to its shareholders describing the arrangement.  If the company is a reporting issuer, the information circular has to provide prospectus level disclosure, which means that the information circular has to have the information that would be disclosed in a prospectus, including audited and pro-forma financial statements of the parent company and the subsidiary.

The Interim Order

The court proceedings with respect to the plan of arrangement are commenced by petition in the Supreme Court of British Columbia.

The Act does not require obtaining an interim court order before calling the shareholders’ meeting to approve the arrangement.  However, an interim court order is generally obtained prior to mailing the notice of meeting, the form of proxy and the information circular to the shareholders of the company.  The application for the interim order is usually brought without notice.  The interim order usually sets the date and place of the meeting as well as the quorum. It imposes requirements regarding the mailing of the information circular, the notice of meeting, the form of proxy and the notice of hearing regarding the final court order, and it also sets the date of the final court hearing.  The draft information circular, the notice of meeting and the form of proxy are attached as exhibits to an affidavit of a director or an executive officer of the company in support of the application for the interim court order.

During this hearing, the court usually considers whether there are any procedural fairness issues such as issues regarding the notice of meeting, the date and place of the meeting, the quorum requirements and whether there is sufficient disclosure in the information circular.  At this point, the court does not review the information circular in detail nor does it approve the information circular.

Shareholders’ Approval

After the interim order is granted the meeting materials are distributed to the shareholders of the company.  At the shareholders’ meeting, the shareholders are asked to approve the plan of arrangement by special resolution, which is usually 66.66% of the shareholders who vote at the meeting, provided the quorum is present.

The Final Court Order

An application for the final court order is brought after the shareholders approve the plan of arrangement.  The company has the obligation to satisfy the court that the statutory procedures have been met, that the application has been put forward in good faith, and that the arrangement is fair and reasonable.  In determining the fairness and reasonableness of the arrangement, the court must be satisfied that the arrangement has a valid business purpose, and that the objections of those whose legal rights are being arranged are being resolved in a fair and balanced way.

Filing the Plan of Arrangement with the Registrar

After the arrangement is approved by the court, the arrangement has to be filed with the corporate registrar.  It is good practice to check with the registrar’s office and confirm in advance that the plan of arrangement and the final court order meet the requirements of the registrar.

The TSX Venture Exchange Requirements

Companies listed on the TSX Venture Exchange (the “TSXV”) have to obtain the acceptance of the arrangement by the TSXV pursuant to section 8 of Policy 5.3 Acquisitions and Dispositions of Non-Cash Assets.  A letter from the TSXV is usually included as an exhibit to the affidavit in support of the final court order approving the plan of arrangement.

The Canadian Securities Exchange Requirements

Arrangements carried out by the companies listed on the Canadian Securities Exchange (the “CSE”) do not require the acceptance of the arrangement by the CSE.  However, companies listed or planning to list on the CSE should be mindful of the Regulatory Guidance on Plans of Arrangement and Capital Structure issued by the CSE on January 23, 2015, which states that:  “The Exchange is considering Policy amendments that would restrict the eligibility for listing of issuers that became reporting issuers by way of a plan of arrangement.  More specifically, an asset or business that was separated from an existing reporting issuer that held the asset or business for a significant period of time before completing a plan of arrangement would be considered eligible for listing.  Except in specific circumstances, an asset or business that simply goes “through” an existing reporting issuer to become a reporting issuer would not be eligible for listing unless it first filed and obtained a receipt for a prospectus.”

Arrangements under the Canada Business Corporations Act

There is a significant distinction regarding the involvement of the registrar with respect to arrangements under the Business Corporations Act (British Columbia) and the Canada Business Corporations Act (“CBCA”).  Pursuant to the “CBCA Director’s Policy Concerning Arrangements, under Section 192 of the Canada Business Corporations Act”, the company, among other things is required to provide advance notice of an arrangement, and to deliver to the CBCA Director the proxy and other materials related to the arrangement. This policy also contains provision with respect to interim court orders, notices of meeting and information circulars, methods of dissemination of materials, voting and approval requirements, fairness opinions, dissent rights, amendments to plans of arrangement and the substantive fairness of arrangements.  Unlike the CBCA, the Act does not contemplate that the registrar will review the fairness of an arrangement or potentially appear and make submissions at a court hearing relating to an arrangement.

Furthermore, unlike the Act, section 192 of the CBCA imposes a solvency limitation on corporations contemplating plans of arrangement.  A corporation must be solvent pursuant to section 192(2) of the CBCA in order to be able to carry out an arrangement.

This article is provided for information purposes only.  For legal advice please consult a lawyer.