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Canada | Publication | July 15, 2022
On July 8, the Superior Court of Québec (the Court) released its reasons for a decision granting a reverse vesting order (RVO) in the restructuring proceedings of Blackrock Metals Inc. and certain related entities (collectively, Blackrock) under the Companies’ Creditors Arrangement Act (CCAA).
Blackrock is the developer of a mining project in Quebec geared towards producing vanadium, high-purity pig iron and titanium products (Project Volt). Blackrock’s principal secured creditors were Investissement Québec (IQ) and OMF Fund II H Ltd. (Orion), which granted a bridge credit facility to the company in 2019 for the purpose of, inter alia, allowing it to continue its operations while it sought to obtain the over $1 billion of financing required to proceed with the construction of Project Volt. At the time Blackrock obtained CCAA protection, IQ and Orion, which were also shareholders of the company, had senior secured claims of approximately $100 million.
On December 23, 2021, Blackrock obtained an initial order under the CCAA and Deloitte Restructuring Inc. was appointed as monitor. At the comeback hearing on January 7, 2022, the Court approved a sale and investment solicitation process (the SISP) and governing procedures (the Bidding Procedures) based on a “stalking horse” credit bid submitted by IQ and Orion (the Stalking Horse Bid). At the request of certain shareholders of Blackrock (the Shareholders), the Court extended the SISP deadlines by 30 days.
Pursuant to the Bidding Procedures, prospective bidders were required to submit a qualified letter of intent by March 9, 2022. The only LOI received during the SISP’s first phase was from a newly incorporated entity backed by certain of the Shareholders (the Shareholder Bidder). In order to proceed to the next phase of the SISP, the Shareholder Bidder was required to submit a binding qualified bid by May 11, 2022. After certain requests to extend the bid deadline were refused, the Shareholder Bidder applied to the Court to obtain a further 30-day extension (the Bid Extension Application).
In parallel, Blackrock sought an order approving the transaction contemplated in the Stalking Horse Bid (the Proposed Transaction). The Proposed Transaction was to be implemented using an RVO structure and was contested by the Shareholder Bidder as well as the Shareholders, which argued the Court had no authority to issue an RVO and that, in any event, the applicable criteria were not satisfied. After a two-day hearing, the Court issued an order dismissing the Bid Extension Application and approving the Proposed Transaction on the terms proposed by Blackrock, the whole with reasons to follow.
In assessing the Bid Extension Application, the Court highlighted the importance of maintaining the integrity of the Bidding Procedures and considered, in particular, that no other bids were received and the Shareholder Bidder had been unable to obtain the necessary financing to submit a qualified bid and had refused to finance the costs of the proposed extension. The Court also determined that it was advantageous to stakeholders generally that Blackrock complete its restructuring as soon as possible such that the CCAA’s remedial objectives were better served by refusing the extension.1
With respect to approving the Proposed Transaction, the Court reviewed the legislative provisions and recent Canadian jurisprudence on RVOs,2 and concluded that it was empowered to render such an order, noting however that “an RVO structure should remain the exception and not the rule.”3 Applying the applicable criteria and guiding principles, the Court approved the Proposed Transaction as:
The Court also rejected the Shareholders’ contention that Blackrock was worth more than the amount of its secured debt, noting the SISP had demonstrated there was no equity for unsecured creditors, let alone shareholders. In the Court’s view, the Shareholders had “little or no say” in the CCAA proceedings, given that their shares had no value, and no legal basis to contest the Proposed Transaction.5
Regarding the third-party releases included as part of the Proposed Transaction, which benefited IQ and Orion, among others, the Court confirmed that it is now commonplace for such releases to be approved in the context of a transaction, although they should not be granted “blindly or systematically.” In considering the applicable criteria, being those developed under a CCAA plan, the releases were justified given, in particular, the instrumental participation of IQ and Orion in the restructuring as well as the absence of any apparent merit to the Shareholders’ alleged claims.6
The judgment provides useful guidance for Quebec courts that will be tasked with considering RVO transactions going forward and confirms that this structure remains available as a means of reducing costs, risks and uncertainties when transferring an insolvent business. It also reaffirms that shareholders should be precluded from contesting RVOs where they have no valid economic interest in the transaction and that various parties, including purchasers, can benefit from third-party releases under an RVO.
On June 13, 2022, the Shareholders sought leave to appeal the order before the Court of Appeal of Québec. Leave was denied on August 5, 2022.
Norton Rose Fulbright Canada acted for IQ in this matter.
Judgment, paras. 118-123 citing, in particular, Proposition de Peloton Pharmaceutiques inc., 2017 QCCS 1165; Forest c. Raymor Industries inc., 2010 QCCA 578; Stelco Inc., Re, 2006 CanLII 1773 (Ont. SC); Harte Gold Corp. (Re), 2022 ONSC 653.
Judgment, paras. 125-137 citing, in particular, Harte Gold Corp. (Re), 2022 ONSC 653; Re Green Relief Inc., 2020 ONSC 6837; 8640025 Canada Inc. (Re), 2021 BCSC 1826; Re Lydian International Limited, 2020 ONSC 4006.
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