Written By Kevin J. Zych, Preet K. Gill, Michael S. Shakra and Joshua Foster
Stoneway was advised in its CBCA proceedings by a team including: Kevin Zych, Michael S. Shakra and Joshua Foster (Restructuring & Insolvency); Richard Swan (Litigation); Kristopher Hanc (Capital Markets); Thomas Bauer and Philip Ward (Tax); and Preet K. Gill (Complex Legal Issues and Opinions).
In May 2022, the Canada Business Corporations Act (CBCA) was used to implement a cross-border and international restructuring of a group of companies (collectively known as Stoneway),1 whose principal business is the operation of power generation facilities in Argentina. A CBCA Plan of Arrangement was utilized in parallel with a Chapter 11 Plan of Reorganization under the United States Bankruptcy Code, and contained certain unique features in light of the intertwined cross-border proceedings of Stoneway. This case affirms the flexibility of the CBCA's arrangement provision and its utility as a cross-border and international restructuring tool.
Stoneway borrowed significant amounts to finance the construction of its power generation facilities in Argentina, resulting in Stoneway commencing its operations with a highly leveraged capital structure. As a result, on April 7, 2021, certain Stoneway entities filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code in the United States Bankruptcy Court in New York. On March 14, 2022, Stoneway commenced distinct (but parallel) proceedings under section 192 of the CBCA, which sought to implement the restructuring transactions contemplated by the U.S. Chapter 11 Plan. The proposed CBCA Plan also contained an international element in that Stoneway was seeking a release and discharge of certain guarantees and security provided by four of its Argentinian subsidiaries for which Stoneway was the principal obligor.
The CBCA Plan and the Chapter 11 Plan were codependent insofar as approval of the CBCA Plan was a condition precedent to the implementation of the Chapter 11 Plan and vice versa. Principally, the CBCA Plan and the Chapter 11 Plan aimed to implement a pre-negotiated consensual sale transaction pursuant to which a newly formed arm's length entity would acquire Stoneway's business enterprise. As a consequence of implementation of the sale, Stoneway's primary secured creditors would recover less than the full amount owed.
The CBCA Arrangement Provision
The Arrangement provision of the CBCA—section 192—was traditionally used for reorganizations of share capital that were impractical to be effected under the other provisions of the CBCA. However, the flexibility of the arrangement provision has resulted in its use by corporations seeking to restructure debt, usually in connection with a more comprehensive balance sheet restructuring. This was the case of Stoneway.
The process for approval of a plan of arrangement under section 192 typically involves the corporation first applying for an interim order, which sets the wheels in motion with the calling of meetings and distribution of materials. After stakeholders have voted on the arrangement, the corporation would apply to court for a final order approving the arrangement before it is implemented.
Broadly speaking, there are four statutory requirements for approval: (1) the proposed arrangement constitutes an "arrangement" under the CBCA; (2) the applicants are not insolvent; (3) it is not practicable to effect the arrangement under any other provision of the CBCA; and (4) notice has been provided to the CBCA Director. If these are satisfied, the court must also satisfy itself that the arrangement is fair and reasonable before it can be approved at the final order hearing.
Unique Features in Stoneway's CBCA Proceedings
While the use of the CBCA for debt restructurings is no longer novel, Stoneway's CBCA restructuring contained two unique features that are worth highlighting: (1) instead of using the more standard information circular to provide information on the CBCA Plan to stakeholders, the Interim Order authorized Stoneway to instead utilize the disclosure statement that was already being distributed in the U.S. Chapter 11 proceedings; and (2) instead of holding a separate meeting and vote of stakeholders whose interests were to be arranged under the CBCA Plan, the Interim Order did not require Stoneway to hold a meeting to conduct a separate vote on the CBCA Plan and provided that votes cast in the Chapter 11 proceedings would constitute votes in the same amount for or against the CBCA Plan.
These features were intended to maximize efficiency, eliminate unnecessary expenses and ensure consistency between the CBCA proceedings and the Chapter 11 proceedings.
1. Utilizing a Disclosure Statement in Lieu of an Information Circular
While the CBCA does not mandate the use of an information circular in CBCA proceedings, it is typical for CBCA applicants to prepare and distribute an information circular and ancillary meeting materials in respect of a plan of arrangement. This practice generally accords with the CBCA Director's guidance on disclosure: "shareholders and other security holders voting on the proposed arrangement receive sufficient information to allow them to form a reasoned judgment as to whether to support or to vote against the proposal."2 In support of the Interim Order, Stoneway asserted that, in keeping with the CBCA Director's Policy's guidance, the extensive information already contained in the U.S. Disclosure Statement provided affected stakeholders with sufficient information to cast an informed vote on the CBCA Plan. Indeed, the Disclosure Statement provided, among other things, a comprehensive description of Stoneway and its business, the Chapter 11 Plan and its relationship to the CBCA Plan, the CBCA Plan itself, and a description of the risks associated therewith. The Court agreed and was satisfied that the Disclosure Statement contained adequate information to allow stakeholders to make an informed decision when voting on the CBCA Plan.
2. Dispensing with a Separate Meeting and Deeming Votes to be Cast
In lieu of calling and conducting a separate meeting under the CBCA, the Interim Order authorized Stoneway to utilize the solicitation and voting procedures approved in the Chapter 11 proceedings. Those procedures provided that votes cast by stakeholders under the Chapter 11 Plan, whose rights were to be arranged under the CBCA Plan, would also constitute votes cast for or against, as the case may be, the CBCA Plan. The use of such a dual voting mechanism is not precluded by the CBCA or the CBCA Director's Policy. In addition, the CBCA does not contain an express requirement for a meeting or a vote of approval, and the CBCA Director's Policy only indicates that all securityholders affected by a plan should be entitled to vote in respect of that plan.3 Stoneway asserted that its proposed dual voting mechanism was appropriate and substantively consistent with this guidance. Simply put, while the voting process was not the typical process seen in prior CBCA proceedings, in light of the unique facts of the case, the disclosure provided in the Chapter 11 proceedings with respect to the CBCA Plan, and the interrelated nature of both plans, the process still provided all stakeholders with an opportunity to cast an informed vote on the CBCA Plan. In granting the Interim Order and the Final Order, the Court was satisfied that Stoneway's proposed dual voting mechanism was appropriate in the circumstances and did not detract from the fairness and reasonableness of the CBCA Plan.
Stoneway's CBCA proceedings demonstrate the utility of the CBCA's arrangement provision as an effective cross-border and international restructuring tool. While the procedures adopted in the Stoneway case may not be appropriate in other situations, the unique mechanisms approved by the Court further demonstrate the flexibility of the CBCA's arrangement provisions, including the ability to adapt to new situations where the principles of efficiency and economy support a novel approach.