Canada: Pre-Pack Sale Option – Potential Investment Opportunity For Prospective Purchasers

Last Updated: April 24 2017
Article by Larissa Roche

Introduction

Acquiring a distressed business or asset can be an excellent investment opportunity for prospective purchasers. Strategic buyers see distressed entities as presenting avenues which may not have otherwise been available if the target was solvent. Purchasers can attempt to acquire a struggling business with a view to building it back up and either continuing the business as a going concern or selling it for a profit. Purchasers may also attempt to acquire only specific assets and consolidate those with their own. Either way, the financial position of the vendor can present unique opportunities for savvy purchasers.

In a typical distressed sale, a formal insolvency proceeding is initiated under either the Companies' Creditors Arrangement Act (the CCAA) or the Bankruptcy and Insolvency Act (the BIA). The courts approve the sale process, and it is conducted under the supervision of a CCAA monitor or a BIA receiver or trustee.

New Trend Emerges

Recently however, a new trend in distressed asset sales has emerged in Alberta. The downturn in the energy industry in 2016 led debtors, who were defaulting on credit covenants, and their creditors to get creative. The result was the rise of the "pre-pack" sale option. While this type of sale has been used in other jurisdictions, it has only recently become popular in Alberta.

What Is a Pre-Pack Sale?

A pre-pack sale allows the vendor and purchaser to negotiate an agreement for the sale of distressed assets outside of the court process, but with a mutual understanding that the transaction will ultimately close through an insolvency proceeding, with the court's blessing. Prior to entering into any formal insolvency proceedings, the debtor runs a sales process similar to the sort that would be undertaken within a court supervised CCAA or BIA process. Once the sale agreement has been finalized, the debtor or secured creditor initiates formal insolvency proceedings in court. The deal closes under the court's administration, and ultimately the purchaser takes the assets free and clear of any creditor encumbrances, pursuant to a court order.

While the parties may negotiate the terms and timing of the deal, the court holds the ultimate power to approve or dismiss the pre-pack sale. The court's decision will depend on a number of factors.

Recent Alberta Decision in Re Sanjel

In Re Sanjel Corporation,1 (Sanjel) the Alberta Court of Queen's Bench (the Court) considered a pre-pack sale under the CCAA. Sanjel was an oilfield services company saddled with $880 million of debt — approximately $400 million of which was owed to its banking syndicate and approximately US $300 million to unsecured bondholders. By late 2015, the company had defaulted on its loan agreement and bond trust indenture. Between December 2015 and April 2016, several unsuccessful attempts were made to negotiate a deal with the bondholders to keep Sanjel alive. At the same time, Sanjel canvassed the open market to seek sale and investment proposals. Even though the sales process was not conducted under court supervision, it tracked closely to typical CCAA proceedings — Sanjel specifically targeted marketing efforts at potentially interested purchasers, established a virtual data room, and imposed deadlines for preliminary and final offers over multiple phases.

On April 3, 2016, Sanjel entered into two asset purchase agreements to sell substantially all of their assets to two bidders who had submitted proposals under the out of court process. The next day, Sanjel commenced proceedings under the CCAA. Sanjel's banking syndicate supported the application, but it was forcefully opposed by the bondholders, who would be left empty-handed by the transactions.

The Court looked at Section 36(3) of the CCAA, which sets out a non-exhaustive list of six factors that a court must consider when approving a sale. The Court also considered the four principles arising from Royal Bank of Canada v Soundair Corp.2 (Soundair). The Court commented that conducting the sales process without prior court approval left both the procedure and the execution "open to attack by aggrieved stakeholders and bitter bidders".

Ultimately, the Court was satisfied that the sale met both the conditions set out in Section 36(3) of the CCAA and the Soundair principles. The Court held that the process was reasonable in the circumstances — it was brief, but not unreasonably brief given the current economic climate and Sanjel's rapidly deteriorating financial position. The monitor was supportive of the transactions, comfortable with the process that led to them and confident that Sanjel had made sufficient efforts to obtain the best possible price for the assets. Creditors had been consulted and were involved in the process. Sanjel thoroughly canvassed the market, such that all other viable or reasonable options were considered. Finally, the consideration received was reasonable and fair.

Sanjel confirms the court's willingness to respect a robust, fair and competitive pre-filing process, even when that process takes place outside of the court's supervision. With this outcome, the Court recognized that such sales are "consistent with the broad remedial purpose and flexibility of the CCAA."

Final Thoughts

Pre-pack sales are becoming more popular in Alberta. This approach offers a unique and cost-effective way for a distressed entity to relieve financial pressure. By condensing the time spent in creditor protection, debtors reduce costs and minimize the disruption to the business. The pre-pack sale appeals to the purchaser because it allows them to take the assets free and clear of all encumbrances pursuant to a court order. If they are to become the ultimate owner and attempt to move the business forward as a going concern, they also benefit from the shortened insolvency process.

However, purchasers in pre-pack sale scenarios need to be aware of the risks involved as well. Because the negotiations take place outside of the court's supervision, there is no guarantee of a fair and equitable process. This also leaves the deal open to attack from another bidder or a disgruntled stakeholder — an interested third party might suggest that the sales process was not conducted fairly or did not maximize value for creditors. Courts will scrutinize the marketing and sales process heavily to ensure the parties maintained transparency and integrity throughout, and to confirm a fair and competitive process was achieved.

Footnotes

1  2016 ABQB 257 [Sanjel].

2 [1991] OJ No. 1137, 4 OR 93d) 1 (CA) .

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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