Canada: Concordia International Corp.'s Canada Business Corporations Act Proceedings Explained

The recent restructuring proceedings of Concordia International Corp. (Concordia) demonstrate that the arrangement provisions of the Canada Business Corporations Act (CBCA) remain as a powerful tool for balance sheet restructurings in Canada. These provisions allow a company to submit a plan of arrangement for creditor and court approval in order to affect a balance sheet restructuring in a timely and efficient manner. Although the CBCA does not provide a platform for operational restructurings or the compromise of trade debt, it can be used as a statutory mechanism to rationalize the capital structure of a business, even when dealing with a complex multinational enterprise. This bulletin examines the Concordia CBCA proceedings, the most recent example of the utility of the CBCA arrangement mechanism.

Blakes acted as Canadian counsel to the administrative agent for the syndicate of secured lenders.

Concordia's recapitalization transaction, completed in September 2018 pursuant to a CBCA plan of arrangement, resulted in, among other things:

  • A reduction of approximately US$2.4-billion in debt and approximately US$170-million in annual cash interest expenses
  • The issuance of approximately 87.69 per cent of the aggregate outstanding limited voting shares of the pro forma capital structure of Concordia, pursuant to a US$586.5-million private placement
  • A consolidation of Concordia's existing common shares by a ratio of 300:1

Remarkably, the recapitalization transaction was approved by 100 per cent of voting secured creditors, 100 per cent of voting unsecured debtholders and 87.47 per cent of voting shareholders. This far exceeded the commonly accepted voting threshold (although not statutorily prescribed) of a 66⅔ per cent majority of voting claims in each class of creditors voting on the plan. Although Concordia called for (and held) a shareholder vote, it reserved the right to seek Court approval of the CBCA plan, even if its shareholders had not approved the CBCA plan in the requisite majority. In this instance, Concordia would have likely needed to demonstrate that existing shareholders had no economic interest in Concordia.

BACKGROUND

Concordia is a global pharmaceutical company with international reach and operations in approximately 90 countries, headquartered in Ontario, Canada. Prior to the commencement of the CBCA proceedings, Concordia had assets valued at approximately US$3.7-billion and liabilities of approximately US$4.1-billion. Its liabilities were comprised of approximately:

  • US$1.07-billion and £485.63-million of principal outstanding under secured term loans
  • US$350-million of principal outstanding under secured notes
  • US$134-million in principal outstanding under unsecured bridge loans
  • US$1.5-billion of principal outstanding under unsecured notes

Concordia was listed on the TSX and its shares were widely held.

Set out below is a timeline of key events during the Concordia CBCA proceedings:

  • October 20, 2017: Concordia obtained a preliminary interim order from the Ontario Superior Court of Justice (Commercial List) (Court), providing a stay of proceedings and commencing the CBCA proceedings.
  • May 2, 2018: Concordia executed a support agreement with approximately 72 per cent of secured debtholders and 64 per cent of unsecured debtholders and obtained an interim order from the Court, which — among other things — authorized the holding of meetings of creditors and shareholders to consider and vote upon the proposed CBCA plan.
  • June 19, 2018: The meetings of creditors took place and each voting class of creditors and shareholders approved the CBCA plan.
  • June 26, 2018: Concordia obtained a final order from the Court, approving the CBCA plan.
  • September 6, 2018: The conditions to implementation of the CBCA plan were satisfied and Concordia completed its CBCA balance sheet restructuring and emerged as a recapitalized going concern.

NOTABLE MATTERS

Preliminary Interim Order and Extension of Stay to Foreign Entities

Historically, to the extent that a stay was granted in CBCA proceedings, it was granted at the interim order stage, traditionally the first step in a CBCA case. The interim order provides for a time and place for a meeting of creditors to vote on and consider a proposed plan.

In a few recent examples however, corporations have commenced CBCA proceedings without a proposed plan having been negotiated and sought a preliminary interim order, which provides for a comprehensive stay of debtholder rights (while normally leaving trade creditors unaffected), so as to preserve the status quo while negotiations on a plan are advanced with key stakeholders (as was the case in the 2016 Lightstream Resources Ltd. CBCA proceedings). The preliminary interim order and the stay provided therein is intended to bridge the gap between the date when the company needs protection and the date on which the terms of the CBCA plan are settled with key stakeholders and the interim order is granted. Key features of the Concordia stay are set out below:

