NORTH OF THE BORDER UPDATE
This article has been contributed to the blog by Tracy Sandler and Patrick Riesterer. Tracy Sandler is the national chair of the Insolvency and Restructuring group of Osler, Hoskin & Harcourt LLP, and Patrick Riesterer is an associate in the group.
In Re Terrace Bay Pulp Inc., the Ontario Court of Superior Justice [Commercial List] (the “Canadian Court”) approved a sale of Terrace Bay Pulp Inc.’s (“TB”) assets to AV Terrace Bay Inc. (the “Purchaser”), after the Purchaser submitted a bid in accordance with the terms of a sales process (the “Sales Process”) established in proceedings under the Companies’ Creditors Arrangement Act (the “CCAA”). The Canadian Court approved the sale despite a better bid that was received by TB before the court hearing to approve the sale to the Purchaser. In deciding to approve the sale to the Purchaser, the Canadian Court explained the test for approving sales made in a sales process established under the CCAA.
TB operated a large pulp mill in a town in northern Ontario, where it is the dominant economic entity and a significant employer. TB encountered financial difficulties due in part to the declining market for paper products and in part due to the financial downturn. TB commenced proceedings under the CCAA in 2009 (the “2009 Proceeding”). TB appeared to have successfully restructured under the 2009 Proceeding; however, an industrial accident in late 2011 forced TB to idle its pulp mill. A lack of liquidity ensued and TB once again sought CCAA protection in early 2012 (the “2012 Proceeding”). Ernst & Young Inc. was appointed by the Canadian Court as monitor (the “Monitor”).
In the 2012 Proceeding, it was determined that TB should sell substantially all of its assets and property. The Sales Process was approved by the Canadian Court under the CCAA and conducted by the Monitor. The Monitor canvassed the market, including through the International Business Development Representative Program (the “IBDR”) managed by the Ministry of Economic Development and Innovation (“MEDI”) for the Province of Ontario. The IBDR operates a network of contracts and agents throughout the world to enable MEDI to disseminate information about investment opportunities in Ontario to a worldwide investment audience.
The Monitor received 13 non-binding offers by the initial deadline of February 15, 2012. All the parties that had submitted offers were invited to do further due diligence and submit binding offers by the March 16, 2012 deadline provided for in the terms of the Sales Process (the “Bid Deadline”). The Monitor received 8 binding offers by the Bid Deadline. It selected the Purchaser’s bid as the best offer among these 8 binding bids. TB and the Monitor negotiated an Asset Purchase Agreement (“APA”) with the Purchaser and sought approval of the sale and vesting of the assets of TB in the Purchaser (the “Approval Motion”).
The terms of the APA included a purchase price of $2 million, plus assumed liabilities, and the forgiveness by the Province of Ontario of a loan of $25 million (the “Loan Forgiveness”). The Approval Motion was supported by the Province of Ontario and the unionized employees of TB. The APA contemplated that the pulp mill would be re-opened in October 2012. As the Province of Ontario was the first ranking creditor of TB, the Loan Forgiveness meant that the positions of other creditors of TB were significantly improved.
The Approval Motion was opposed by one of TB’s unsecured creditors, Birchwood Trading Inc. (“Birchwood”) and a late bidder, Tangshan Sanyu Group Xingda Chemical Fiberco Limited (“Tangshan”). Tangshan was one of four parties that submitted bids after the Bid Deadline. Tangshan’s initial non-binding offer was received by the Monitor prior to the Monitor’s selection of the Purchaser’s bid as the best bid. Subsequently, Tangshan submitted a binding offer prior to the signing of the APA.
