Suspending third party ROFR rights in a SISP?

Re Groupe Selection Inc., Quebec Superior Court Commercial Division File No. 500-11-061657-223 (March 24, 2023)
Can a court suspend rights of first refusal and other restrictive covenants between a debtor and solvent parties on the initiation of the SISP?

GS and other debtors obtained protection from the Court pursuant to the CCAA on November 21, 2022. At that time, the banking Syndicate, which was GS’s largest creditor, objected to the restructuring plan contemplated by GS, the appointment of the monitor selected by GS, and the $50-million interim financing that GS was trying to obtain from a third party. The Syndicate, which was already involved as a secured creditor, offered its own interim financing and recommended the appointment of another firm as Monitor.
 
The Court essentially accepted the position of the Syndicate, and the latter was able to put in place an initial interim financing of $20 million to temporarily ensure the continuity of GS’s operations. GS and the Syndicate then proposed a SISP in order to (i) stem the major financial hemorrhaging that was then afflicting GS’s businesses, (ii) settle its indebtedness to its creditors, and (iii) allow for the recovery of GS on a healthier financial footing, to the extent possible.
 
By Application dated March 10, 2023, the Monitor advised the Court that it was ready to launch the SISP and requested its approval. The SISP approval was challenged by GS and objected to by several of GS’s hypothecary creditors or business partners. Most of GS’s hypothecary creditors and business partners held controlling interests primarily in real estate assets (which were also of interest to GS) and were intent on monetizing their minority interests.

The benefit of a full two-day hearing on the SISP application allowed for the continued out-of-court discussions between the interested parties and the Monitor, which settled most of the issues identified in the Bidding Procedure document accompanying the draft SISP order. The Bidding Procedure includes the terms and conditions of the SISP, essentially offering to the market certain of GS’s identified assets, which GS and the Monitor hope to monetize on the best possible terms and conditions, including with respect to the Syndicate.
 
Apart from three GS business partners objecting to GS’s rights in some of the specific contracts between them forming part of the SISP assets, no one objected to the implementation and holding of the SISP. The issues raised related instead to the terms and conditions established by the Monitor, which elicited several interventions and objections from the affected stakeholders. GS’s business partners objected to the marketing of GS’s rights in certain contracts binding them to GS on the basis that such contracts were non-transferable and consequently, GS’s rights in them could not be sold or transferred to a third party, especially without the business partners’ approval.

The Court concluded that the interventions of these business partners were hypothetical and premature, especially since it is not known at this time whether these possibly non-transferable contractual rights will, in fact, be of any interest whatsoever to a potential purchaser. The Court made it clear that these partners will be able to reiterate their positions and arguments at a later stage of the SISP, if and when the disputed contractual rights become the subject of a binding letter of intent from a potential purchaser. In other words, these business partners will not be barred on the grounds of late intervention.
 
Nevertheless, in the interest of transparency and considering that all sales to be made under the SISP will be made on an "As is, Where is" basis, the Court noted that the Monitor should add a specific note in the Virtual Data Room about these particular assets to make any potential purchaser aware of the potential debate to come with the co-contracting parties if the purchaser’s identity is not acceptable to them.
 
Other hypothecary creditors and business partners also expressed concerns about the process proposed by the Monitor in that they would ultimately have a new debtor or a new partner replacing GS without their consent. They did not want to be required to advance additional funds. In this regard, the Court was satisfied that the terms and conditions of the Bidding Procedure reasonably addressed their concerns and fears. The Monitor took care to ensure that the affected hypothecary creditors and business partners would always have a final say in the disposition of the SISP assets that affect them through, among other things, the mandatory auction process that has been put in place.

In short, in addition to ultimately monetizing the SISP assets, the purpose of the SISP is, above all, to verify the interest generated by these assets on the market and, more particularly, their market value. Accordingly, the Court approved a SISP order containing the following provisions:
 
ORDERS and DECLARES that, subject to the provisions of the SISP Procedure, the contractual rights and remedies of third parties specifically restricting the disposal of assets defined in the SISP Procedure as being the "SISP Assets" (for the purposes of this Order, the "SISP Assets") and/or any part of the Debtors’ business as defined in the SISP Procedure as being "[the] Business" (for the purposes of this Order, the "Business")), including, but not limited to, provisions with respect to rights of first refusal, rights of first offer, rights to match an offer, options to purchase, or other restrictive covenants with respect to the sale of an interest in the SISP Assets and/or a part of the Business (collectively hereinafter "Restrictive Sale Provisions"), are stayed and unenforceable in the context of the SISP, may not be enforced against a potential bidder (defined as a "Potential Bidder" in the SISP Procedure, and for the purposes of this Order, a "Potential Bidder") in the context of the SISP, and shall not limit or impair the Monitor’s ability to conduct the SISP or implement any transaction thereunder; and
 
ORDERS and DECLARES that the Monitor is authorized to market and solicit bids for any SISP Asset and/or any part of the Business without complying with the Restrictive Sale Provisions, in accordance with the SISP Procedure.

This appears to be the first decision by a Canadian court suspending the rights of first refusal and other restrictive covenants between a debtor and solvent third parties upon the initiation of a SISP.

Judge: Michel A. Pinsonnault, J.S.C

Counsel: Luc Morin, Guillaume Michaud and Noah Zucker of Norton Rose Fulbright for the National Bank of Canada; Joseph Reynaud, Guy Martel and Danny Vu of Stikeman Elliott for the companies; Alain Riendeau, Brandon Farber and Éliane Dupéré-Tremblay of Fasken for PwC as Monitor