In prior issues of the International Restructuring Newswire, we reported on the prevalence of acquisitions in insolvency proceedings structured through Reverse Vesting Orders during 2020 and 2021. To recap, a Reverse Vesting Order allows for the transfer of liabilities and unwanted assets out of a target debtor company, rather than transferring the purchased assets out of the target debtor company, into a newly formed acquirer entity. The end result of a Reverse Vesting Order is to expunge the existing corporate structure of anything a purchaser does not want to acquire and see the debtor company successfully emerge from its restructuring process under the control of the acquirer and cleansed of those unwanted liabilities and assets.

The structure combines the benefits of a traditional restructuring plan of arrangement by keeping the existing debtor's corporate entity intact post-acquisition and also the benefits of the speed, efficiency and absence of a creditor vote that would be available in a traditional asset sale transaction.

Courts accepted that Reverse Vesting Orders could be used to implement acquisitions for a number of reasons:

  • These transactions furthered the remedial objectives of Canadian restructuring statutes, being the timely, efficient and impartial resolution of the debtor's insolvency, value maximization, fair and equitable treatment of claims, the public interest and avoiding the social and economic losses resulting from the liquidation of an insolvent company.
  • The debtor companies pursuing these transactions were proceeding in good faith and with due diligence.
  • No other viable options were available that would suggest another alternative path.

Many of the considerations mentioned by the courts approving these transactions mirrored the considerations applicable to traditional sale or restructuring plan transactions. If the court's considerations were substantively the same for all such structures, one reasonably began to wonder whether the Reverse Vesting Order (which is not expressly provided for in Canada's restructuring statutes) would usurp the positions of the asset sale and restructuring plan transaction structures (which are expressly provided for in those restructuring statutes) as the tool chosen for all complex, distressed acquisitions in Canada.

If the Reverse Vesting Order structure entirely overtook other potential transaction structures in Canadian insolvencies, this would have significant implications. In particular, a debtor company would be able to pursue desirable transactions without creditor votes in all cases, and the protections that large creditors may otherwise believe they have available to veto a restructuring plan through a negative vote would become illusory for practical purposes.

The Ontario Court has recently sought to establish some limits on the use of the Reverse Vesting Order in the restructuring of Harte Gold Corp., clarifying that it is not the ideal tool for all situations.

Harte Gold Corp.

Harte Gold Corp. was a public company with shares listed on the Toronto Stock Exchange and the Frankfurt Stock Exchange. It operated a gold mine in Ontario, Canada. The mine was producing and Harte Gold Corp. had over 200 employees on payroll. The company had 12 material permits and licenses they were required to have to maintain its mining operations and 24 work permits and licenses for exploration work, along with a variety of other licenses, mineral tenures and mineral claims.

Harte Gold Corp. was insolvent in late 2021 and commenced insolvency proceedings in Canada for the purpose of implementing a value maximizing acquisition transaction. The complexity, cost and potential risk and delay in the transfer of the above licenses, mineral tenures and mineral claims was a key consideration.

In these circumstances, preserving the assets within the existing corporate entity and avoiding the attempted transfer of permits, licenses and other items to a new corporate entity was desirable. Therefore, when pursuing a restructuring transaction, the Reverse Vesting Order was an attractive option to keep the existing corporate structure and desirable assets intact for the purchaser.

Following a marketing process, Harte Gold Corp. presented a transaction to the court for approval, which was described as follows:

In broad brush terms, the Silver Lake/833 purchase is structured as a Reverse Vesting Order. The transaction will involve:

  • the cancellation of all Harte Gold shares and the issue of new shares to the purchaser;
  • payment by the purchaser of all secured debt;
  • payment by the purchaser of virtually all pre-filing trade amounts (estimated at CAD$7.5 million but with a CAD$10 million cap) and post-filing trade amounts;
  • certain excluded contracts and liabilities being assigned to newly formed companies which will, ultimately, be put into bankruptcy. The excluded contracts and liabilities include a number of agreements involving ongoing or future services in respect of which there is little if any money currently owed. They also include a number of contracts with Appian entities and Orion, both of which support approval of the transaction. The employment contracts of four terminated executives will, however, be excluded liabilities, which will nullify the value of any termination claims. Notably, excluded liabilities does not include regulatory or environmental liabilities to any government authority;
  • retaining on the payroll all but four employees (the four members of the executive team whose employment contracts will be terminated); and
  • releases, including of Harte Gold and its directors and officers, the Monitor and its legal counsel and Silver Lake and its directors and officers.

