On March 22, 2010, the Superior Court of Quebec approved a plan of arrangement under the Canada Business Corporations Act (the CBCA) that allowed a corporation, MEGA Brands Inc., to achieve a worldwide restructuring of its business under a corporate statute, rather than a more typical insolvency and restructuring statute like the Companies Creditors' Arrangement Act.
The arrangement compromised the claims of secured lenders under a credit agreement and two swap agreements as well as the claims of convertible debenture holders. The arrangement also effected a significant dilution of shareholders, but preserved an equity stake in the continuing company for these shareholders. The Court granted a temporary stay of proceedings against the applicant corporations as well as impleaded parties in the United States, Europe, and Mexico.
On March 23, 2010, the United States Bankruptcy Court for the District of Delaware granted an order enforcing the arrangement in the United States, under Chapter 15 of the U.S. Bankruptcy Code.
These orders confirm that the CBCA arrangement provision can provide a practical option for a quick and effective restructuring of a company's debt securities where stakeholders support the outcome and the Court is able to conclude that the transaction is fair and reasonable. This result was of critical importance to MEGA Brands, given that it operates in the toy industry and its concern that proceeding under an alternative statutory framework such as the Companies Creditors Arrangement Act and Chapter 11 under the U.S. Bankruptcy Code, could result in substantial harm to its relations with suppliers and customers, and substantial erosion of value to the business and stakeholder interests.
It is the first time an arrangement of this nature has been implemented in Canada. Although certain companies, such as Abitibi-Consolidated Inc., have previously tried to restructure under the CBCA, they have not been able to successfully complete their restructuring under this corporate statute as MEGA Brands managed to do.
MEGA Brands is a corporation governed by the CBCA, with its head office and senior management in Montreal. The arrangement involved a transaction between MEGA Brands and a number of related corporations and direct and indirect subsidiaries in Canada, the United States, Luxembourg, and Mexico.
Shareholders and lenders voted overwhelmingly in favour of the arrangement.
In written reasons for issuing the interim order, Castonguay J. confirmed that restructuring debt is an appropriate use of the CBCA arrangement provision. He based this decision on a small line of precedents involving the companies Tembec Arrangement Inc., Trizec Corporation Ltd., and Abitibi-Consolidated Inc. In the case of MEGA Brands, this included secured bank debt outstanding under a credit agreement with a number of banks and other lenders, secured debt under two swap agreements and unsecured notes issued under a trust indenture.
To be able to avail itself of the CBCA arrangement provisions, a corporation must be able to demonstrate both that it is not insolvent and that it is impracticable for the corporation to effect a fundamental change in the nature of an arrangement under any other provision of the Act. Castonguay J. found that MEGA Brands met the first of these requirements because at least two of the applicant corporations were solvent and because MEGA Brands continued to meet its obligations as they became due and would become solvent upon completion of the transaction. He also found that it was not practicable to proceed other than by way of arrangement when viewing the transaction as a complete package, in part because the arrangement contemplated the issuing of new shares by a company subject to American law. In reaching this conclusion, he preferred the English version of the arrangement provision over the French, which would translate literally to "practically impossible" rather than "not practicable." He found that the Policy Statement of Industry Canada concerning CBCA arrangements was consistent with the more permissive language in the English version. With respect to the stay of proceedings, he noted that MEGA Brands was party to a number of contracts that could be interpreted to stipulate events of default if MEGA Brands availed itself of the CBCA arrangement provision. He noted that the objectives of the arrangement were legitimate and contemplated by the statute and that the stay of proceedings was necessary to give effect to these objectives. He also noted that the stay was temporary and would only affect a limited number of creditors. For these reasons, he granted a stay of proceedings relating to any default as a result of the arrangement until the hearing of the application for a final order approving the arrangement.
Gascon J. did not issue reasons in conjunction with his final order approving the arrangement. He did, however, write a preamble to the order noting that the arrangement was fair and reasonable. In the final order itself, he gave effect to the mutual releases and discharges contemplated in the plan of arrangement and declared that the applicants and impleaded parties were authorized to take all steps and actions necessary or appropriate to implement the arrangement and the transactions contemplated thereby. He also granted a stay of proceedings relating to the arrangement until the earlier of May 15, 2010 or the date at which the arrangement was fully implemented. He declined to grant a permanent stay of proceedings such as Pepall J. granted in the Tembec arrangement.
In the U.S. proceeding, Sontchi J. granted an order recognizing the Canadian proceeding under Chapter 15 of the U.S. Bankruptcy Code.
Specifically, he found that the Canadian arrangement proceeding was a "foreign main proceeding" for the Canadian entities involved and that it was a "foreign nonmain proceeding" for the U.S. entities involved in the arrangement for purposes of §§ 1515 and 1517 of the U.S. Bankruptcy Code. He also recognized MEGA Brands' Chief Financial Officer as the foreign representative of the entities involved in the arrangement pursuant to § 101(24) of the Bankruptcy Code. Finally, he granted an order giving full force and effect to the arrangement in the United States.
In particular, Sontchi J. gave effect to the mutual releases and discharges contemplated in the plan of arrangement; authorized the entities involved in the Canadian proceeding to take actions in the U.S. necessary or appropriate to implement the Arrangement and the transactions contemplated thereby; and gave effect to the stay of proceedings contemplated in the order of Gascon J. He also authorized the foreign representative to take all actions necessary to effectuate the relief granted in the U.S. order.
The orders described above confirm that the arrangement provision provided in Section 192 of the CBCA can be an effective mechanism for a company to restructure its debt securities by exchanging them for cash, equity, new debt, or a combination thereof.
Unlike the CCAA, the CBCA allows the arranged entities to remain in control of the restructuring process and does not call for a trustee or court-appointed monitor to oversee the transaction. Thus, in circumstances where compromising trade creditors is not an important aspect of the restructuring, a CBCA arrangement may provide a more efficient and flexible alternative for corporations that choose to restructure debt. In addition, the CBCA process is faster and less costly than the CCAA, and there may be a business benefit to not undertaking insolvency proceedings.
At the same time, it remains an open question as to the scope of circumstances in which the Court will endorse the CBCA as an appropriate statutory framework for balance sheet restructuring, particularly where secured bank debt, non-CBCA companies or broad stays of proceedings are involved.
Ward Sellers practice covers many areas of corporate and securities law with a focus on domestic and cross-border corporate finance and M&A. Sandra Abitan is a Partner in the Insolvency & Restructuring group of the law firm Osler, Hoskin & Harcourt LLP in Montreal. Audrey DeMarsico practice focuses on legal research as an expert service to resolve complex legal issues in all practice areas.
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