Vesting out a court-ordered sales charge?

Good Natured Products Inc. (Re), 2024 BCSC 2126
Can an RVO be used to vest out a court-ordered sales charge in a CCAA proceeding?

Summary: A SISP and DIP loan were approved in a CCAA proceeding. A sales agent was engaged to implement the SISP, and its “transaction success fee” (3% of the value of any transaction) was approved by the court, together with a first-ranking charge over the proceeds of any sale. An agreement structured as an RVO was entered into with the ultimate purchaser, who structured the terms of the RVO to assume all of the secured debt and pay or satisfy all of the CCAA charges except for the transaction success fee charge, and instead proposed to pay the sales agent a “closing payment” of $315,000. The sales agent and the monitor opposed, arguing that the closing payment was a small fraction of what the sales agent was arguably due on closing (the value of the transaction was estimated to be in excess of $53 million). The Court refused to approve the transaction in that form. The sales agent did what it was engaged to do and produced a successful result. It would be morally and commercially repugnant for stakeholders who benefitted from that result to now disregard the means by which that successful solution was found and the price that they agreed to pay for that effort. In addition, it would offend the conscience of the Court to endorse such an ex post facto balancing approach that would void protections granted by the Court and would result in unfairness.

The petitioners were a group of companies (“GDNP”) in the business of developing and manufacturing plant-based products in Canada and the U.S. On June 28, 2024, GDNP was granted creditor protection under the Companies’ Creditors Arrangement Act. On July 11, 2024, the Court granted an Order approving a sale and investment solicitation process (“SISP”) and appointing Capital West Partners (“Cap West”) as sales agent to implement and carry out the SISP. The Court also granted a “DIP Order”, approving an interim financing facility to a maximum of $15.1 million to allow GDNP to continue its restructuring efforts, including under the SISP. The DIP Order also addressed the involvement of Cap West and specifically, approved the terms of Cap West’s engagement letter, including how Cap West was to be remunerated.

Cap West’s remuneration included a “Transaction Success Fee”, equal to 3% of the “Enterprise Value” implied under a “Transaction”, with a minimum amount of $1.25 million. The Court endorsed protections in favour of Cap West that ensured that it had a first ranking charge against “proceeds” derived from GDNP’s assets and undertakings as was anticipated to be achieved under the SISP, to pay any Transaction Success Fee.

The SISP was carried out in accordance with its terms and Cap West fulfilled its duties under the SISP. Cap West expended extensive efforts to ensure that GDNP’s business and assets were widely marketed and it achieved a successful result. On September 30, 2024, the successful bidder (the “Purchaser”) was notified and the parties set about preparing the necessary documentation. Cap West anticipated that it would receive its Transaction Success Fee, based on 3% of the Enterprise Value of the transaction proposed by the Purchaser. The Monitor estimated that the value of the transaction would be in excess of $53 million.

On October 23, 2024, GDNP entered into a Subscription Agreement with the Purchaser. The structure of this agreement—a sale via the granting of a reverse vesting order—led to an issue arising in relation to Cap West. The Purchaser structured the terms of the RVO to assume all of the secured debt and pay or satisfy all of the CCAA charges except for the Cap West Success Fee Charge. The treatment of Cap West on closing, chosen by the Purchaser, was to fashion the Transaction and the RVO so that the only cash payment to be made on closing was $315,000 (defined as the “Closing Payment”). This amount represented a payment of $300,000 plus tax, which was to be paid from the Purchaser’s credit facility, which the Monitor was then allowed to pay to Cap West to “satisfy” the Cap West Success Fee. This “Closing Payment” was a small fraction of what Cap West was arguably due on closing. Both Cap West and the Monitor opposed the approval of the Transaction for that reason.

GDNP and the Purchaser argued that the Court should ignore the substantial amount of debt being assumed as being part of the “proceeds” of the Transaction. The Purchaser asserted that it “takes no responsibility for these debts”. GDNP argued that the Cap West Success Fee Charge attached to nothing since the Retained Liabilities were left in GDNP under the RVO and continued in their prior form, not producing any “proceeds”. The Purchaser’s argument rested on the fact that the structure of the RVO resulted in a transfer to it of shares and not the underlying assets.

