Law Times

www.lawtimesnews.com Law TiMes / March 31, 2008 Page 13 T he Canadian insolvency- sale process has tradition- ally followed a familiar pattern. It begins with a call for non- binding offers, which are then culled for the leading prospects, who in turn receive a short time to come up with an agreement. The purchase agreement is then negotiated with the lead bidder, following which the parties seek approval of the sale and a vesting order. Once these have been obtained, closing occurs. Unfortunately for cross-border proceedings, the Canadian process is faster and markedly different from its American counterpart. At the core of the difference is the confidentiality surrounding the winning bidder's purchase agreement. "This makes it difficult to stage the type of open bidding competition that we see in the U.S., through the mechanism of a public auction or otherwise," says Sheryl Seigel, the Toronto- based chair of Lang Michener LLP's restructuring and insolvency group. For example, higher bids that arise after a purchaser has been selected need not be entertained in Canada. And Canadian courts have been reluctant to set aside proposed sales, so long as the process is fair and honest. But American practice is gaining influence, not only in consolidated cross-border sales processes, but also in domestic Canadian proceedings where there are prospective purchasers from the U.S. "Over the past several years, in many cross-border cases where a business group is being marketed for sale, we have come to accept that a bid and sale process mirroring the process approved by a bankruptcy court in the U.S. will be required in relation to the sale of Canadian business that is a subsidiary, affiliate, or even a parent of the U.S. debtor," Seigel says. "This is particularly so when it is anticipated that a single purchaser will have an interest in acquiring the assets of both the U.S. and Canadian debtors, or that the likely purchaser will come from a universe of U.S. bidders used to a bid-and- auction process." By way of example of the growing influence of U.S. parties in a domestic sale, Seigel points to the Companies' Creditors Arrangement Act proceedings relating to the Calpine companies in early 2007 in the Alberta Court of Queen's Bench. Particularly instructive are a series of motions relating to the disposition by one of the CCAA debtors, known as CCPL, of certain assets. The motions sought approval of a settlement dealing with the disposition of these assets and resolving other litigious issues. Before the motion was heard, CCPL received an offer from HCP, a U.S.-based investor, for an amount that exceeded the proceeds from the settlement agreement. The arrival of the offer was a surprise and precipitated complaints by creditors, including U.S. note- holders, that there had been no sales or auction process. The creditors also complained about the confidentiality surrounding the settlement agreement. The court ordered the monitor to summarize the third party's offer, compare it to the settlement agreement, and make recommendations. The motion approving the settlement agreement would follow. But before the motion could be heard, HCP submitted a better offer, prompting renewed complaints from the creditors. The court responded by ordering an abbreviated sale process, following which the monitor was to deliver a new report. The process produced three bidders, including Catalyst, a Canadian private equity fund. Catalyst clarified its initial offer after the deadline, making it higher on its face than the HCP final offer. Still, the court approved the HCP bid, largely on the basis of closing certainty and monitor and creditor support. It would not approve the Catalyst offer nor reopen the bidding process. But six days after the court granted approval, another U.S. entity, Khanjee Holdings Inc., sought permission to make a bid. "Khanjee argued that it should be able to do so because the final order had not been signed, issued, or entered, and because it claimed the sale process was tainted," Seigel says. Catalyst reacted by seeking permission to submit another offer itself. Like Khanjee, Catalyst claimed that reopening the bidding process would produce a better price for the CCPL assets. But the court refused to vary its order. According to Seigel, the decision highlights a message that Canadian courts have conveyed frequently. "Once the court approves of an offer following a court- supervised sales process, it will be reluctant to vary its order, even in the face of a potentially higher and better offer," she told Law Times. "Despite the result, however, Canada continues to be influenced by developments in the U.S., including the increasing presence of U.S. distressed-debt lenders and hedge funds." 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