• Confirmation that “Sunset” Clauses in Plans of Arrangement are Effective and Enforceable: Sturm v. Sprott Resource Lending Corporation, 2014 BCSC 190
  • February 18, 2014 | Author: Gregory Hogan
  • Law Firm: Cassels Brock & Blackwell LLP - Toronto Office
  • This decision provides comfort to participants in M&A transactions (including boards) that, following issuance of a final order approving a plan of arrangement, the plan and its operation will be extremely difficult to impugn.

    The plaintiff in this case was an investor who had purchased shares in a number of corporations that were subject to plans of arrangement. The plaintiff was required to take specified steps to exchange his shares for new shares. Despite receiving written notice of the need to do so, the plaintiff did not take those steps and after the 6 year deadline imposed by those arrangements had passed, the entitlement to these new shares expired. The relevant deadline provisions in the various transactions (the “sunset” clause or the “proscription” clause) were typical for these types of plans and stated that failure to take the required steps and deliver the required documents to exchange the share certificates within 6 years would mean that the shareholder was deemed to have surrendered to the acquiror/resulting issuer all rights and interest in such shares together with all entitlements to dividend distributions and interest thereon. In the final orders approving the plans of arrangement, the court had declared that the plans were in fact fair to shareholders.

    The court held that the plans, including the sunset clauses, were effective and enforceable. The final order stood as the court’s decree on fairness and reasonableness and was binding.

    The court rejected the argument that the sunset clauses were unfair and unenforceable. The court stated that “the binding nature of a plan of arrangement provides necessary certainty to companies and their investors”. In the final orders approving the plans of arrangement, the court declared that the plans were in fact fair to shareholders. No claim of oppression was advanced by the plaintiff. In response to the plaintiff’s claim that he was not attacking the fairness of the plan, which had been found to be fair by the court, but the specific manner in which the sunset clause operated, the court responded that the “plan of arrangement must be taken as including not only the substance of what was to be accomplished - but also the procedure or means by which the former shares would be surrendered and replaced with the new shares”. The court further recognized the legitimate objective of a sunset clause, being to supply a mechanism by which the share register can be made more accurate and certain.

    The court also pointed out the obvious, being that if the plaintiff wished to challenge the inclusion of the sunset clauses in the plan of arrangement, he need only have attended at the meeting or at court. He did not object at the meeting or at court. The court agreed that the Company Act (the “Act”) provisions related to circulars and disclosures therein on arrangements provide the basis upon which corporations are to make disclosure of arrangements to shareholders. The Act “depends upon, shareholders reviewing and if appropriate, acting on the information that is provided to them as they deem necessary”. The plaintiff received the materials, and there was no question that the company was deficient in any respect making shareholders aware of the plan and its terms.

    The court also rejected arguments that:

    • the sunset clause resulted in unjust enrichment;

    • the corporations owed a duty of care to the plaintiff to ensure that the plaintiff understood the sunset clauses and to make efforts to make the plaintiff aware of the loss of rights;

    • the sunset clauses were a penalty;

    • the defendant now held the new shares in trust for the plaintiff;

    • the hearing for the final order was in the nature of an ex parte application, requiring full and frank disclosure of all material facts, without which permits the court to set the order obtained aside without regard to the merits of the application; and

    • since the corporations were, without opposition, seeking to deprive the shareholders of their proprietary rights, there was an obligation to ensure that the court was fully and specifically aware of the sunset clauses in assessing fairness and reasonableness.