Key legal and regulatory developments driving and shaping M&A
The Companies' Creditors Arrangement Act (the "CCAA"), Canada's primary restructuring legislation for larger businesses, has been the subject of a collection of substantive amendments that came into effect on November 1, 2019.
The CCAA provides courts with authority to, among other things, grant stays of proceedings in favour of debtor companies and various other interested parties, and approve interim lending arrangements. The stay prevents potentially adverse parties from commencing, continuing or enforcing claims or enforcing other remedies. Interim lending arrangements can provide funding for the continued operation of the debtor's business and for the costs of the restructuring process and can be secured by a court-ordered super-priority charge.
The CCAA amendments include specific and material modifications to these key aspects of CCAA restructuring proceedings:
Longer term relief is now deferred to a subsequent hearing.
These amendments may have broad impacts upon the sequencing and speed of Canadian restructuring proceedings. For example, steps to advance pre-packaged restructuring plans and sale processes may not be able to proceed at the initial hearing. In addition, debtors and their lenders may not be able to implement comprehensive interim financing arrangements at an initial hearing as they would have in the past.
Lenders, insolvency practitioners and other market participants now have some guidance on the court's application of these new amendments in practice. On December 23, 2019, Lydian International Limited ("Lydian") and certain of its affiliates engaged in gold exploration and development activities sought protection from their creditors under the CCAA. Given the holiday season, the Applicants requested that the court immediately grant a second order following the initial order to extend the stay period beyond the initial 10-day period.
In the Lydian proceedings, the Ontario court has directed that:
The court explained that this approach was consistent with the objectives of the amendments which include improving participation of all players (including those players who may not have been at the table in the negotiations leading up to the insolvency filing).
Following the introduction of the CCAA amendments there was a great deal of speculation regarding the court's approach to the new amendments and whether the more flexible provisions of the CCAA may be used to work around the practical implications of the amendments. Courts initially took varying approaches to these issues. The court in Lydian has taken a firm line on (i) the 10-day initial stay period; and (ii) the requirement that any relief granted in the initial order be reasonably necessary for the continued operations of the debtor company in the ordinary course of business during that period, though flexibility may remain to accommodate exceptional circumstances.
The court commented that following the granting of the initial order, a number of steps can be taken and negotiations can commence or continue, including but not limited to:
It was not uncommon, prior to the recent amendments, for an initial order to include provisions that would affect some or all of the aforementioned issues and parties. This will likely no longer be the case.
This is an important consideration for restructuring companies. For example:
When considering possible approaches to a CCAA restructuring, debtor companies, lenders and their respective advisors will need to fully consider the impacts of the amendments and the guidance provided by the court in Lydian.
In this issue, we cover a broad spectrum of ‘hot button issues’ for boards and companies operating internationally.
© Norton Rose Fulbright LLP 2021