Although not a new concept, use of the reverse vesting order (RVO) structure to effect distressed M&A transactions in proceedings under the Companies’ Creditors Arrangement Act (Canada) (CCAA) has quickly gained popularity in Canada over the last year. At its core, an RVO transaction involves a transfer of unwanted assets and liabilities — the “bad assets” — out of a distressed company into a newly established non-operating subsidiary, leaving the distressed business entity with only the “good assets” left to be acquired. When used in appropriate circumstances, this creative mechanism can achieve a more efficient and effective realization of the going-concern value and tax attributes of a distressed business than traditional distressed M&A structures.
Below are five factors to consider when looking at whether the RVO structure can be utilized to implement a distressed M&A transaction:
RVOs can be very useful for distressed companies in industries that are highly regulated, such as the cannabis sector, with permits and other regulatory approvals that are either not, or not easily, transferable to a purchaser.
RVOs can be very useful to preserve valuable tax attributes not available in an asset purchase that in the past could be extracted only through the process of a CCAA plan of compromise or arrangement and creditor approval.
The RVO structure allows for the acquisition of a distressed business to occur without the cost, delay and risks associated with regulatory approval or a vote of creditors. In Canada, there is no ability to “cramdown” subordinate classes of creditors in a CCAA Plan context.
RVOs can be used for debt-to-equity restructurings where secured creditors seek to obtain ownership of the distressed company.
The jurisdiction of the CCAA court to grant RVOs has not yet been the subject of extensive judicial consideration by Canadian courts or significant opposition. It remains to be seen whether the RVO structure could withstand a serious challenge by stakeholders of the distressed company who object to a process that avoids a creditor vote, particularly where there may be value beyond the secured debt.
Have more than five minutes? Contact Milly Chow or any member of our Restructuring & Insolvency group to learn more.
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