As Canadian businesses continue to grapple with decreased cash flow as a result of COVID-19, many are looking for ways to generate cash and remain viable. One such way is to sell non-core assets or divisions through a pre-packaged sale transaction.
Pre-Packaged Sale Overview
Often when a debtor wants to liquidate assets it files under the Companies’ Creditors Arrangement Act[1] (the “CCAA”). Such a sale of the debtor’s assets can become subject to a lengthy and expensive court process whereby the debtor’s assets are marketed for sale and potential purchasers are identified and invited to submit bids. Once a winning bidder is selected, an asset purchase agreement is negotiated and settled and the sale is then approved by the court and a vesting order is issued in favour of the purchaser. Alternatively, a pre-packaged sale allows the debtor to generate cash and sell non-core assets to a purchaser outside of a formal court process with the mutual understanding that the transaction will ultimately be approved by the court through a CCAA filing initiated immediately after execution of the asset purchase agreement.
Pursuant to section 36(3) of the CCAA[2], in determining whether to grant the authorization for a sale, including pre-packaged sales, the court will consider, among other things, the following factors:
- whether the process leading to the proposed sale or disposition was reasonable in the circumstances;
- whether the monitor approved the process leading to the proposed sale or disposition;
- whether the monitor filed with the court a report stating that in their opinion the sale or disposition would be more beneficial to the creditors than a sale or disposition under a bankruptcy;
- the extent to which the creditors were consulted;
- the effects of the proposed sale or disposition on the creditors and other interested parties; and
- whether the consideration to be received for the assets is reasonable and fair, taking into account their market value.
In addition to the factors outlined in the CCAA, courts must also consider the principles applicable to sale transactions in insolvency proceedings outlined in Royal Bank of Canada v Soundair Corp.[3] as follows:
- whether the debtor has made a sufficient effort to get the best price and has not acted improvidently;
- whether the debtor considered the interests of all parties;
- the efficacy and integrity of the process by which offers were obtained; and
- whether there has been unfairness in the working out of the process.
Timeline of Pre-Packaged Sale Transactions
Historically, courts have been reluctant to approve pre-packaged sale transactions and would only do so in specific circumstances. However, in light of the expediency afforded by pre-packaged sale transactions, numerous distressed debtors have opted to proceed by way of pre-packaged sale in certain circumstances over the last few years. By way of example, in Re Primus Telecommunications Inc.[4] (“Primus”), PT Holdco, Inc., Primus Telecommunications Canada Inc. (“Primus Canada”), PTUS Inc., Primus Telecommunications, Inc. and Lingo, Inc. (collectively the “Primus Entities”) provided telecommunications services in Canada and the United States. The Primus Entities began experiencing financial difficulties in 2013 and by 2014 they were unable to meet various financial obligations which led to a default under their secured credit facilities. As of November 2015, the Primus Entities owed approximately $101 million dollars, of that $40.7 million dollars was owed to a syndicate of lenders led by the Bank of Montreal (“BMO”) and $20 million dollars was owed to a subordinate syndicate of lenders led by Manulife. Facing significant liquidity issues, the Primus Entities decided to pursue a pre-packaged sale transaction as they were concerned that the extensive period of CCAA protection required to implement a post-filing sale process would have serious and detrimental impacts on their business and customers. Examining the timeline of the Primus transaction highlights the efficiency of the pre-packaged sale approach:
- On August 31, 2015, Primus Canada entered into a forbearance agreement with BMO that was predicated on the development and execution of the pre-filing sale and investor solicitation process. Primus Canada began a sale and investor solicitation process, with the assistance of their advisor Origin Merchant Partners, that mirrored other processes that had been used and approved in CCAA proceedings. The first phase included gathering non-binding letters of intent from interested parties while the second stage included more intensive due diligence before final offers were solicited.
