Guidance on opposed stalking horse bids

Re Validus Power Corp. 
What is the test for approving an opposed stalking horse bid?

Overview: In this case, the Court set out the test for approving a stalking horse bid. The Court found that the stalking horse bid at issue should be approved over the objections of the company, since it provided a degree of certainty to employees and other stakeholders that there is a possible going-concern solution for the business.

KSV as the Court-appointed Monitor of the Validus Entities sought an order, among other things, approving a Stalking Horse Bid by Macquarie and a SISP to be implemented by the Monitor. The Validus Entities are a group of privately held companies that own and operate power generation plants located across Ontario. Macquarie, the senior secured lender of the Validus Entities, supported the relief sought by the Monitor.

The proposed Stalking Horse Offer was essentially a credit bid by Macquarie based on the amounts owing to it. The Validus Entities did not agree with the calculation of the quantum of the obligations owing to Macquarie and, accordingly, opposed the approval of the Stalking Horse Bid. In the alternative, the Validus Entities argued that the amount owing to Macquarie was unconscionable and violated the anti-deprivation rule.

Approval of the Stalking Horse Bid was sought to provide a “floor” or minimum initial bid. Courts have recognized that the broad, remedial nature of the CCAA, and the discretion in s.11, in particular, which confers the power to approve a SISP in respect of CCAA debtors and their property. The Canadian authorities relevant to consideration of stalking horse bids distill, essentially, to this question: taking into account the support for and opposition to the terms of the proposed SISP and stalking horse agreement, while recognizing whether and how those parties supporting or opposing it are economically affected by the outcome, will the proposed process (including its stalking horse bid component and all other material terms), if approved, likely result in the best recovery on the assets being sold pursuant to a fair and transparent process?

The SISP was developed and would be conducted by the Court-appointed Monitor, who bore the obligation to conduct that process in a fair and transparent manner. The proposed SISP contemplated and facilitated possible transactions with greater value than the Stalking Horse Bid if one were identified. The inclusion in the SISP of the Stalking Horse Bid was appropriate because it provided an important degree of certainty to the employees of the Validus Entities and other stakeholders who may take some comfort that there is a possible going-concern solution for the business. This was contrasted with the risks of conducting a SISP without a stalking horse, which risks included the absence of support from Macquarie as the senior secured creditor, the possible resignation of the employees and consequent shutdown of all plants, and the likely detrimental impact on value.

The Court was satisfied that the amount owing to Macquarie was correct for the purposes of this motion, and flowed from the operation of the bargain made by the parties as reflected in the transacting documents. There was no evidence of any overstatement of rent arrears or double-counting.

With respect to the Validus Entities’ alternative argument, the Court found that the anti-derivation rule did not apply in the circumstances of this case. The anti-deprivation rule has its origins in the common law. It is intended to prohibit contracts that frustrate statutory insolvency schemes and was originally directed against fraudulent conduct. The Supreme Court stated that the rule renders void any provision in an agreement which provides that, upon an insolvency (or bankruptcy), value is removed from the reach of the insolvent person’s creditors which would otherwise have been available to them, and places that value in the hands of others.

The entitlements of Macquarie did not arise as a result of the insolvency of the Validus Entities. They arose, as intended by the parties in making their bargain, on the default by the Validus Entities of their contractual obligation to make the rent payments when due. Macquarie would have been no less entitled to the amounts it was now claiming if the Validus Entities were not insolvent at all (then or now) but rather had simply breached their contractual bargain in the absence of an insolvency.

Accordingly, the motion approving the SISP—including the Stalking Horse Bid—was granted.

Judge: Justice Osborne

Counsel: Jennifer Stam and James Renihan of Norton Rose Fulbright for KSV as monitor; Scott Bomhof, Jeremy Opolsky and Mike Noel of Torys for Macquarie; Edward Park of the Department of Justice for CRA; Jesse Mighton of Bennett Jones for Hut 8 Mining Corp. / Far North; and Catherine Francis of Minden Gross for Validus.