Challenging a stalking horse bid

On what grounds can a stalking horse bid be challenged?

Tool Shed Brewing (Re), 2024 ABKB 234
On what grounds can a stalking horse bid be challenged?

Overview: In this case, the Court considered whether a stalking horse bid could be challenged, principally on the basis that the CEO of the debtor company was an investor in the stalking horse bidder. The Court found that this issue should have been raised at the hearing to approve the SISP, and that it was not appropriate to raise this submission on the sale approval application since it had the effect of undermining the SISP order. The Court ultimately approved the stalking horse bid.

Tool Shed Brewing Company Inc. (“Tool Shed”) brews craft beer and operates a restaurant. It sought approval of a reverse vesting order for a stalking horse bid (the “Stalking Horse Bid”) made by 2582568 Alberta Inc., a company controlled by Tool Shed’s current CEO, James Costello (the “Stalking Horse Bidder”). Tool Shed’s application was opposed by two individual Tool Shed investors, who were also secured creditors (the “Investors”). The Investors were also owners of a company that submitted a competing bid (the “Donovan Group”). 

Tool Shed had nine non-transferable licenses and permits issued by the Alberta Gaming, Liquor and Cannabis Commission (the “AGLC”), which were the key asset of its business. Accordingly, it argued that a reverse vesting order was the only way to preserve the non-transferrable permits and licenses.

At the initial hearing of the application on April 15, 2024, the Court raised the issue of standing as it had not been addressed in the materials or briefs of the parties. Counsel for the Donovan Group and the Investors submitted that the Investors had standing as secured creditors of Tool Shed and that a distinction should not be made between them. Tool Shed submitted that there was no issue with granting the Investors and the Donovan Group standing. At the return of the hearing on April 16, 2024, the Donovan Group submitted that, in addition to the materials already provided, it also relied on Bloom Lake, gpl (Arrangement relatif à), 2015 QCCS 1920, para 85. In that case, the Court queried who would raise the issues of fairness and integrity if the losing bidder, sometimes referred to as the “bitter bidder”, has no standing and cannot raise them. The Investors and the Donovan Group also note that in Royal Bank of Canada v Keller & Sons, 2016 MBCA 46, at para 13, the Court recognized that the unfairness of the process itself could prevent a party from obtaining a material interest in the sale process such that it did not have standing.

Tool Shed submitted that the non-exclusive factors set out in s 65.13(4) of the BIA for approval of disposition of Tool Shed have been met, and that considering those factors ensured that the principles set out in Royal Bank of Canada v Soundair Corp, 1991 CanLII 2727 (ONCA) were also assessed. In any event, Tool Shed argued that the Soundair principles were satisfied. The Donovan Group submitted that the Soundair principles were not met, that approval of the Stalking Horse Bid was not the best option for Tool Shed and that it should be rejected. In addition, the Donovan Group asserted that it should be entitled to seek approval of its bid at a subsequent application.

The Court noted that Tool Shed was conflating process with substance. The SISP Order approval of the SISP Process addressed the process considerations set out in s 65.13(4) of the BIA. This sale approval application was not an opportunity to make a collateral attack on the SISP Order that was granted on February 12, 2024. The SISP Order was not appealed and the SISP Process could not now be impugned. Accordingly, the Soundair principles were to be addressed independently:

  1. Were there sufficient efforts to get the best price without acting improvidently;

  2. Were the interests of all parties considered;

  3. The efficacy and integrity of the SISP Process; and

  4. Whether there has been unfairness in the working out of the process.

The Donovan Group’s main concerns arose from Mr. Costello’s dual role as CEO of Tool Shed and as an investor in the Stalking Horse Bidder. The Court noted that the difficulty with addressing this tension, and possible conflict of interest, on an application for approval of the SISP transaction, was that they are inherent in the SISP Process which has already been approved. Whether the integrity of the SISP Process was affected by the Stalking Horse Bidder providing the Stalking Horse Bid was something that the Donovan Group should have raised on the application where the SISP Process was approved. It was not appropriate to raise this submission on this sale approval application as it had the effect of undermining the SISP Order. The Court found that the Donovan Group had not shown that the Stalking Horse Bidder had any different or better information upon which to base the Stalking Horse Bid.

The SISP Process set the initial deadline for bids as March 11, 2024. The Donovan Group submitted its Preliminary Bid on March 14, 2024. The Donovan Group clearly identified its bid as conditional on “due diligence inquiries”. The Proposal Trustee reported in its Second Report that the Donovan Group’s preliminary bid was rejected because, inter alia, (a) it was conditional, contrary to the SISP Process approved by the SISP Order; and (b) it required 50% of Tool Shed’s full-time employees to accept offers of employment with the Donovan Group, a condition which Tool Shed and the Proposal Trustee were unable to enforce. The Donovan Group’s subsequent request for an extension of the bid deadline so that it could submit an unconditional bid was denied. In the absence of any Qualified Bid, the Proposal Trustee declared the proponent of the Stalking Horse Bid to be the successful bidder on March 19, 2024. On March 22, 2024, the Donovan Group nevertheless submitted an unconditional bid. Notwithstanding that it was submitted after the deadline, the Proposal Trustee reviewed the revised bid, but rejected it for various reasons, including the prejudice to the Stalking Horse Bidder after having been informed its bid was declared the Successful Bid in the SISP. The Court concluded that the Proposal Trustee implemented and followed the SISP Process and sufficient efforts were made to get the best price.

The Court also found that the revised Donovan bid was not a “Qualified Bid” within the meaning of the SISP Process. As a result, the Donovan Group had no interested to be considered. Further, there was no evidence of a lack of integrity in the implementation of the SISP Process. Finally, when viewed in totality, there was no unfairness. The Proposal Trustee met its obligation to implement the SISP Process and to act in a commercially reasonable manner in the circumstances, with a view to obtaining the best price having regard to the competing interests of the parties. Accordingly, the objection to the SISP transaction could not succeed, the Stalking Horse Bid was successful and the transaction contemplated thereby was approved.

Judge: Justice Sidnell

Counsel: James Reid and Bryan Hosking of Miller Thomson for Tool Shed Brewing Company; Alexis Teasdale of Lawson Lundell for 2594617 Alberta Ltd.; Catrina Webster for KPMG as Proposal Trustee; Daniel Segal and Bertrand Malo for the CRA; Jeffrey N Thom, KC of McLeod Law for 2582568 Alberta Inc.