Approving an RVO on the comeback hearing?

Re SRx Health Solutions (Canada) Inc. et al. v. Minister of National Revenue 
What is the test for the approval of an RVO at a comeback hearing?

Summary: In this case, the Court considered whether to approve two reverse vesting transactions at the CCAA comeback hearing of a chain of specialty pharmacy stores and clinics located across Canada. The Court previously approved a 6-day SISP at the hearing of the initial application. Owing to the significant risks concerning disruption to healthcare services and the lack of liquidity, the timeline for the sale process was very short, and approval of the transactions arising out of the sale process was sought at the comeback hearing. The first of the two transactions involved the transfer of the company’s Charter—a non-transferable asset with significant market value. The reverse vesting structure permitted the conveyance of the Charter absent any liabilities. The Court found that the Charter transaction readily complied with the case law as to the appropriate use of a reverse vesting structure. The Charter was clearly a unique and valuable asset, and was preserved, and its value maximized, by the reverse vesting structure. The second transaction—which involved the preservation of valuable tax attributes that would be lost in a conventional sale—was a “closer call” but still approved on balance, with the Court finding that it met the necessary criteria.

SRx Group operates a chain of specialty pharmacy stores and clinics located across Canada, offering specialized health services, including the administration of medication to patients with complex and often chronic, life-threatening conditions. The application for an initial order under the Companies’ Creditors Arrangement Act was brought urgently, citing the need to avoid a serious disruption to the continuity of health care services to patients as a consequence of the SRx Group’s critical financial challenges.

Among other relief, the initial order granted on August 12 approved a sale process for the SRx Group’s assets or shares. Owing to the significant risks concerning disruption to healthcare services and the lack of liquidity, the timeline for the sale process was very short, with a deadline of August 18, and approval of any transactions arising out of the sale process to be sought at the comeback hearing.

At the comeback hearing, the Applicants sought, among other things, two approval and reverse vesting orders approving share purchase agreements and the transactions contemplated therein. The winning bids were selected in accordance with the court-approved procedures. 

In the context of considering a reverse vesting order, courts must consider whether:

1. the reverse vesting structure is necessary in the case at hand;

2. the reverse vesting order structure produces an economic result that is at least as favourable as any other viable transaction;

3. any stakeholder is worse off under the reverse vesting order structure than they would have been under any other viable alternative; and

4. the consideration paid for the debtor’s business reflects the importance and value of intangible assets being preserved under the reverse vesting structure.

The first of the two transactions involved the transfer of the company’s Charter— a non-transferable marketable asset of SRx Group with significant market value. SRx Health Ontario Inc. is considered a “Pre-1954 Charter company”, meaning that, unlike pharmacies incorporated after May 14, 1954, the owner of the pharmacy is not required by law to be a licensed pharmacist. The reverse vesting structure permitted the conveyance of the Charter absent any liabilities.

There was no suggestion nor evidence that any stakeholder is worse off under the reverse vesting structure, so the proposed transaction would permit the completion of a value-maximizing going concern sale that preserved supply, customer and employee relationships.

The Court found that the Charter transaction readily complied with the case law as to the appropriate use of a reverse vesting structure. The Charter was clearly a unique and valuable asset, and was preserved, and its value maximized, by the reverse vesting structure.

The second transaction was a “closer call” but, still, on balance, the Court found that it met the necessary criteria. The reverse vesting structure was proposed to preserve valuable tax attributes that would otherwise be lost in a conventional sale. There was no suggestion nor evidence that any stakeholder would be worse off by virtue of the reverse vesting structure being deployed. As such, on balance, the Court was prepared to approve the reverse vesting structure.

Judge: Justice W.D. Black

Professionals involved:

• Matthew Cressatti, Gavin Finlayson and Monica Faheim of Miller Thomson for the SRx Group

• Adam Slavens of Torys for AbbVie Corporation

• Howard Manis of Manis Law for Adesh Vora

• Chad Kopach of Blaney McMurtry for Yonge Wellesley Holdings Inc.

• Marco Ciccone of Dentons for NW Healthcase Properties

• Jamey Gage of McCarthy Tetrault for National Bank of Canada

• Aaron Gold of Babin Bessner Spry for Desai et al.

• Miranda Spence of Aird & Berlis for Cairn Merchant Partners Inc.