The court had no difficulty quickly concluding that it had the power to grant a Reverse Vesting Order. However, the question of when that power should be exercised required further consideration. The court explained:

  1. Canada's restructuring statutes do not deal specifically with the use or application of a Reverse Vesting Order structure.
  2. The judicial authorities approving this approach, while there are now quite a few, do not generally provide much guidance on the positive and negative implications of this restructuring technique or what to look out for.
  3. It would be wrong to regard employment of the Reverse Vesting Order structure in an insolvency situation as the "norm" or something that is routine or ordinary course.
  4. The Reverse Vesting Order should continue to be regarded as an unusual or extraordinary measure, not as an approach appropriate in any case merely because it may be more convenient or beneficial for the purchaser.
  5. Approval of the use of a Reverse Vesting Order structure should, therefore, involve close scrutiny.

The court proposed a non-exhaustive series of questions that should be considered in connection with approval of a Reverse Vesting Order transaction:

  1. Why is the Reverse Vesting Order necessary in this case?
  2. Does the Reverse Vesting Order structure produce an economic result at least as favourable as any other viable alternative?
  3. Is any stakeholder worse off under the Reverse Vesting Order structure than they would have been under any other viable alternative? and
  4. Does the consideration being paid for the debtor's business reflect the importance and value of the licences and permits (or other intangible assets) being preserved under the Reverse Vesting Order structure?

The court granted the Reverse Vesting Order in the Harte Gold case based upon the above considerations.

Implications of Harte Gold Decision

While this is only one decision in one jurisdiction, out of a collection of many decisions from many jurisdictions on the Reverse Vesting Order in Canada, the Harte Gold decision highlighted an issue that many practitioners were considering.

As a practical matter it is not yet clear that the new enumerated considerations applicable to Reverse Vesting Orders will limit the availability of the structure generally.

Considerations (2) and (4) above would appear to mirror similar considerations in any restructuring transaction, regardless of legal structure. A court would consider whether a transaction, under any legal structure, produces an economic result at least as favourable as other options and would also consider whether the consideration being paid reflects the importance and value of the assets being transferred.

We find considerations (1) and (3) to be unique aspects of the analysis focused on the question of why a Reverse Vesting Order, instead of an asset sale or a restructuring plan, is necessary, and whether any stakeholder is prejudiced by the selected structure.

From the limited guidance available at this stage, it appears that 'necessity' is a flexible concept and does not mean that there is absolutely no other possible avenue to implement the transaction. Rather, the available analysis suggests that necessity, in this context, is aimed at determining if the Reverse Vesting Order is reasonably required because of the impracticality of other options. Examples of necessity included that an alternative asset sale structure would require a longer process with uncertain results to transfer permits, contracts and licenses, which the purchaser or other parties (e.g. shareholders or lenders) would reasonably not fund. It will be interesting to see how strictly courts follow this 'necessity' requirement in the future.

Whether any stakeholder is worse off through the Reverse Vesting Order structure than they would have been under any other viable alternative is an interesting consideration. Importantly, any relevant alternative must be viable. For example, it should not be sufficient for an objecting creditor to argue they are worse off because the Reverse Vesting Order structure eliminates their right to vote on a hypothetical restructuring plan in a case where no such restructuring plan would ever reasonably be put forward. Rather, the question for the objecting creditor is whether another alternative method of achieving the transaction outcome is practically achievable, does not require the Reverse Vesting Order and would leave the creditor in a better position. In many ways, this consideration overlaps with the consideration of (1) above.

It remains to be seen how Harte Gold will be interpreted and applied in practice. However, in principle, it begins to position the Reverse Vesting Order again as the exception to the traditional asset sale and restructuring plan options in Canadian proceedings, rather than the new standard approach for distressed acquisitions in Canada.

Recent publications

Subscribe and stay up to date with the latest legal news, information and events . . .