The Court noted that, inherently, the Purchaser would be assuming responsibility for the $44 million of secured debt in that GDNP, to be owned by the Purchaser, would pay down those debts in the ordinary course of business, just as it would if it had otherwise financed the purchase price. Moreover, the interpretation of the engagement letter was beyond doubt, based on the wording itself and the surrounding circumstances in which it was made. The Transaction came within the meaning of “proceeds” as that term was used in the engagement letter and as was intended by GDNP and Cap West. The RVO structure did not negate the fact that the value of GDNP’s assets was being effectively transferred to the Purchaser as “proceeds” of the Transaction, which arose as a result of the SISP and Cap West’s efforts.

Cap West sought and obtained both approval of its fee structure and also a court ordered charge or protection to secure payment of its compensation. The language used in the DIP Order was broad and referred to the charge attaching to “any proceeds derived from the sale of [GDNP]’s Property”. The overall intention of the parties was to protect Cap West for its agreed upon compensation from whatever solution might arise from the SISP that would be acceptable to the creditors and the Court.

In respect of any sale under the CCAA, one factor under s. 36(3)(e) is the effect of the sale or disposition on the creditors and other interested parties. Cap West was an interested party. Although s. 36(3) of the CCAA was not directly engaged in respect of the RVO, this same factor is a relevant consideration under s. 11 of the CCAA in considering whether the RVO transaction is appropriate. One factor is whether any stakeholder is worse off under the RVO structure than they would have been under any other viable alternative, a factor that similarly requires a consideration of the effect of the RVO on the stakeholders.

While a refusal to approve the Transaction invited some risk in terms of how the matter would proceed, if at all, the prejudice and unfairness to Cap West could not be ignored. GDNP sought and obtained the assistance of Cap West to find a solution. The stakeholders agreed to that arrangement. There was no guarantee that a viable solution would be found, in which case Cap West would not have earned any success fee. The results of the SISP were positive and the stakeholders stood to reap the benefits. Cap West did what it was engaged to do, and produced a successful result. It would be morally and commercially repugnant for those stakeholders to now disregard the means by which that successful solution was found and the price that they agreed to pay for that effort. In addition, it would offend the conscience of the Court to endorse such an ex post facto balancing approach that would void protections granted by this Court and would result in unfairness. Accordingly, the Court declined to exercise its discretion to approve the Transaction under s. 11 of the CCAA.

On October 28, 2024, GDNP filed a new application to approve an amended Transaction. The only two changes were to extend the closing date and increase the “Closing Payment” to be paid to Cap West for the Transaction Success Fee from $300,000, plus tax, to $850,000, plus tax (the “Revised Transaction”). With that amendment, Cap West supported the Revised Transaction and the Monitor withdrew its objection. The Court concluded that the Revised Transaction was reasonable and appropriate.

Judge: Madam Justice Fitzpatrick

Counsel:

• Peter Reardon of Nathanson, Schachter & Thompson for Capital West Partners

• Lance Williams and Ashley Bowron of McCarthys for the Monitor, Alvarez & Marsal Canada

• Emma Newbery, Emily Paplawski and Christian Garton of Osler for the Petitioners

• Matthew Cressatti, Larry Ellis and Harrison Fox of Miller Thomson for the Purchaser, HUK 149 Limited

• Maya Poliak of Chaitons for Export Development Canada

• Valerie Cross and Cassandra Federico of Dentons for Royal Bank of Canada

• Scott Stephens of Owen Bird for Toronto-Dominion Bank

• Kieran Siddall, Candace Formosa and Evan Cobb of Norton Rose Fulbright for Wells Fargo

• R. Taylor for Spark Power Low Voltage Services Inc.

• Pavin Takhar for EY Financial Advisors

• Nicole Johnston for the His Majesty the King in Right of Canada