Law Times

PAGE 8 NEW An online resource tool 1.800.263.3269 Bestcase earlug.indd 1 3/26/08 11:52:01 AM Focus On BUSINESS/COMPETITION LAW Lawyers turn to 'reverse M&As' to help distressed companies BY DARYL-LYNN CARLSON For Law Times have been building their exper- tise in assisting over-leveraged companies with financial re- structuring to relieve debt. Colloquially, some lawyers D refer to the projects as "reverse M&As" due to the nature of the work involved. Edward Sellers, chairman of the insolvency and restruc- turing practice group at Osler Hoskin & Harcourt LLP, is one of several lawyers who have been in the thick of such work over the past two years. He de- scribes it as involving distressed transactions. "That can refer to the dives- titure of underperforming divi- sions or assets or can be simply the shedding of contractual li- abilities inside of an insolvency proceeding," he says. "It's a relatively small group of people who've been do- ing this type of work," Sellers points out. "Since [the] reces- sion, more M&A lawyers have become involved in helping put these deals together." Sellers says that unlike past recessions, more companies have had to find recourse to man- age debt under the Companies' Creditors Arrangement Act that allows large corporations to re- structure their financial affairs ue to the past year's tough economy, a handful of lawyers through a plan of arrange- ment to avoid bankrupt- cy while enabling credi- tors to still receive some payments. "The difference is that in the context of the CCAA, there's the con- cept of a planned sponsor coming forward to recapi- talize the business and ac- quire the equity, and that's a relatively recent phe- nomenon," says Sellers. "Also, there's the credit bid where someone will come in and acquire the debt — the so-called loan- to-own strategy — which is also relatively recent over the last five years." He says it's "not just a Canadian phenom- enon," although during this recession, "savvy and accomplished ing competitor Rogers' products from the The Source. The deal closed a few months ago. Stelco Inc. leveraged similar means to divest itself of a few lines of business in 2006, which is when the trend began to take hold in Canada, says Sellers. In the Stelco deal, lawyers at Osler acted for one of the purchasers and also for Tricap, which bought Stelco's operating assets through a plan of arrangement. "So Stelco both sold players 'It's a relatively small group of people who've been doing this type of work,' says Edward Sellers. such as Brookfield have been able to adapt these techniques and apply them successfully in Canada." An example is the recent acquisition of MAAX Corp., a bathroom products manu- facturer, by Brookfield Bridge Lending Fund Inc.'s Tricap Partners Ltd., a private equity fund established by Brookfield Asset Management Inc. "Brookfield did a credit bid to buy the assets in exchange for surrendering all or a por- tion of its debt," explains Sell- ers, who acted for Brookfield in the credit bid transaction. Sellers also acted for Circuit City, whose U.S.-based par- ent company went bankrupt, threatening the closure of the company's 750 retail locations called The Source. "The credit markets were virtually closed, so they filed for court protection under the CCAA," says Sellers. Then, Bell Canada Enter- prises stepped in and purchased the retail stores in a strategic move that enabled it to enhance its market share by eliminat- a portion of its business but also restructured itself by getting a plan sponsor like Brookfield to come forward with a large amount of money and underwrite the acquisi- tion transaction through a plan of arrangement," says Sellers. He says only a handful of lawyers do such work routinely because of the complexity in- volved and familiarity with the work required. In Ottawa, where besides government and retail the business base is predominant- ly comprised of the technol- ogy and biotechnology sectors, more companies have been seeking to sell either part or all of their assets, says Jeremy Farr, a partner at Borden Ladner Gervais LLP who does a signif- icant amount of mergers and acquisitions work. "Certainly, with the reces- sion and equally important in Ottawa where all the compa- nies are technology-driven and dependant on access to capital that no longer exists, compa- nies had to significantly reduce their burn rate to maintain cash resources to see them through," says Farr. "So when the reces- sion hit, the impact on Ottawa was significantly problematic with the complete absence of venture capital." He says many businesses in Ottawa had already been in sale mode since venture capital dried up in late 2006 before the recession hit full steam. "Many started disposing of businesses that they saw as no longer key to their core," he says. "Then, the second stream was to unwind themselves out of long-term contracts where the contract might have been profit- able but they couldn't get the fi- nancing to support the working- capital needs of the contract." He says shareholders are particularly supportive of sell- ing all or part of a distressed business. He adds that while it's not un- common for a company to sell off a portion of its business that isn't considered core even in a healthy economy, can force the issue." "certainly a recession LT Family shareholder fights highlight need for formal agreements S BY DARYL-LYNN CARLSON For Law Times hareholder disputes can become nasty and very public. But when the business is owned by a small number of shareholders from the same family, things can get ugly. Such was the case with one dispute that ended up in court for three years before settling recently for close to $1 million. "Shareholder disputes are really about power and money," says Igor Ellyn, founding partner of Ellyn Law LLP who represented one of the family members in the dispute. "When a family is dys- functional, there can be ways where the business is used as a weapon." The dispute involved a successful fam- ily manufacturing business founded by the father, who suffered a stroke in 1996. The mother, along with the two chil- dren once they became adults, worked at the business. The son, whom Ellyn represented, was named the company's president when the father was no longer able play an active role. But things began to deteriorate when the son got divorced, then re- married to a woman the family didn't like. On the eve of the wedding, the father named his daughter president of the company and eventually reduced the son's salary and responsibilities. Distraught, the son had an emo- tional breakdown and had to leave the business, which is when he retained Ellyn's services. "In this particular case, there were some family dynamics going on that drove the founders of the company, the elderly father and mother, to make decisions based on whether they ap- proved or disapproved of my client's contacts," says Ellyn, who also used to practise family law before becoming a certified specialist in litigation with a focus on shareholder disputes. He acknowledges that during a feud within a small family business, "you scratch your head about some of the ri- diculous things that motivate people and prevent them from being reasonable." The lawsuit sought punitive dam- ages and compensation for the son's shares based on oppression, breach of trust, and breach of fiduciary duty. That's because the father had de- manded the son's shares be returned. During the matter, the daughter, in her role as president, was unco-operative in providing disclosure of the business' finances. Ellyn also had to retain a team of experts to quantify the value of the business for the courts. He says that with an allegation of shareholder oppression, there are a va- riety of recourses the courts can impose under the Ontario Business Corpo- rations Act, ranging from ordering a mandatory shareholder meeting to or- dering the company's assets be split and divided up amongst the shareholders. Most commonly, he says, an oppres- www.lawtimesnews.com September 28, 2009 • Law timeS sion remedy comes into play when the court determines that a shareholder is behaving in a way that prevents others from receiving their "reasonable expecta- tions," whether financial or behavioural. "Reasonable expectations can be driven by law, a shareholder agree- ment, unreasonable treatment of a shareholder who's also an employee or by breach of fiduciary duty." He says the oppression remedy is "one of the broadest areas of judicial discretion that judges have," empow- ering them to resolve the matter by means that could range from directing one shareholder to buy the shares of an- other to ordering the company sold. Intense negotiations finally enabled Ellyn's client to recover the value of his shares, although the matter proved to be a messy battle. "When the shareholders are also re- lated, it can be about family feuds, inheri- tances, succession in the business or value See Business, page 11

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