British Columbia Supreme Court rejects plan of arrangement for barring claims of historical shareholders

Overview

In Re iAnthus Capital Holdings, Inc., 2020 BCSC 1442, Justice Gomery of the BCSC rejected a plan of arrangement due to the overly broad scope of release and injunction clauses which were found to bar claims of historical shareholders which preceded the plan. His Honour did not dismiss the petition, but rather provided iAnthus and its noteholders with an opportunity to amend the plan to “narrow the release and injunction to the point of acceptability”.¹ 

Background

iAnthus Capital Holdings, Inc. (“iAnthus”) develops, owns, and operates licensed cannabis cultivation, processing, and dispensary facilities in the United States. iAnthus is incorporated pursuant to British Columbia’s Business Corporations Act (the “BCA”), and its shares trade on the Canadian Securities Exchange.

In April 2020, iAnthus defaulted on multiple debt obligations to both secured and unsecured debenture holders. On July 10, 2020, after negotiations, iAnthus, all secured noteholders, and holders of 91% of the indebtedness under the unsecured notes entered into a Restructuring Support Agreement (“RSA”).

The RSA contemplated a restructuring of iAnthus by way of a plan of arrangement, requiring court approval pursuant to s. 291 of the BCA. The terms of the RSA provided the noteholders would release iAnthus of its debt obligations (US$33 million to secured noteholders and US$45 million to unsecured noteholders) in exchange for 97.25% of the outstanding common shares of the company. Accordingly, the interest of iAnthus’ present holders of common shares would be reduced to the remaining 2.75% in the equity. The noteholders unanimously approved the arrangement.

iAnthus petitioned the court seeking to obtain the required approval of the arrangement. The order sought by iAnthus included a permanent injunction enjoining “all persons” from advancing any of the released claims.²

Justice Gomery declined to approve the plan of arrangement, citing specific concern with the broad scope of its release and injunction clauses as they pertained to the rights of historic shareholders.  

Analysis

Justice Gomery began his analysis by noting that the court’s power to approve an arrangement is conferred by s. 291 of the BCA. His Honour noted the legal framework governing the exercise of the court’s power under s. 291 was settled in BCE Inc. v. 1976 Debentureholders, 2008 SCC 69 (“BCE”), and requires the court explore the following questions: 

1. Have the statutory requirements been met?
2. Is the arrangement made in good faith?
3. Is the arrangement fair and reasonable?

Justice Gomery concluded that he was satisfied that all abovementioned questions would be answered in the affirmative, but for the broad scope of release and injunction clauses.

The Release Clause

The release clause in the plan of arrangement, as drafted, released the following parties:

“iAnthus Released Parties” defined in as: iAnthus and each of their respective current and former officers, directors, employees, current and former shareholders, auditors, financial advisors, legal counsel, and agents; and

“Securityholders’ Released Parties” defined as: noteholders and persons associated with them.³

Justice Gomery noted the beneficiaries of the release included persons who provided advice to iAnthus at arms’ length years ago, former officers and directors, and former shareholders who may have held shares and sold them years ago. Moreover, the release as drafted barred claims “arising on or prior to the Effective Date … for a monetary loss resulting from the ownership, purchase or sale of an equity interest in iAnthus”.⁴

Justice Gomery held the release was too broad and as such it was legally unjustifiable for him to make it an “ancillary order” under the BCA (discussed below) as it would bar claims of historical shareholders that preceded the plan of arrangement.⁵ His Honour rejected iAnthus’ justification that the alternative to the plan of arrangement would be a Companies’ Creditors Arrangement Act (“CCAA”) filing under which neither present nor former shareholders would receive anything from the company.⁶

Third Parties

Justice Gomery took issue with the release pertaining to third parties. His Honour rejected iAnthus’ reliance on Concordia International Corp. (Re), 2018 ONSC 4165 (“Concordia”) where, in the context of an arrangement proposed pursuant to s. 192 of the CBCA, the court applied principles developed under the CCAA in deciding that third party releases were appropriate.

In rejecting the applicability of Concordia to the case at hand, Justice Gomery stressed the difference between the CCAA and the arrangement procedure under the BCA. Specifically, His Honour noted the BCA is “not as open-ended as the CCAA”.⁷ While the CCAA expressly allows all creditors to have a say with respect to adopting a proposed arrangement, third party releases under the BCA restrict the rights of persons who have not been given an opportunity to have their say.⁸ His Honour concluded: third parties do not get a vote under the BCA. Consistently, in the case at hand, the RSA negotiation involved only iAnthus and its noteholders. Third parties were not at the table.

