Law Times

Law TiMes • March 21, 2011 FOCUS PAGE 11 Stalking-horse process benefited Nortel Company just one of many ongoing distressed M&A transactions BY DARYL-LYNN CARLSON For Law Times for the company involved, law- yers need to be creative when it comes to providing advice. Th eir primary focus is to A diff use any hostility by the company's creditors and equity holders while assisting the ac- quiring entity with its bid to ensure ongoing viability. As a result, the lawyers in- volved must act fast in order to facilitate an acquisition that will protect the company from further fi nancial strife. Yet the complexity of dis- tressed deals requires a lot of work. David Cohen, leader of the insolvency and restructuring na- tional practice group at Gowl- ing Lafl eur Henderson LLP in Toronto, says there are still many ongoing distressed M&A transactions resulting from the recent global credit crisis. "During 2008 when the re- cession was coming on, what you found was an absence of liquidity in the marketplace, and the unavailability to obtain new fi nancing put a downward pressure on distressed M&A deals," Cohen says. "Nobody wanted to buy assets in the high side of down. So what we found was diff erent about the last recession is that the buyers weren't there because the mon- ey wasn't there and the banks weren't lending for the acquisi- tion of assets. So it was a quiet time for distressed M&As." Cohen notes that the eco- nomic recovery in the context of distressed M&As is still lin- gering as there are many com- panies experiencing fi scal diffi - culties. Th at's due to companies that grew too quickly or put too much money into capital- ization to fund their expansion and in some cases made bad decisions about their direction and development, he says. Looking back on 2008 and 2009, Cohen says the economic environment spawned some anomalies that don't usually hap- pen in distressed M&As. "You had patient creditors who were holding off because they didn't know if they would get the value s a distressed merger or acquisition can have sig- nifi cant consequences if they pushed the button." As well, there were many companies with subsidiar- ies in the United States that were in distressed situ- ations. Canada responded by amending its insolvency legislation. "Th e legislation has been adjusted to permit a better co-ordination be- tween U.S. and Canadian proceedings," says Cohen. "We have protocols between the courts, and there is a high degree of co-operation be- tween the major U.S. bank- ruptcy courts and the major Ontario bankruptcy courts, which is a good thing." According to Cohen, one thing lawyers have to watch for is a buyer, particularly one from the United States, that wants to rush a transac- tion. "When the buyer wants to move quickly, it can put pressure on the sales process and the courts have pushed back and asserted that the buy- er has to comply with the pro- cess. Canadian courts want to see the appropriate time frame and notice and don't like to see a sudden sale being sought by U.S. creditors." As a result, it's important to customize the documents for each distressed M&A transac- tion according to the case at hand. Lydia Salvi, a lawyer at Baker & McKenzie LLP who acts for lenders, directors, companies, and receivers in distressed M&A situations, says a transaction is much more straightforward if the business is going through The recession was a quiet time for dis- tressed M&A deals, says David Cohen. formal court proceedings under the Bankruptcy and Insolvency Act or the Companies' Credi- tors Arrangement Act. "For companies not under the formal insolvency process, it means the selling company is fi - nancially distressed and is prob- ably insolvent but hasn't taken the formal steps," she says. "So potential buyers of assets from a distressed company will want to ascertain whether the company is in a formal proceeding be- cause it's more formal and time- sensitive whereas if I'm a buyer and want to target a company that's not in a formal process, I'd have more fl exibility in the time process and would have the ability to have more one- on-one contact with the seller, carefully pick the assets, and possibly get a more favour- able purchase price." But there's a downside, Salvi says, to a distressed M&A that isn't before courts: the lack of certainty of title of the assets that buyers would like to acquire. "When you have a formal proceeding or- der, you get certain exemp- tions and title assurances that can satisfy the buyer of things like the title is free and clear of liens." Salvi points to the Nortel Networks Corp. insolvency, which involved a formal pro- cess under the CCAA that enabled the buyers of the as- sets to make their purchases free of any liens. "All of the buyers were free to walk away knowing there is clear title," she says. "Another ad- vantage of going through the CCAA is there are provisions that transactions have to be for the purpose of fair-market transactions and if any weren't, creditors can attack the trans- action." As well, she notes that On- tario is one of the few provinces that have something like the Bulk Sales Act protecting creditors in a distressed M&A transaction. Salvi, who has been practising in the fi eld for more than a de- cade, says there have been some positive developments related to the Nortel insolvency that serve to assist lawyers with dis- tressed M&A transactions. "In the insolvency community over the last two years, there's been a change from the traditional debt restructuring under the CCAA to the Nortel kind of restructur- ing model, which has been the distressed M&A sales. So we've gone from the traditional debt- restructuring model to more of a management-led, prepackaged sale restructuring model that simplifi es the process." She also notes that in the Nortel matter, there's a court- appointed monitor. As a result, prospective buyers of any of its assets can fi nd everything that's for sale on the monitor's web site. Nevertheless, Salvi says there's a lot of due diligence that prospective purchasers and their lawyers must do when making a bid for any assets. "What I always stress to our clients who are buyers is, not- withstanding the fact that it is an as-is, where-is sale, you still want to be as accurate as pos- sible on the description of the assets in the purchase agree- ment," she says. "Typically, the vendors don't like this, but we put this in all of our agreements that there is no material change in the purchased asset." As well, Canada has been open to the U.S. stalking-horse bidding process in which mul- tiple groups of bidders can seek to purchase an insolvent com- pany's assets in both countries. "In Nortel, they have used the stalking-horse process, and the business units have come out at almost double the purchase price of the stalking- horse initial bid," says Salvi. "It is a very good process and benefi cial." CANADIAN LAW OF COMPETITIVE BIDDING AND PROCUREMENT Anne C. McNeely UNDERSTAND THE RAPIDLY EVOLVING AND UNIQUE RULES FOR PROCUREMENT PROCESSES This is a guide to the law governing the procurement of construction and other services in Canada. Rarely discussed and analyzed together, this text reviews both court (including the 2010 Supreme Court decision of Tercon Contractors) and tribunal decisions, as well as trade agreement rules on fair procurement. 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