Monitor-Controlled Sales Processes: Preserving Integrity or Overstepping its Role?
Sales Process Orders are a common feature of CCAA proceedings. In the ordinary course, the sales process is administered by the debtor company, with Monitor oversight. Recently, courts have been more willing to restrict the role played by the debtor, in favour of a process designed and controlled by the Monitor. This trend is particularly evident where insiders are expected to participate in the acquisition of all or part o f the debtor’s assets, creating inherent conflict in the sales process. Such cases invite concern over the integrity of the sales process. Moreover, the presence of an inside bidder can create a “cooling effect” on bona fide third party purchasers, deterring them from carrying out costly due diligence and offer preparation. In turn, this can minimize the size of potential purchaser pool, the realization value of the assets and the eventual return to creditors.
Where insider involvement is anticipated, stakeholders and Monitors have been proactively addressing these difficulties by implementing practical strategies to ensure the sales process remains transparent and balanced. As seen in the two recent CCAA cases of Aviawest and
Azure Dynamics in British Columbia, it is common for a protocol to be established between the insider, the debtor company and the Monitor.
AviaWest: Principals Bidding in a Sales Process
In the case of AviaWest Group (“AviaWest”), a closely held corporate group that developed and managed vacation time share properties, filed for and obtained creditor protection from the
British Columbia Supreme Court (the “Court”), in October 2011, appointing Grant Thornton as
Monitor. In December 2011, when it became clear that a Plan of Arrangement would not be viable, and that the principals of AviaWest would be seeking to acquire certain of the assets through the resulting liquidation process, the Court directed and authorized the Monitor to design a process for the sale, transfer, lease or ass ignment in the debtors’ real estate and other business assets.
Although the CCAA process had become a pure liquidation exercise, the debtors and the principal stakeholders determined that their respective interests would be best served by leaving the insiders (the Pearson family) in control of the day to day operations. In January 2012, with the support of the main secured creditors, the Monitor’s sales process was approved by the
Court. The Sales and Investment Solicitation Process (“SISP”) Order essentially empowered the Monitor to implement an independent marketing process, while ensuring that the Monitor did not undertake any management functions in relation to the debtors. The SISP Order expressly provided that the enhancement of the Monitor’s role would not expose it to any liability, and that any sales would be subject to Court approval, and effected through the debtor companies.
The SISP Order also established a confidentiality protocol to ensure that the insiders (and the debtors) would not have any knowledge of the existence or terms of any competing bids, while expressly permitting the secured creditors to be given such information. While such a provision is inconsistent with the usual requirement that the Monitor treat all stakeholders equally, and share relevant information without favour, this exception was necessary to ensure the integrity of the process, and was accepted by the debtors.
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As a result of this process, one of the primary assets of AviaWest was acquired by an insider group, at a value acceptable to the creditors. The transparency of the marketing process was central to the creditors’ position, and all stakeholders benefitted from a sale completed without the costs associated with a Receivership
Azure Dynamics: DIP Lender Bidding in a Sales Process
In March 2012, Azure Dynamics (“Azure”), an international group of companies developing and marketing electric and hybrid drive vehicles, sought creditor protection under the CCAA.
Pursuant to the Initial Order, Ernst & Young Ltd. was appointed as Monitor, and Azure was granted a stay of proceedings in the usual terms.
In April 2012, the Court approved a DIP facility, and Azure commenced a marketing process in order to sell off its primary assets. Later in April 2012, the court granted an order approving a
SISP. The DIP loan agreement included a term requiring disclosure of certain information to the
DIP Lender; this extended to information related to the SISP, including any Letters of Intent
(“LOI’s”).
During the course of the SISP, the DIP Lender advised Azure that it intended to participate as a potential bidder in the SISP. Following discussions among the primary stakeholders, and having regard to the fact that only limited disclosure relating to the SISP has been provided to the DIP
Lender, it was agreed the DIP Lender could participate in the SISP.
To maintain the integrity of the SISP, a protocol was established between the DIP Lender and
Azure, relieving Azure of its disclosure obligations relative to the SISP and any LOIs it received.
The protocol provided that on-going communications with the DIP lender as to the SISP would be convened exclusively with the Monitor, and that any information shared with the DIP would be redacted and summarized in order to preserve the integrity of the SISP. This arrangement was sanctioned by the Court. Ultimately, the DIP Lender chose not to make an offer in the SISP.
Nevertheless, the DIP Lender was still treated as a potential bidder throughout the remainder of the SISP and the protocol remained in force. At the time of writing this paper, an acceptable offer had been accepted by Azure with respect to the sale of its intellectual property. However, the sales process relating to the residual assets remains ongoing.
Summary
Protocols providing for Monitor control over the administration of a CCAA sales process will specify the mechanisms by which information and communications are to be addressed. As seen in the recent cases of AviaWest and Azure the establishment of such protocols, designed to neutralize the involvement of an insider, are effective in levelling the playing field and providing comfort to bona fide third party purchasers. However, the Monitor’s central role in controlling the sale process, in effect undertaking the additional and concurrent role of
“receiver”, raises concerns regarding its fiduciary obligations to all stakeholders.–
While this practical approach will generally result in increased efficiency, and fulfill parties’ objectives in managing costs, counsel should be concerned about loading too many tasks onto the Monitor’s plate. Few Monitors would be inclined to reject a request for creative assistance in
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