Justice Gomery noted authorization of a plan of arrangement involving third party releases can only be pursuant to the court’s power under s. 291 (4)(c). The section states:

(4) […] on an application to court for approval of the arrangement,

(c) the court may make any incidental, consequential and supplemental orders necessary to ensure that the arrangement is fully and effectively carried out.⁹

Justice Gomery referred to the British Columbia Court of Appeal’s decision in Protiva Biotherapeutics Inc. v. Inex Pharmaceuticals Co., 2007 BCCA 161 (“Protiva”), in which a plan of arrangement involving third party rights was approved. In Protiva, the BCCA held:

Third party rights must be considered and accommodated within the discretionary analysis but they cannot be erected as an impermeable barrier to an arrangement. 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.¹⁰

Justice Gomery explained that while the BCCA in Protiva approved the plan of arrangement involving third party rights, it did so only after being satisfied that the objecting creditor would not suffer prejudice. The BCCA made it clear that the court’s power to make “incidental, consequential and supplemental orders,” could only be justified where any interference with the rights of third parties to the arrangement is “truly ancillary and the substantive positions of third parties are protected”.¹¹

In the case at hand, Justice Gomery found that the release sought could not be justified as a “fair and reasonable balancing of the interests of the historical shareholders” who would receive no benefit under the plan and may not even be aware of the current proceeding.¹²

The Injunction Clause

Next, Justice Gomery took issue with the permanent injunction clause in the plan of arrangement which would bar “all persons” in the following terms:

All Persons are permanently and forever barred, estopped, stayed and enjoined, on and after the Effective Date, with respect to any and all Released Claims, from (a) commencing, conducting or continuing in any manner, directly or indirectly, any action, suits, demands or other proceedings of any nature or kind whatsoever against the Released Parties, as applicable; (b) enforcing, levying, attaching, collecting or otherwise recovering or enforcing by any manner or means, directly or indirectly, any judgment, award, decree or order against the Released Parties; (c) creating, perfecting, asserting or otherwise enforcing, directly or indirectly, any lien or encumbrance of any kind against the Released Parties or their property; or (d) taking any actions to interfere with the implementation or consummation of this Plan; provided, however, that the foregoing shall not apply to the enforcement of any obligations under this Plan.¹³

iAnthus submitted the purpose of the injunction clause was to encourage early resolution of any issues concerning the availability of the release. Justice Gomery rejected this submission and found not only would the effects of the injunction go beyond encouraging early resolution, but that it would in fact convert any unsuccessful attempt to challenge the release into a contempt of this Court.¹⁴

Justice Gomery held the injunction, much like the release clause, would bind historical shareholders, who may not have had notice of this proceeding. His Honour went further and stated that even if the release clause was modified to the point of acceptability, he would not approve the plan of arrangement on the basis of the injunction clause as presently formulated.¹⁵

Update

Following the release of Justice Gomery’s decision, the petitioners narrowed scope of release and eliminated the injunction clause in a revised plan of arrangement. The revised plan of arrangement was approved by Justice Gomery a month later, in iAnthus Capital Holdings, Inc. (Re) 2020 BCSC 1484.

¹ Re iAnthus Capital Holdings, Inc., 2020 BCSC 1442 at para 99.

² Re iAnthus Capital Holdings, Inc., 2020 BCSC 1442 at para 8.

³ Re iAnthus Capital Holdings, Inc., 2020 BCSC 1442 at para 56.

⁴ Re iAnthus Capital Holdings, Inc., 2020 BCSC 1442 at para 57.

⁵ Re iAnthus Capital Holdings, Inc., 2020 BCSC 1442 at para 82.

⁶ Re iAnthus Capital Holdings, Inc., 2020 BCSC 1442 at para 59.

⁷ Re iAnthus Capital Holdings, Inc., 2020 BCSC 1442 at para 73.

⁸ Re iAnthus Capital Holdings, Inc., 2020 BCSC 1442 at paras 69 and 73.

⁹ Re iAnthus Capital Holdings, Inc., 2020 BCSC 1442 at para 64.

¹⁰ Re iAnthus Capital Holdings, Inc., 2020 BCSC 1442 at para 66.

¹¹ Re iAnthus Capital Holdings, Inc., 2020 BCSC 1442 at para 80.

¹² Re iAnthus Capital Holdings, Inc., 2020 BCSC 1442 at para 83.

¹³ Re iAnthus Capital Holdings, Inc., 2020 BCSC 1442 at para 91.

¹⁴ Re iAnthus Capital Holdings, Inc., 2020 BCSC 1442 at para 94.

¹⁵ Re iAnthus Capital Holdings, Inc., 2020 BCSC 1442 at paras 97 and 98.