Tangshan’s offer included a purchase price of $35 million. Tangshan’s offer therefore consisted of at least $8 million greater consideration than the consideration in the APA and, if the Province of Ontario would continue to provide the Loan Forgiveness, $33 million more consideration than the APA. Birchwood and Tangshan argued that Tangshan’s offer was significantly better than the Purchaser’s offer, would result in significantly higher recovery for TB’s creditors and that Tangshan’s offer called into question the integrity and efficacy of the Sales Process. In addition, Tangshan, through Birchwood, argued that it was not made aware of the opportunity to participate in the Sales Process by the Bid Deadline.
In deciding to grant the order sought by TB and the Monitor in the Approval Motion, the Canadian Court rejected Tangshan’s and Birchwood’s arguments. The Canadian Court stated that the Monitor cannot be expected to prove that it had made the terms of a Sales Process available to every prospective bidder. Instead, the Monitor had to show that it had taken reasonable steps to make the terms of the Sales Process known. The Canadian Court found that the Monitor’s use of the IBDR program was reasonable in the circumstances. The IBDR has contacts worldwide, including contacts in China.
The Canadian Court then turned to section 36 of the CCAA, which sets out a non-exhaustive list of factors for the court to consider in determining whether to approve a sale transaction. Section 36(3) of the CCAA lists the following factors:
(a) whether the process leading to the proposed sale or disposition was reasonable in the circumstances;
(b) whether the monitor approved the process leading to the proposed sale or disposition;
(c) whether the monitor filed with the court a report stating that in their opinion the sale or disposition would be more beneficial to the creditors than a sale or disposition under a bankruptcy;
(d) the extent to which the creditors were consulted;
(e) the effects of the proposed sale or disposition on the creditors and other interested parties; and
(f) whether the consideration to be received for the assets is reasonable and fair, taking into account their market value.
The Canadian Court found that the factors in section 36 of the CCAA largely overlap with the test established in Royal Bank of Canada v. Soundair Corp. (1991), 4 OR (3d) 1 (ONCA) (“Soundair”) pursuant to which the court will consider the following factors when approving sales under receiverships: (a) whether the receiver has made sufficient effort to obtain the best price and has not acted improvidently; (b) the interests of all of the parties; (c) the efficacy and integrity of the process by which offers are obtained; and (iv) whether there has been unfairness in the working out of the process.
In deciding to grant the order sought in the Approval Motion, the Canadian Court accepted the Monitor’s view that it was not appropriate to vary the terms of the Sales Process or to accept Tangshan’s offer. The Monitor provided several reasons, including (i) the fairness and integrity of the Sales Process; (ii) that the terms of the Sales Process had been disseminated widely to interested parties; (iii) that considering late bids may result in a delay in the closing of a sale of the assets of TB, which, in the Monitor’s view, posed a risk to TB’s minimal cash position; (iv) that the Purchaser would drop its interest in purchasing TB if the terms of the Sales Process were revised; and (v) that the Province of Ontario supported the order sought in the Approval Motion.
The Canadian Court stated that the test to be applied had to take into account the information available to the Monitor at the time it decided to recommend that the Purchaser’s offer be accepted. At the time, Tangshan’s offer was non-binding and significant steps needed to be accomplished before the Tangshan offer could become binding. The Canadian Court cited Soundair in holding that a court must exercise extreme caution before interfering with the terms of a court-ordered Sales Process. It is important that prospective purchasers know that if they are acting in good faith, a court will be unlikely to interfere with the commercial judgment of the Monitor. The Canadian Court found that the terms of the Sales Process were complied with and that the purchase price offered was not so unreasonably low as to call into question the terms of the Sales Process. In addition, the Canadian Court noted that the APA was extensively negotiated. Similar negotiations with Tangshan could significantly delay the closing of a sale. The Canadian Court therefore granted the Approval Motion and the order sought therein.
The decision in Re Terrace Bay Pulp Inc. should give prospective purchasers comfort that the terms of a sales process established in court-supervised proceedings will be respected by Canadian courts when the time comes to seek approval of a transaction. The Canadian courts will not lightly decide to second guess the business judgment of court officers in deciding to approve a transaction.