- On September 22, 2015, the Primus Entities and Origin Merchant Partners distributed a process letter that reiterated their main objectives of receiving the highest value, ensuring certainty of execution, proper treatment of all stakeholders and consummating a sale transaction on an expedited timeline. Ultimately, seventy-five prospective parties were invited to participate in the sale and investor solicitation process which resulted in five of the bidders who submitted letters of intent being invited to participate in the second phase.
- By November 16, 2015, five bidders had submitted proposals to purchase all or substantially all of the assets of the Primus Entities, three bidders, including the eventual purchaser, offered to buy only the assets of Primus Canada, while the last bidder, who would become the proposed US purchaser, offered to buy the assets of the US Primus entities.
- The asset purchase agreement for Primus Canada was finalized on January 18, 2016 and the CCAA filing was made on January 19, 2016.
- The transaction ultimately closed on April 4, 2016, a mere three months after the commencement of the CCAA proceeding. The court approved the sale based on the lack of any opposition to the proposed sale, the recommendation of the monitor who had been hired by the Primus Entities to oversee the process, approving the sale, and the extensive sale and investor solicitation process that had been undertaken.
Key Considerations
As a result of the impact of COVID-19, many debtors may wish to pursue a pre-packaged sale transaction and should consider the following:
- Circumstances of the Debtor—this includes examining if the debtor is in a position to weather the lengthy CCAA process and whether the public scrutiny of a CCAA proceeding would have detrimental effects on the business;
- Design of the Sale and Investor Solicitation Process—once a debtor has elected to go forward with a pre-packaged sale transaction, the debtor’s advisors must carefully consider the design of the sale and investor solicitation process, run a fair process and be sure to model their approach off of previous court approved processes;
- Canvas the Market—a debtor and its advisors must make a concerted effort to widely canvas the market as part of the sale and investor solicitation process in order to assure the court that they have surveyed all viable options;
- Engage a Monitor or Financial Advisor—this should be done at the outset of the process and will allow the debtor to show that it pursued the advice of an experienced insolvency practitioner before proceeding;
- Engage Legal and Sale Advisors—this will allow the debtor to generate a clear record of all correspondence, discussions and documents during the pre-filing process; and
- Coordination with Stakeholders—the debtor should keep key stakeholders apprised of its efforts in order to minimize the arguments about lack of transparency down the road.
Advantages and Disadvantages of Pre-Packaged Sales
Some of the greatest advantages of a pre-packaged sale transaction include the ability to expedite the sale process and the flexibility to test the market and survey a wide range of options before determining whether a CCAA filing is necessary. Additionally, a pre-packaged sale transaction allows the debtor to preserve the reputation of the business by avoiding the loss of goodwill that is often associated with a full blown insolvency filing. While there are numerous advantages, stakeholders tend to be critical about the lack of supervision by the court and the monitor in the process of a pre-packaged sale. Stakeholders also tend to be concerned with the lack of transparency which will require any evidence or reasonable allegations of impropriety to be investigated thoroughly.
Conclusion
If a debtor finds itself under some financial distress and is in need of cash to remain viable, it should consider the option of a pre-packaged sale of non-core assets. A pre-packaged sale can allow the debtor to efficiently and cost-effectively unlock capital and generate cash without incurring the cost of a full blown CCAA proceeding. As the pandemic continues to wreak havoc on the cash flow of Canadian businesses, there is no doubt that pre-packaged sale transactions will become an attractive solution in the coming months which we believe the courts will be more receptive to and more likely to approve.
If you have any additional questions or would like more information, please feel free to contact any member of the Miller Thomson Financial Services Group.
[1] Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36.
[2] Ibid at s 36(3).
[3] Royal Bank of Canada v Soundair Corp. [1991] O.J. No. 1137
[4] Re Primus Telecommunications Canada Inc., 2015 Court File No. CV-16-11257-00CL (Factum of Applicant re Issuance of Initial Order).
Miller Thomson is closely monitoring the COVID-19 situation to ensure that we provide our clients with appropriate support in this rapidly changing environment. For articles, information updates and firm developments, please visit our COVID-19 Resources page.
