Canadian distressed M&A activity seems
poised to rise, as low commodity prices and tight capital markets
spur a re-examination of business models and balance sheets built
for better times. Investment capital is readying itself for
upcoming distressed opportunities, and restructuring laws are
conducive to facilitating these deals.
Some investors and strategic buyers have shied away from
distressed opportunities in the past because they see them as being
especially risky, complicated and contentious. While there is some
truth to this, savvy investors know that this field also comes with
unique benefits and potentially outsized returns.
What is Distressed M&A?
Distressed M&A typically refers to deals completed when the
target company is facing insolvency or is already insolvent. The
Companies' Creditors Arrangement Act (CCAA) is a
popular proceeding for larger insolvent companies, while
receiverships are more common for smaller companies. Solvent
companies have increasingly used the plan of arrangement provisions
under the Canada Business Corporations Act or its
provincial counterparts to de-lever balance sheets by way of
securities exchanges. Most restructuring proceedings now involve a
competitive sales process, equity subscription, debt-to-equity
conversion, or other M&A component.
Benefits and Considerations
Court oversight and the involvement of a CCAA monitor or a
receiver can significantly reduce acquisition risks. These
independent eyes add rigour to the disclosure process and a
dealmaking orientation. A court's powers can also simplify the
process. For example, a court can stay the exercise of contractual
remedies by counterparties and override restrictions against
assignment or other actions. For asset purchases, a court can vest
title free and clear of liens and other interests to achieve a
level of title certainty rarely equalled by even the most
comprehensive (and costly) legal due diligence exercises.
Meanwhile, judicial oversight and approvals reduce liability
exposure for boards of directors.
There can also be extraordinary opportunities to re-model the
target business. In addition to debt reduction, uneconomic
contracts can be terminated or left behind. A purchaser can also
"cherry pick" attractive parts of a business with more
ease than in the ordinary course.
There are, however, unique considerations. Even in
"debtor-in-possession" CCAA proceedings, it is not always
clear that a company's management and board are firmly in
control. Lenders, bondholders, employee groups and other key
stakeholders are often heavily involved and can strongly influence
outcomes. Confidentiality can also be challenging. Generally, the
transparency and multi-party nature of most insolvency proceedings
promotes leaks and disclosure. And asset sales may deliver
"cleansed" assets, but they can also leave behind
valuable tax attributes (although share transaction alternatives
exist). Restructuring processes can also be notoriously fluid and
Some distressed M&A opportunities allow buyers to
"cherry pick" parts of a business with more ease than in
the ordinary course.
Perhaps topping the sights of distressed investors presently is
the oil and gas sector. A steep drop in oil prices, tightening of
the capital markets, and other factors are taking their toll. The
sector has already seen insolvency filings for companies like
Laricina Energy and Southern Pacific, and it is still uncertain
where we sit in the cycle.
Elsewhere, players in the mining and retail sectors are also
looking to generate distressed M&A opportunities. With
investment options across a number of sectors, those prepared to
enter distressed M&A waters may find attractive opportunities
in the coming year.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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