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Mountain Equipment Co-Operative (Re), 2020 BCSC 1586

What criteria must be met for the court to approve a pre-packaged sale?

On September 14, 2020, MEC sought and obtained relief pursuant to the Companies’ Creditors Arrangement Act. It subsequently sought an order approving a sale of substantially all of its assets, pursuant to a Sale Approval and Vesting Order (SAVO). MEC submitted that it was critical that the sale occur without delay.

MEC’s assets consisted primarily of: owned and leased real property; equipment; inventory; accounts receivable; and intangible assets including certain trademarks on trade names, membership lists and goodwill. As of February 2020, MEC recorded a book value of approximately $389 million in current and long-term assets. MEC’s current and long-term liabilities totaled approximately $229.6 million.

The key aims and elements of the Sale Agreement were:

  1. the purchaser would continue to operate the business as a going concern under a similar name to MEC and would maintain the goodwill of the retail business;
  2. the purchased assets comprised almost all of the assets currently used by MEC for the business;
  3. the purchaser would retain at least 75% of the active employees of MEC;
  4. the purchaser would assume the liabilities of MEC; and
  5. the sale price would repay MEC’s lenders in full and leave MEC with additional funds to support a CCAA plan that would see a distribution to unsecured creditors.
This was a classic “pre-packaged” proceeding. As in many CCAA proceedings, most of MEC’s restructuring efforts took place before the filing of the court proceeding, and the most obvious restructuring path presented by MEC was the sale arising from a Sales and Investment Solicitation Process (SISP). There are often good reasons why a debtor company may choose this course of action, namely the real or perceived threats or disruptions to a business by pursuing options within a proceeding. MEC submitted that it ran the SISP prior to any CCAA proceedings to maintain stability in its business and to promote a going concern solution.
 
The Court’s approach in considering a proposed sale under s. 36 of the CCAA is informed by the CCAA’s statutory objectives. The main objective is to avoid, if possible, the devastating social and economic costs of a liquidation of a debtor’s assets. In achieving these remedial goals, the Court must be cognizant of the various interests at stake, including the debtor, the creditors, employees, counterparties, directors and shareholders. The Court must strive to balance what are often competing interests and objectives.

Here, the design of the SISP included the usual features, in that it was structured and implemented in the same or similar manner as is typically done in a SISP in the course of CCAA proceedings. The list of persons contacted was extensive, and the purchaser’s bid was clearly the best bid of the four that MEC received. All other bids paled in comparison, particularly in relation to the purchase price and commitments to ongoing store operations and employee retention.

Another relevant factor was the level of oversight throughout the process. MEC’s advisors were well-qualified and experienced business professionals. Further, the process was reviewed by MEC’s lenders and their experienced professional advisors, without objection. The process was not a rushed affair. While many of the stakeholders on this application felt that they had been ignored or disadvantaged by the lack of prior consultation and the short notice given to them to respond to the application, the Court concluded that MEC had provided reasonable and understandable explanations for proceeding in that manner. To proceed otherwise would have created significant uncertainty and disruption in MEC’s day-to-day business and put MEC’s business operations and a potential going concern sale at unnecessary risk.

The Court concluded that the SISP was a competitive process, was conducted in a fair and reasonable manner and adequately canvassed the market for options available to MEC. The sale would avoid the devastating impact of a liquidation on employees’ jobs, preserve many of the leases, trade supply agreements and service agreements, and provides value to many unsecured creditors by the purchaser’s full assumption of liabilities. The Court concluded that the sale was commercially reasonable and, on balance, was more beneficial to MEC’s stakeholders, and particularly its creditors, than any other alternative. It granted the SAVO on the terms sought.

Madam Justice Fitzpatrick concluded her reasons by noting that “this decision is a disappointing conclusion to the fate of what was an iconic Canadian retailer who has inspired the passion and commitment of many Canadians for outdoor activity.” Nevertheless, even though the sale transaction was not “wrapped in the Canadian flag” (in that the purchaser is not a Canadian entity), Madam Justice Fitzpatrick concluded that the sale met the core objectives of the CCAA in a reasonable manner, which is all anyone can ask.

CounselHoward Gorman, Q.C. and Scott Boucher of Norton Rose Fulbright Canada LLP for the Petitioners, Mountain Equipment Co-Operative and 1314625 Ontario Limited; Lance Williams and Jared Enns of Cassels Brock & Blackwell LLP for the Monitor, Alvarez & Marsal Canada Inc.; John Sandrelli and Valerie Cross of Dentons Canada LLP for Royal Bank of Canada, as Administrative Agent and Collateral Agent under Credit Agreement; Dylan Chochla and Kibben Jackson of Fasken Martineau DuMoulin LLP for Kingswood Capital Management LP, Kingswood Capital Opportunities Fund I, LP, Kingswood Capital Opportunities Fund I-A, LP and 1264686 B.C. Ltd.

Judge: Fitzpatrick J.

 

Fullcase: http://canlii.ca/t/jb9qg