Following in the footsteps of the decision rendered in October
of 2019 in the context of Stornoway Diamond Corporation's CCAA
proceedings1, the recent decision by
the Superior Court of Québec in the CCAA proceedings of
Nemaska Lithium Inc. and its affiliates (collectively Nemaska)
provides further recognition to reverse vesting orders (RVO) as
another tool of insolvency practitioners to effectuate an efficient
transfer of going concern operations in a distressed context. It is
the first RVO approved in a contested context.
As explained in the decision rendered on October 15, an RVO
consists, in essence, of the sale of an insolvent company's
shares to a purchaser, wherein certain unwanted assets and
liabilities of the debtor are excluded. These non-assumed
liabilities are transferred, assigned and vested in newly
incorporated non-operating companies (ResidualCos) as part of a
pre-closing reorganization, thereby allowing the purchaser to
efficiently carry on the operations of the debtor while maintaining
in force the existing permits, licences, authorizations, essential
contracts and fiscal attributes of the debtor. Vesting out unwanted
assets and liabilities maintains the existing corporate structure
of the debtor companies rather than vesting out the purchased
assets into a newly formed entity.
Essentially, an RVO allows for the transfer of liabilities/unwanted
assets out of the debtor companies, rather than transferring the
assets out of the toxic debtor into a newly formed entity. The end
result is to expunge the existing corporate structure of the debtor
companies of anything the purchaser does not want, have the debtor
companies emerge from their CCAA process and be replaced by
ResidualCos. The main objectives are to preserve the
permitting/licensing and preserve the tax attributes.
An RVO offers an efficient and effective alternative to plans of
arrangement (POA) and traditional approval and vesting orders
(AVO), particularly for debtor companies operating in a highly
regulated environment and where there is no value remaining beyond
the realization of secured debt and the parties intend to maintain
the going concern operations of the debtor company.
Nemaska ? the factual context
Nemaska is a public company that was in the process of
developing a significant spodumene lithium hard rock deposit, known
as the Whabouchi mine located in Quebec's James Bay region, as
well a commercial electro-chemical plant where the spodumene
concentrate would be transformed into high purity lithium hydroxide
using proprietary methods developed by Nemaska.
In large part due to the falling price of lithium, Nemaska had to
seek CCAA protection on December 23, 2019. Following the conclusion
of a sale or investment solicitation process (the SISP), Nemaska
accepted a qualified bid submitted by a group of third-party
bidders, including Investissement Québec (the offer).
The transaction contemplated pursuant to the offer was conditional
upon the issuance of an RVO.
However, an alleged creditor and some Nemaska shareholders sought
to oppose the approval of the offer. The arguments raised multiple
grounds of opposition to the RVO, notably that the court does not
have the authority to grant a vesting order for anything other than
a sale or disposition of assets through an AVO, that the RVO is
impermissible under the CCAA because it permits Nemaska to emerge
from CCAA protection outside the confines of a plan of arrangement,
that the corporate reorganization contemplated by the RVO was not
allowed under securities laws, and that the release in favour of
Nemaska's directors and officers pursuant to the proposed
transaction should not be authorized.
The decision and formal recognition of reverse vesting orders
The court began its analysis with a brief overview of the recent
history of RVOs and their efficiency in maintaining the going
concern operations of the debtor. The court noted that this is only
the sixth time an RVO is being sought under the purview of s. 36 of
the CCAA, and the first time an RVO is being
contested.
It is not for the court to dictate to the offerors, the court
noted, which terms and conditions should be included in their
offer, and the uncontested SISP order was the stepping stone and
the backdrop against which the legality of the offer was to be
analyzed.
In approving a vesting order pursuant to s. 36 CCAA, the court must
first review the following criteria:
- Whether sufficient efforts to get the best price have been made and whether the parties acted providently;
- The efficacy and integrity of the process followed;
- The interests of the parties; and
- Whether any unfairness resulted from the process.
Furthermore, the analysis must take into account the lessons from the recent Supreme Court of Canada decision in Bluberi, notably:
- That Canada's insolvency statutes pursue an array of overarching remedial objectives, which include: providing for timely, efficient and impartial resolution of a debtor's insolvency; preserving and maximizing the value of a debtor's assets; ensuring fair and equitable treatment of the claims against a debtor; protecting the public interest; and, in the context of a commercial insolvency, balancing the costs and benefits of restructuring or liquidating the company;
- The CCAA generally prioritizes "avoiding the social and economic losses resulting from the liquidation of an insolvent company" by facilitating the reorganization and survival of the pre-filing debtor company in an operational state — that is, as a going concern;
- To further the objectives sought by the law, a CCAA supervising judge enjoys wide discretion pursuant to s. 11 of the CCAA. This authority must be exercised in furtherance of the remedial objectives of the CCAA and the court must keep in mind three "baseline considerations," which the applicant bears the burden of demonstrating: (1) that the order sought is appropriate in the circumstances, and (2) that the applicant has been acting in good faith and (3) with due diligence.
The court concluded that Nemaska had acted in good faith and
with the required diligence, and that the approval of the RVO was
the best possible outcome, particularly because the alternatives
were (i) the realization of the rights held by secured creditors,
(ii) putting on hold the restructuring process to possibly redo a
SISP, in a few months, at a very high cost and in an uncertain
market that has already been thoroughly canvassed, or (iii) the
bankruptcy of the debtors, leading to catastrophic choices for all
stakeholders, notably the employees, creditors, suppliers, the Cree
community and, in general, for the economies of the affected
regions.
Ultimately, the court found that the "global picture"
only leads to the conclusion that the issuance of RVOs is a valid
use of the supervising judge's discretion, particularly when
the RVO maximizes creditor recoveries, maintains the going concern
operations of the debtors and efficiently transfers the necessary
permits, licences and authorization to the purchaser.
Accordingly, to limit the remedies available under the CCAA would
unduly hinder the innovative solutions that can be applied to ever
more complex commercial and social problems. Additionally, a
purchaser is entitled to request releases in favour of the
debtors' directors and officers via an RVO, particularly when
the release is modulated so as to protect the rights of
shareholders and creditors who may have a valid claim based on
wrongful or oppressive conduct of the directors and officers.
Takeaway
By vesting out its unwanted assets and liabilities, an RVO may
prove to be the most efficient manner to facilitate a going concern
operation transfer allowing a business to emerge from CCAA
proceedings swiftly while preserving key attributes attached to the
existing corporate structure of the debtor companies. Additionally,
an RVO allows for an effective change of control with broad
releases in favour of third parties, notably the directors and
officers of the debtors who played a key role in the
reorganization.
The remedial nature of the CCAA is designed to enable insolvent
companies to restructure, particularly where such transactions are
to permit an internal reorganization that is fair to the interests
of affected stakeholders and there is no prejudice to the
applicants' major creditors.
RVOs are the most recent example of the flexibility that CCAA
proceedings offer for distressed M&A transactions.
Footnotes
Originally published October 15, 2020
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