BC Courts Uphold Controversial Plan of Arrangement 

publication 

Spring 2008 - (Commercial Litigation Brief Spring 2008)

Commercial Litigation Brief Spring 2008

Typically, courts will only rarely and sparingly interfere with contractual rights that parties freely negotiate and agree upon.

However, in Protiva Biotherapeutics Inc. v. Inex Pharma­ceuticals Corp. , the British Columbia Court of Appeal recently determined that the courts can adjust contractual rights in order to achieve a workable plan of arrangement proposed by a company under the British Columbia Business Corporations Act (the "Act").

A plan of arrangement is a mech­a­nism by which a company may reorganize its affairs in order to achieve an economic benefit for the company and its stakeholders. Convenience and flexibility are at the heart of the purpose for the arrangement provisions of the Act. Plans of arrangement may consist of virtually any kind of corporate reorganization that a company wants to propose and must be voted on by the stake­holders directly affected by the arrangement. Once the plan of arrangement is approved by those stakeholders, it must be approved by the court.

In the Inex case, Protiva ap­pealed an order of the Supreme Court of British Columbia approving a plan of arrangement proposed by Inex to transfer all of its property, rights, interests and liabilities to a company called Tekmira Pharmaceuticals Cor­poration with the result that Inex's contractual obligations with Protiva were also transferred to Tekmira.

The plan of arrangement was opposed by Protiva because the assignment of the contracts it had with Inex required Protiva's consent and Protiva was not willing to provide that consent. Inex argued that the court had broad discretion under the Act to approve any plan of arrangement as long as the arrangement was fair and reasonable to all of those affected by the arrangement.

The issue before the court in the Inex case was whether the broad discretion of the court under the Act included the ability of the court to approve an arrangement that would essentially circumvent Protiva's contractual rights. Mr. Justice Pitfield was able to reconcile the principle of freedom of contact with the purpose of the arrangement provisions in the Act. Because the reorganization proposed by Inex was otherwise fair and reasonable from a business perspective, the court preferred to approve the plan of arrangement, as long as it could find a way to address any prejudice that might be suffered by Protiva as a result of circumventing its right to withhold consent to the as­signment of its contracts to Tekmira.

Protiva asserted, among other things, that Tekmira would be better positioned than Inex to compete with Protiva. It also asserted that if the contracts were assigned to Tekmira, thereby relieving Inex from its contractual obligations, Inex would be under no obligation to respect the contracts' confidentiality provisions and would not be constrained from carrying on the business activity prohibited by those contracts.

Mr. Justice Pitfield held that there was no prejudice to Protiva that could not be re­moved by means of court orders. He found that the power to remove any such prejudice by court order is contemplated in the language of the Act (section 291(4)(c)). For instance, Inex was permanently enjoined from disclosing any confidential information and from pursuing any business activity as provided in the contracts.

Protiva unsuccessfully appealed the decision of the Supreme Court of British Columbia. The Court of Appeal held that "third party rights must be considered and accommodated within the discretionary analysis but they cannot be erected as an impermeable barrier to an arrangement."

Had the court not balanced the parties' interests and exercised its discretion in this way, the restrictions on assignment contained in the Inex/Protiva contracts would have allowed Protiva to effectively exercise a veto over the plan of arrangement. As stated by the Court of Appeal, "were it otherwise, the third party could exercise powerful leverage wholly out of proportion to the value of the rights compromised by the arrangement, or the party could simply act as a spoiler for purposes unrelated to those rights."

The balancing of third party contractual rights against an otherwise fair and reasonable plan of arrangement had not previously been considered in British Colum­bia in con­nection with the arrangement provisions of the Act. This issue had also not been considered in the other provinces with similar arrange­ment provisions, except in Petro­Kazakhstan Inc . v. Lukoil Over­seas Kumkol B.V ., [2005] A.J. No. 1415 (Alta.Q.B.), where the Alberta Court of Queen's Bench applied a similar analysis to that approved by the British Columbia Court of Appeal.

It is now certain that the courts are empowered by the Act to affect contractual rights in connection with the approval of a plan of arrangement. The actual extent to which contractual rights might actually be compromised under the arrangement provisions of the Act, and similar provisions in other provinces, will likely depend on the severity of the prejudice that can be demonstrated by a third party trying to assert its contractual rights in opposition to a plan of arrangement. As long as any prejudice to that third party can be minimized or eliminated either through the plan arrangement itself, or by way of a proposed court order in connection with court approval of the plan of arrangement, such resistance will not be a bar to a company's access to the arrangement mechanism in the Act.

By Karen Carteri

This article appeared in Commercial Litigation Brief Spring 2008

The article originally appeared as "Contractual Rights Circumvented to Uphold Plan of Arrangement" in the July 13, 2007 issue of The Lawyers Weekly , published by LexisNexis Canada Inc.