Written by Kevin J. Zych, Sean Zweig and Preet K. Bell1
On June 26, 2018, Regional Senior Justice Morawetz of the Ontario Superior Court of Justice granted an order approving a plan of arrangement under the Canada Business Corporations Act (“CBCA”), in respect of Concordia International Corp. and Concordia Healthcare (Canada) Limited (collectively, “Concordia”).2 The Concordia plan of arrangement, and the order approving it under subsection 192(4) of the CBCA, contained provisions which, in effect, limited recovery on equity claims embodied in class action proceedings which were extant to available insurance proceeds, and released all other equity claims against Concordia. Such provisions, while common in plans of arrangement under the Companies Creditors’ Arrangement Act (“CCAA”), had not previously been implemented within a CBCA plan of arrangement. The Concordia decision represents an example of the flexible use of the CBCA plan of arrangement provisions to implement balance sheet restructurings that would otherwise need to be implemented under the CCAA with the resultant increase in cost, delay and potential value destruction.
Concordia, together with its subsidiaries, is an international specialty pharmaceutical company, with sales in more than 90 countries and a diversified portfolio of more than 200 established off-patent products. When it came before the Court for relief, Concordia had an unsustainable capital structure with approximately $4 billion of secured and unsecured outstanding debt obligations and 2017 EBITDA that was 33 percent lower than its 2016 EBITDA. Through the plan of arrangement, Concordia strengthened its financial position by reducing its indebtedness by approximately $2.4 billion, reducing annual cash interest costs by approximately $171 million and improving the company’s capital structure and liquidity.
The CBCA Provisions
The CBCA plan of arrangement provisions (section 192) are used to implement complex corporate transactions which are impractical to effect under other provisions of the CBCA. In recent years, section 192 has been increasingly used to implement balance sheet restructurings, as it was used in this case. Procedurally, under the CBCA plan of arrangement provisions, applicants typically first apply for an interim order to permit one or more meetings of creditors and/or shareholders to vote on the plan. If the vote is successful, the company will then apply to court for a final order to approve the plan.
The Preliminary Interim Order
In certain CBCA proceedings, applicants have sought what is referred to as a “preliminary interim order” in advance of the interim order that would normally commence CBCA proceedings. On October 20, 2017, Concordia sought such an order. Typically, at the time of an interim order application, the company would have a proposed plan of arrangement and is seeking to set the wheels in motion for the vote on that plan and other procedural steps. However, when seeking a preliminary interim order, the company may not yet have a fully finalized plan but is generally seeking the imposition of a stay of proceedings so that it can continue to negotiate with stakeholders and work on developing and finalizing a plan of arrangement, without fear of debtholders declaring defaults and taking enforcement steps. In the examples of cases where preliminary interim orders had been made (including the CBCA proceedings of Essar Algoma, Tervita Corporation and others), the company generally had a relatively defined framework for a deal with certain of its major stakeholders on the proposed new capital structure. However, that was not the case for Concordia. Concordia had aspirations of reducing its debt by in excess of $2 billion, however, while both of the ad hoc committees of Concordia’s secured and unsecured debt securities were supportive of continued negotiations and did not oppose the making of the preliminary interim order, no agreement on the specifics of the new capital structure had been agreed to at the time.
In making the preliminary interim order, Morawetz R.S.J. stated that “where there is an expectation of debt compromise, the parties should not hesitate to incorporate structures or processes that are found in the CCAA and the Bankruptcy and Insolvency Act”3. While the CBCA plan of arrangement provisions do not expressly contemplate such an order, courts have relied on the broad and discretionary authority granted to them under section 192 of the CBCA to provide such relief.
The test to obtain a preliminary interim order is: (a) whether the basic statutory requirements are met; and (b) whether the application is being brought in good faith.
There are four statutory requirements: (1) the arrangement constitutes an “arrangement” within the meaning of subsection 192(1) of the CBCA; (2) the applicants are not “insolvent” within the meaning of subsection 192(2) of the CBCA; (3) it is not practicable for the applicant to effect a fundamental change in the nature of the arrangement under any other provision of the CBCA; and (4) the applicants have given the CBCA director notice.
Concordia was found to meet all requisite statutory requirements:
- The arrangement provisions in the CBCA have been applied very broadly to give effect to a number of complex transactions, including balance sheet restructurings as in this case. Morawetz R.S.J. also noted that the proposed Arrangement was to affect the interests of non-CBCA entities that were guarantors of the parent company’s debt. These entities were all wholly-owned direct or indirect subsidiaries and would be consenting to the transactions. In approving this feature, His Honour noted and relied upon other cases in which courts have approved arrangements involving non-CBCA corporations.
- The solvency requirement can be satisfied if only one of the applicants is solvent. One of the Concordia applicants was found to be solvent.
- The “impracticability” requirement is one of “practicability”, not impossibility, and also considers the most efficient means of implementing the transaction. It was found that the contemplated transactions could be accomplished far more efficiently through the plan of arrangement provisions and therefore it was impracticable to use the other provisions of the CBCA.
- The requisite notice was provided.
Morawetz R.S.J. also found that Concordia was acting in good faith as it was proceeding with the arrangement for a valid business purpose. His Honour granted the preliminary interim order, including the stay of proceedings, finding that it would “assist the Company working to advance and finalize the terms of the Recapitalization Structure and to return to court for an Interim Order and to ultimately seek approval of a proposed Arrangement.”4
The Equity Claims Relief
When it applied under the CBCA provisions, Concordia was facing certain securities class actions, alleging misrepresentations, brought by its shareholders. As part of the final order approving its plan of arrangement, Concordia sought novel equity claims relief, which included releasing all “equity claims”, which was based on the definition in the CCAA (essentially claims and proceedings based on equity interests), and that the class actions shareholders’ recovery be limited to available insurance proceeds. Concordia submitted that given its debtholders were not obtaining full recovery on their claims, channeling the class actions claims to the insurance policies preserved value for the plaintiffs and was fair and reasonable. Notice of the requested equity claims relief was provided to shareholders as per the interim order.
Similar equity claims relief has been granted in insolvency proceedings under the CCAA. Concordia submitted that the objectives of CCAA and CBCA plans of arrangement are to ensure the future viability of applicants, and therefore the principles applied by CCAA courts in granting such orders should also apply here. In addition, the CBCA plan of arrangement provisions are broad and provide for a court to make “any interim or final order it thinks fit”, allowing for a fair amount of discretion.
In this case, Morawetz R.S.J. granted the relief sought, relying on CCAA precedents, and concluding that the equity claims relief was extensively negotiated, formed an integral part of the plan of arrangement, and was appropriate in the circumstances.5 Overall, Morawetz R.S.J. found the plan of arrangement to be fair and reasonable.
In his decision, Morawetz R.S.J. quoted from earlier cases “that section 192 of the CBCA is a flexible statutory provision capable of ‘incorporating whatever tools and mechanisms of corporate law the ingenuity of their creators bring to the particular problem at hand’.”6 The broad discretion granted to courts within section 192 supports such a statement. CBCA plans of arrangement continue to incorporate novel elements to assist a company with effecting a significant restructuring outside of insolvency statutes. The Concordia plan of arrangement is no exception and could expand the circumstances under which large balance sheet restructurings under the CBCA may be implemented.