Following in the footsteps of the decision rendered in October of 2019 in the context of Stornoway Diamond Corporation’s CCAA proceedings, the recent decision by the Superior Court of Québec in the CCAA proceedings of Nemaska Lithium Inc. and its affiliates (collectively Nemaska) provides further recognition to reverse vesting orders (RVO) as another tool of insolvency practitioners to effectuate an efficient transfer of going concern operations in a distressed context. It is the first RVO approved in a contested context.
As explained in the decision rendered on October 15, an RVO consists, in essence, of the sale of an insolvent company’s shares to a purchaser, wherein certain unwanted assets and liabilities of the debtor are excluded. These non-assumed liabilities are transferred, assigned and vested in newly incorporated non-operating companies (ResidualCos) as part of a pre-closing reorganization, thereby allowing the purchaser to efficiently carry on the operations of the debtor while maintaining in force the existing permits, licences, authorizations, essential contracts and fiscal attributes of the debtor. Vesting out unwanted assets and liabilities maintains the existing corporate structure of the debtor companies rather than vesting out the purchased assets into a newly formed entity.
Essentially, an RVO allows for the transfer of liabilities/unwanted assets out of the debtor companies, rather than transferring the assets out of the toxic debtor into a newly formed entity. The end result is to expunge the existing corporate structure of the debtor companies of anything the purchaser does not want, have the debtor companies emerge from their CCAA process and be replaced by ResidualCos. The main objectives are to preserve the permitting/licensing and preserve the tax attributes.
An RVO offers an efficient and effective alternative to plans of arrangement (POA) and traditional approval and vesting orders (AVO), particularly for debtor companies operating in a highly regulated environment and where there is no value remaining beyond the realization of secured debt and the parties intend to maintain the going concern operations of the debtor company.
Nemaska ‒ the factual context
Nemaska is a public company that was in the process of developing a significant spodumene lithium hard rock deposit, known as the Whabouchi mine located in Quebec’s James Bay region, as well a commercial electro-chemical plant where the spodumene concentrate would be transformed into high purity lithium hydroxide using proprietary methods developed by Nemaska.
In large part due to the falling price of lithium, Nemaska had to seek CCAA protection on December 23, 2019. Following the conclusion of a sale or investment solicitation process (the SISP), Nemaska accepted a qualified bid submitted by a group of third-party bidders, including Investissement Québec (the offer). The transaction contemplated pursuant to the offer was conditional upon the issuance of an RVO.
However, an alleged creditor and some Nemaska shareholders sought to oppose the approval of the offer. The arguments raised multiple grounds of opposition to the RVO, notably that the court does not have the authority to grant a vesting order for anything other than a sale or disposition of assets through an AVO, that the RVO is impermissible under the CCAA because it permits Nemaska to emerge from CCAA protection outside the confines of a plan of arrangement, that the corporate reorganization contemplated by the RVO was not allowed under securities laws, and that the release in favour of Nemaska’s directors and officers pursuant to the proposed transaction should not be authorized.
The decision and formal recognition of reverse vesting orders
The court began its analysis with a brief overview of the recent history of RVOs and their efficiency in maintaining the going concern operations of the debtor. The court noted that this is only the sixth time an RVO is being sought under the purview of s. 36 of the CCAA, and the first time an RVO is being contested.
It is not for the court to dictate to the offerors, the court noted, which terms and conditions should be included in their offer, and the uncontested SISP order was the stepping stone and the backdrop against which the legality of the offer was to be analyzed.
In approving a vesting order pursuant to s. 36 CCAA, the court must first review the following criteria:
- Whether sufficient efforts to get the best price have been made and whether the parties acted providently;
- The efficacy and integrity of the process followed;
- The interests of the parties; and
- Whether any unfairness resulted from the process.
Furthermore, the analysis must take into account the lessons from the recent Supreme Court of Canada decision in Bluberi, notably:
- That Canada’s insolvency statutes pursue an array of overarching remedial objectives, which include: providing for timely, efficient and impartial resolution of a debtor’s insolvency; preserving and maximizing the value of a debtor’s assets; ensuring fair and equitable treatment of the claims against a debtor; protecting the public interest; and, in the context of a commercial insolvency, balancing the costs and benefits of restructuring or liquidating the company;
- The CCAA generally prioritizes “avoiding the social and economic losses resulting from the liquidation of an insolvent company” by facilitating the reorganization and survival of the pre-filing debtor company in an operational state — that is, as a going concern;
- To further the objectives sought by the law, a CCAA supervising judge enjoys wide discretion pursuant to s. 11 of the CCAA. This authority must be exercised in furtherance of the remedial objectives of the CCAA and the court must keep in mind three “baseline considerations,” which the applicant bears the burden of demonstrating: (1) that the order sought is appropriate in the circumstances, and (2) that the applicant has been acting in good faith and (3) with due diligence.
The court concluded that Nemaska had acted in good faith and with the required diligence, and that the approval of the RVO was the best possible outcome, particularly because the alternatives were (i) the realization of the rights held by secured creditors, (ii) putting on hold the restructuring process to possibly redo a SISP, in a few months, at a very high cost and in an uncertain market that has already been thoroughly canvassed, or (iii) the bankruptcy of the debtors, leading to catastrophic choices for all stakeholders, notably the employees, creditors, suppliers, the Cree community and, in general, for the economies of the affected regions.
Ultimately, the court found that the “global picture” only leads to the conclusion that the issuance of RVOs is a valid use of the supervising judge’s discretion, particularly when the RVO maximizes creditor recoveries, maintains the going concern operations of the debtors and efficiently transfers the necessary permits, licences and authorization to the purchaser.
Accordingly, to limit the remedies available under the CCAA would unduly hinder the innovative solutions that can be applied to ever more complex commercial and social problems. Additionally, a purchaser is entitled to request releases in favour of the debtors’ directors and officers via an RVO, particularly when the release is modulated so as to protect the rights of shareholders and creditors who may have a valid claim based on wrongful or oppressive conduct of the directors and officers.
By vesting out its unwanted assets and liabilities, an RVO may prove to be the most efficient manner to facilitate a going concern operation transfer allowing a business to emerge from CCAA proceedings swiftly while preserving key attributes attached to the existing corporate structure of the debtor companies. Additionally, an RVO allows for an effective change of control with broad releases in favour of third parties, notably the directors and officers of the debtors who played a key role in the reorganization.
The remedial nature of the CCAA is designed to enable insolvent companies to restructure, particularly where such transactions are to permit an internal reorganization that is fair to the interests of affected stakeholders and there is no prejudice to the applicants’ major creditors.
RVOs are the most recent example of the flexibility that CCAA proceedings offer for distressed M&A transactions.