NORTH OF THE BORDER UPDATE
This article has been contributed to the blog by Steven Golick and Martino Calvaruso. Steven Golick is a partner in the Insolvency and Restructuring Group of Osler Hoskin & Harcourt LLP and Martino Calvaruso is an associate in the group.
On October 6, 2009, Canwest Global Communications Corp. (“Canwest”) and certain of its direct and indirect subsidiaries (collectively, the “CMI Entities”) filed for protection under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended (the “CCAA”). Shortly thereafter, on January 8, 2010, certain of Canwest’s publishing subsidiaries (the “LP Entities”) filed for protection under the CCAA as a separate proceeding. The plans of compromise or arrangement in respect of the LP Entities and the CMI Entities were implemented on July 13, 2010, and October 27, 2010, respectively. The LP Entities’ plan effected the sale of substantially all of the assets of the LP Entities to the ad hoc committee of holders of 9.25% senior subordinated notes, while the CMI Entities’ plan effected the sale of substantially all of the assets of the CMI Entities to a wholly-owned subsidiary of Shaw Communications Inc.
The CCAA proceedings in respect of the CMI Entities and the LP Entities were landmark proceedings for Canadian insolvency law and resulted in a number of precedent practices and rulings which will shape Canadian insolvency practice for years to come. One such precedent is the interpretation of section 36 of the CCAA, which restricts the ability of a debtor company to dispose of its business assets outside of the ordinary course of business. Section 36 of the CCAA came into force on September 18, 2009, and the decision of the Ontario Superior Court of Justice (Commercial List) in Re Canwest Global Communications Corp. (2009), 2009 Carswell Ont 7169 (Ont. S.C.J. [Commercial List]) (“Re Canwest”) was the first judicial consideration of this provision.
One of the issues in the Canwest restructuring was that one of Canada’s national newspapers, The National Post, was owned by one of the CMI Entities (i.e. the broadcast side of Canwest), rather than one of the LP Entities (i.e. the print side of Canwest). As part of the restructuring, the business and assets relating to The National Post had to be transferred from a CMI Entity to a new wholly-owned subsidiary of a LP Entity, and the services shared as between the CMI Entities and the LP Entities had to realigned. Such a transfer required judicial consideration of section 36 of the CCAA.
Section 36 of the CCAA restricts a debtor company from disposing of assets outside of the ordinary course of business unless it is authorized to do so by a Court. In deciding whether to grant authorization, a Court is required to consider, amongst other things, the following factors: (a) the reasonableness of the process for the proposed sale or disposition; (b) whether the Court-appointed monitor approved of the process for the proposed sale or disposition; (c) whether the Court-appointed monitor filed a report with the Court indicating that, in its opinion, the proposed sale or disposition was more beneficial to the creditors of the debtor company than a sale or disposition in a bankruptcy; (d) whether the creditors of the debtor company were consulted and if so, to what extent; (e) the effect of the proposed sale or disposition on the interests of the creditors and other interested parties of the debtor company; and (f) whether reasonable and fair consideration is to be received for the assets (taking into consideration the fair market value of the assets to be sold or disposed of).
After considering the factors above, a Court may only grant authorization for a proposed sale or disposition to a related party where it is satisfied that that: (a) the attempts to sell or dispose of the assets to unrelated parties were made in good faith; and (b) the consideration that will be obtained from the related party is superior to the consideration that would have been obtained from any other party pursuant to a process for the sale or disposition of the assets.
Court approval under section 36 of the CCAA is required only after the provision’s threshold requirements are met; that is, where a debtor company under CCAA protection proposes to sell or dispose of assets outside of the ordinary course of business. Once such requirements are met, the Court is required to examine the list of non-exclusive factors provided for in section 36 of the CCAA and determine whether to approve of the proposed sale or disposition.
In Re Canwest, the CMI Entities moved for an order approving of the “Transition and Reorganization Agreement”, which addressed the restructuring of inter-company arrangements between the CMI Entities and the LP Entities. Included in the Transition and Reorganization Agreement was: (a) a new shared services agreement, which realigned employees, ceased or renegotiated certain services and realigned certain pension plan participants, and (b) a transition agreement in respect of The National Post Company, which effected the going concern sale of The National Post Company from a CMI Entity to a new wholly-owned subsidiary of a LP Entity.
The Court noted that in instances where it determines that a proposed transaction falls outside of the purview of section 36 of the CCAA, the Court may still consider the provisions of section 36 of the CCAA in assessing the fairness of the proposed transaction.
In determining that section 36 of the CCAA did not apply to the sale transaction, the Court found that the Transition and Reorganization Agreement constituted an internal reorganization transaction that was designed to realign the shared services and assets as between the CMI Entities and the LP Entities so as to rationalize the business structure and to better reflect the appropriate business model. The Court also held that the transfer of The National Post to the print side of the business would further the larger reorganization of the relationship between the CMI Entities and the LP Entities.
In its analysis, the Court also noted that in the context of the sale of The National Post Company to the wholly-owned subsidiary of a LP Entity, it would be commercially unreasonable to require the parties to engage in an arm’s length third party sale process as is set out in subsection 36(4) of the CCAA before realigning their shared services arrangements. It is important to note that the Transition and Reorganization Agreement was extensively negotiated between certain important stakeholders and that the Court-appointed monitor supported of the proposed transaction.
Accordingly, the Court held that section 36 of the CCAA was not applicable and as such, the sale was exempt as an ordinary course internal corporate reorganization that was fair in the circumstances.
Re Canwest provides a useful precedent which can be used to exclude certain inter-company arrangements from the scope of section 36 of the CCAA in the appropriate circumstances. For example, in June 2010, the CMI Entities and the LP Entities used reasoning analogous to that in Re Canwest to obtain approval of the “Omnibus Transition and Reorganization Agreement”, which provided for the transfer of misaligned contracts, the extension and amendment of the new shared services agreement and new arm’s length arrangements between the CMI Entities and the LP Entities.