Use of structure can help speed up sale of insolvent company, especially in highly regulated sectors
The Ontario Superior Court of Justice’s recent approval of the use of a reverse vesting order transaction will provide guidance for future transactions, say lawyers at Stikeman Elliott LLP.
The decision in Re Harte Gold Corp. will likely become a leading authority for courts when evaluating RVOs, says a recent blog post by Stikeman lawyers Guy Martel and Danny Vu. The firm acted on behalf of Harte Golde in the proceedings.
“It [the decision] suggests a debtor company will be subject to a two-step test that will involve: first, evaluating whether the contemplated sale should be approved taking into consideration the applicable statutory criteria, and second, evaluating whether it is appropriate in the circumstances for the sale to be implemented through a reverse vesting structure given the specific facts of the case.”
The implication, the two lawyers say, is that additional scrutiny on the use of RVOs might come in the future. Parties to such a transaction will need to be “prepared to justify why an RVO structure is necessary or appropriate for completing a value-maximizing transaction, in comparison to a traditional approval and vesting order.
However, despite such additional scrutiny, “RVOs will remain nonetheless a powerful tool in complex restructurings which will allow for the completion of going concern sale transactions in industries where assets and licenses may be difficult to transfer such as the cannabis and mining industries.”
Martel says that while there have been decisions in the Quebec and British Columbia courts upholding RVO transactions, having the Ontario court system weigh in on the matter “is the missing piece of the puzzle,” given the size of the province and the number of insolvency filings there. “This decision provides useful guidance on when and how RVOs can be used.”
Vu agrees, noting that a reverse vesting order process can help handle insolvent companies in sectors with a high regulatory component, such as the mining and cannabis sectors. This can make it difficult to obtain permits and licences that are not easily transferable.
Martel says, for example, that Health Canada has “stated point blank” that licences and permits given to one cannabis company can’t be transferred to another, “so the workaround is and RVO.” An added advantage is that settling an insolvency case through an RVO can be faster and less complicated than other methods and potentially provide huge legal fee savings.
Over the past two years, RVOs have become increasingly popular in the context of insolvency proceedings. They allow for the completion of “going concern” sale transactions in a timely and efficient manner by effectively allowing the transfer or issuance to a buyer of all of the shares of a debtor company while vesting out unwanted assets, contracts and liabilities to an entity formed for the transaction.
In this case, Harte Gold Corp. proposed completing a going concern sale transaction according to a reverse vesting structure. Under this structure, the first ranking secured creditor would subscribe for new shares in the company. The existing shares would be cancelled, and certain assets, contracts and liabilities would be vested out of the company to newly formed residual entities.
After considering the appropriateness of the sale and its proposed structure, the court issued an RVO. It provided detailed reasons for the court’s jurisdiction to grant RVOs and the criteria by which courts should evaluate RVOs in the future. However, the court noted that RVO structures should not be considered the “norm” in future transactions.
Harte Gold was a public company that operated a gold mining operation in northern Ontario. It filed for creditor protection under the Companies Creditors’ Arrangement Act on December 7, 2021. At the time of its CCAA filing, it had conducted a strategic review process over several months, which led to a subscription agreement with its senior secured creditor, proposed as a stalking horse bid.
The subscription agreement contemplated a reverse vesting structure whereby the purchaser would acquire Harte Gold’s business and operations, “free and clear” of certain designated assets, contracts, and liabilities. Following the submission of a competing bid prior and intensive negotiations between the parties, Harte Gold entered into a first amended and restated stalking horse subscription agreement with its senior secured creditor, the execution of which was ultimately approved by the Court.
The company then received a qualified bid from its junior secured creditor, leading it to enter into negotiations with both interested parties again. This ultimately led to resolving certain disputes between the company’s secured creditors and a second amended and restated subscription agreement with its senior secured creditor. It provided additional consideration in favour of Harte Gold and its stakeholders.
- the Company would issue new shares in favour of the purchaser and cancel all of its outstanding shares, and
- certain designated assets, contracts and liabilities would be “vested out” to residual companies, all in consideration of the payment or satisfaction by the purchaser of all secured debt and priority payables the payment of substantially all pre-filing and post-filing trade amounts, the assumption of several contracts and the retention of substantially all of the Company’s employees.
The value of the consideration payable by the purchaser under the came in over $160 million.
In the Ontario court’s decision approving the transaction, it found that Section 11 of CCAA “clearly provide[d] the court with jurisdiction to issue” the RVO, noting, however, that the discretion available should be “exercised in accordance with the objects and purposes of the CCAA.”
The court also cautioned that the use of RVOs should involve “close scrutiny” and not become the “norm or something that is routine or ordinary course” simply because it may be more convenient or beneficial to the purchaser.
It said that courts and monitors should ensure that the restructuring is fair and reasonable to all parties. In addition to evaluating the criteria for approval of a sale under CCAA, the debtor, the purchaser and the monitor must be prepared to answer questions such as:
• Why is the RVO necessary in this case?
• Does the RVO structure produce an economic result at least as favourable as any other viable alternative?
• Is any stakeholder worse off under the RVO structure than they would have been under any other viable alternative? And
• 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 RVO structure?
In the case of Harte Gold, the court determined the company and the monitor had demonstrated that the use of an RVO was appropriate in the circumstances, as it allowed for the preservation of the company’s many permits and licenses necessary to conduct its gold mining operations.
Under a traditional asset sale and approval and vesting order structure, the purchaser would have had to apply to the various agencies and regulatory authorities for the transfer of existing licenses and permits. If transfers were not possible, the buyer would have to apply for new licenses and permits, which would involve risk, delays, and additional costs.
The Court also determined it had jurisdiction to cancel all outstanding shares and the issuance of new shares to the purchaser as part of the RVO. It pointed to the Ontario Business Corporations Act. It says if a corporation is subject to a reorganization, its articles may be amended by court order to make changes that include the designation of all or any of its shares. It can also add, change or remove any rights, privileges, restrictions and conditions relating to all or any of its shares.
