Benefits to Buyers and Sellers
Businesses must continually adapt to changing economic conditions. Some strategies are appropriate for a booming economy and others are better suited for today’s more uncertain times.
Working through the Companies’ Creditors Arrangement Act (CCAA) is one of the best available strategies when considering an acquisition in a turbulent economic environment. It can provide real benefits to both the buyer and the seller, making it an attractive option for all parties.
This executive summary is meant to provide a general overview of the CCAA and some of its relevant benefits for prospective buyers and sellers.
In Canada, there are several insolvency regimes available to debtor companies and companies looking at purchasing distressed businesses or assets. Due to its flexibility, the CCAA is the most favoured of these regimes for large debtor companies and for parties looking to pursue complicated restructurings.
In times of economic instability and stress, the CCAA is a particularly viable option because it provides benefits to both buyers and sellers. Proceedings under the CCAA, if done correctly, can benefit insolvent debtor companies that are hoping to restructure while still being protected from their creditors.
It also benefits buyers looking to purchase assets from distressed companies while avoiding some of the procedural hurdles present in other M&A transaction options.
The CCAA structure is such that the judge supervising proceedings has broad discretion to grant insolvent companies protection to deal with their assets.
- Broad discretion can enable business combinations.
- Broad discretion can enable asset sales to occur which otherwise might not be possible.
Safe Haven for Directors of Distressed Companies
Directors of distressed companies must make difficult decisions with little to no safety net. These decisions are made more complicated by the need to act quickly and in line with a myriad of fiduciary and statutory duties. For example, one challenge directors face is the likelihood that their company will be unable to continue operations needed to preserve the “going concern” value in the insolvent business. This is value which would likely be lost in a bankruptcy. Therefore, a distressed company’s management might decide that a sale of all or part of its business is the best decision. Unfortunately, it might not be possible to make a deal in an acceptable time frame or on acceptable terms for the acquirer. Roadblocks include the potential for unpaid creditors to intervene or for shareholder approvals and regulatory or other third-party consents to be required first.
This is where operating through the CCAA can be useful. Through the CCAA, management of troubled companies are offered protections:
- Clear and firm stay of proceedings by creditors.
- Ability to continue operations.
- Sufficient time to come to a “fair and reasonable” restructuring of the business.
- Time to arrange for a beneficial and expedited sale of assets or shares outside of bankruptcy.
Safe Haven for Acquirers of Distressed Assets
The purchase of a distressed company or its assets can be challenging for a prospective buyer. Investment in a struggling business might leave the buyer ranking behind other creditors in the event of a bankruptcy. In other cases, rights acquired in distressed assets might be judicially deemed to be unfair to creditors.
The CCAA offers a judicially supervised transaction, which helps to give certainty and clarity to buyers as they move through the difficulties of purchasing distressed assets. The buyer knows that the court will expressly approve the transaction, thus reducing the risk of future challenges to the validity of the transaction.
Use of “Stalking Horse Bids”
One potentially useful aspect of the CCAA is that it allows the purchase of assets by “stalking horse bids”. This is a relatively new approach in Canada. Here’s how it works:
- The debtor company enters into an agreement with a potential bidder (the “stalking horse bidder”) for the sale of particular assets or of the entire distressed business.
- A tendering process then begins with the goal of obtaining the best possible offer.
- The stalking horse bidder, by having placed an arm’s-length value on the relevant assets through its due diligence, provides a price that underlays the tendering process.
- The stalking horse bidder comes into the process knowing it could lose out to a higher bidder. Therefore, it negotiates compensation for its transaction costs.
- This is usually in the form of a “break fee” that it receives if its bid is not successful.
This process provides security to all parties involved and makes the CCAA an attractive option for buyers and sellers to consider.
Availability of Debtor in Possession Financing (DIP)
DIP financing is another potentially beneficial option of working under the CCAA. DIP financing is the provision of additional financing to a debtor company looking to restructure or sell its assets in the context of CCAA protection.
- A DIP loan is a secured revolving credit facility.
- Gives investors another way to take advantage of opportunities which might not be available by conventional methods.
- Allows the debtor company to apply for an order to permit a lender to lend new money during a restructuring, potentially on the strength of a “priming charge” that typically ranks ahead of existing secured lenders.
DIP lending can be a useful tool for investors. For example, if the lender wants to ultimately acquire some or all of a debtor’s business, DIP financing can give the lender a significant role in the management of the debtor company through covenants in the DIP financing documents.
When assets are sold through CCAA proceedings, a vesting order is issued by the court. This applies whether it is part of the financing of a restructuring or through a creditor and court-approved overall plan of arrangement.
- Creditors’ claims to the assets included in the sale are converted into claims to the proceeds of the sale.
- These assets are then transferred free and clear of registered encumbrances, security interests and claims against the assets, unless explicitly assumed by the buyer.
- Can also remove the need to obtain certain consents and other requirements for closing a transaction, including shareholder consent and consents from parties to contracts related to the assets.
- The court has the authority to assign contracts to an assignee, notwithstanding restrictions on assignment in the contract, if certain pre-conditions are met.
It should be noted that where an acquiror wishes to secure control of a distressed target, there are instances where CCAA proceedings are not advisable or feasible. For example, many Canadian public resource companies are headquartered in Canada but have the majority of their operations in foreign jurisdictions. In this situation, CCAA proceedings in Canada may not safeguard the company’s operations in the foreign jurisdiction. In that foreign jurisdiction, obtaining equivalent protection is often impossible or too time-consuming.
However, for most businesses, proceeding through the CCAA is a strategy that must be seriously considered. As such, the CCAA regime will be an important tool for both buyers and sellers moving forward through this period of economic pain.
If you have any questions or would like any additional information regarding any of the above, please don’t hesitate to contact the Segev team at:
toll free: 1-800-604-1312
Business hours are Monday to Friday from 9am – 5pm
Our team is currently working remotely, and our physical office is open by appointment only.
The above blog post is provided for informational purposes only and has not been tailored to your specific circumstances. This blog post does not constitute legal advice or other professional advice and may not be relied upon as such.