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 achieve 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.
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.
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 achieve 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 effected 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).
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.
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.
The recent Concordia CBCA proceedings reiterate that in the appropriate circumstances, the CBCA arrangement mechanism can be used to successfully execute 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.
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