  • Entities Covered: The stay extended to the entire global Concordia corporate enterprise (i.e., all of Concordia's domestic and foreign direct and indirect subsidiaries). This is a continuation of a trend whereby CBCA stays are extended beyond the Canadian incorporated applicant to foreign entities, as was the case in the 2014 Essar Steel Algoma Inc., 2016 Tervita Corporation and the 2016 Sherritt International Corporation CBCA proceedings. Concordia did not seek recognition of the stay in any foreign jurisdictions.
  • Scope of Stay: The stay prevented all secured creditors, unsecured debtholders and counterparties to contracts with the Concordia entities from exercising any rights or remedies as a result of the commencement of the CBCA proceedings, non-payment of interest under unsecured debt, any default or cross defaults under the unsecured debt and/or any defaults or cross defaults under secured debt (other than defaults arising as a result of non-payment of interest or amortization payments). Concordia continued making interest (at non-default rates) and amortization payments on its secured debt throughout the duration of the CBCA proceedings. The stay did not extend to employee or trade obligations.
  • Duration of Stay: The stay was effectively "evergreen", without temporal restriction. However, the preliminary interim order did expressly provide that any interested party wishing to amend or vary the preliminary interim order could bring a motion before the Court on seven business days' notice. No motion to limit or vary the stay granted pursuant to the preliminary interim order was brought and the preliminary interim stay remained operative in excess of six months without a plan having been proposed or interim order granted. This was more than four months longer than the period between the preliminary interim order and interim order in any prior CBCA arrangement proceeding.

Satisfying CBCA Requirements

Concordia was incorporated under the Ontario Business Corporations Act and as such, outside of the auspices of the CBCA at the commencement of the proceedings. Further, Concordia faced significant business challenges (i.e., liabilities exceeding the value of its assets and missed debt interest and principal payments) and may not have met the solvency requirements of the CBCA (the applicable arrangement provisions only apply to solvent entities). To overcome these potential barriers, Concordia followed the established practice of incorporating a separate corporation under the CBCA, which had no liabilities (ArrangeCo), with the intention that upon implementation of the CBCA plan, Concordia would amalgamate with ArrangeCo and continue as a CBCA corporation (as was the case in the 2008 Ainsworth Lumber Co. Ltd., 2013 8440522 Canada Inc. (known as Mobilicity) and 2016 Lightstream Resources Ltd. CBCA proceedings).

In granting the preliminary interim order, Justice G. Morawetz noted that "Canadian courts have held that the CBCA solvency requirement is satisfied where at least one of the applicant companies is solvent or where the applicant will be solvent after the arrangement is implemented." The Court went on to hold that it was satisfied that ArrangeCo did not have any liabilities and was solvent.

Secured Loan Indebtedness

The CBCA arrangement provisions have traditionally been used to affect more limited and surgical balance sheet restructurings, affecting only security holders. While courts have found that security holders clearly include holders of equity and publicly issued debt, the practice of using the CBCA arrangement mechanism to compromise secured loan debt pursuant to a commercial loan agreement is controversial and has not been affected in the face of opposition.

In the Concordia CBCA proceedings, secured creditors (both term lenders and noteholders) were classified into a single class for voting purposes and the CBCA plan affected and compromised secured debt (providing a combination of cash and new secured debt in settlement of the existing obligations).

Equity Claims

Prior to the commencement of the CBCA proceedings, Concordia was the subject of certain securities class action lawsuits. As part of the CBCA plan and final order of the Court approving it, Concordia obtained a release of all such class action claims (and any other claims based on equity interests) and their continuation and enforcement was limited to insurance proceeds (to the extent available). The rationale for this was that such claims, even if successful, would be equity interests or at best, unsecured claims, and in each case, would rank behind secured debtholders who were being compromised as part of the CBCA plan. It was the first time those principles were relied upon and applied in the CBCA arrangement context, although similar arguments have been advanced and relief has been granted in Companies' Creditors Arrangement Act (Canada) (Canada's principal statue for the restructuring of large insolvent companies) (CCAA) proceedings, as was the case in the Lightstream Resources Ltd. CCAA proceedings.

Implementation Mechanism

In the Concordia proceedings, the CBCA plan expressly contemplated that if certain milestones were not met, Concordia would seek to advance a recapitalization transaction on substantially similar terms under the CCAA or in Chapter 11 proceedings. In that regard, the interim order provided that a vote cast in favour of the CBCA plan may also be counted in favour of a CCAA plan on substantially similar terms, again affirming that in the right circumstances and with adequate advance disclosure, courts will approve a dual CBCA/CCAA voting mechanism (as was done in the Mobilicity CBCA proceedings).

As a Chapter 11 plan has rigid disclosure requirements, the information circular prepared by Concordia in connection with the CBCA plan contained a form of Chapter 11 plan and the requisite disclosure required under Chapter 11. A contemporaneous solicitation of votes for the Chapter 11 plan was included in the disclosure materials.

TAKEAWAY

The recent Concordia CBCA proceedings reiterate that in the appropriate circumstances, the CBCA arrangement mechanism can be used to successfully affect a large-scale balance sheet restructuring of a global enterprise. It also demonstrates the evolving flexibility of the CBCA arrangement mechanism to (i) provide for an extended stay of proceedings while negotiations take place with key stakeholders, (ii) provide for a dual CBCA/CCAA voting mechanism, and (iii) address unique challenges facing a business such as pending shareholder litigation.

For permission to reprint articles, please contact the Blakes Marketing Department.

© 2018 Blake, Cassels & Graydon LLP.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions