WEPPA claims after an RVO?

Re Valeo Pharma Inc.
Can terminated employees transferred to a residualco pursuant to an RVO make a WEPPA claim?

Summary: In this pharmaceutical company CCAA proceeding, the Court considered whether it should approve a purchase transaction structured as an RVO, and whether non-retained employees transferred to a residualco should be able to make WEPPA claims. The Court determined that the RVO transaction was the most advantageous one for stakeholders, generating a considerably better return than a receivership or bankruptcy. There was also a benefit to employees, about 60% of whom would keep their jobs in the restructured company. For those employees not retained in the new company, the Court expected that they would receive compensation under WEPPA, since the structure of the transaction appeared to meet the statutory requirements. Specifically, the Court found that residualco was the “former employer” pursuant to WEPPA.

The Debtors (collectively, “Valeo”) were related pharmaceutical companies engaged in the sale of branded pharmaceutical and hospital specialty products in Canada. Faced with operating losses and a liquidity crisis, Valeo commenced proceedings under the Companies’ Creditors Arrangement Act in September 2024.

In October 2024, Valeo obtained an order which, among other things, authorized it to initiate a sale and investment solicitation process for the sale of all or part of its business. The SISP was conducted over three months by Ernst & Young as Monitor, in consultation with Valeo and Valeo’s interim lender and a secured creditor. The Monitor subsequently sought approval of a transaction with Xediton for the purchase of Valeo’s parent company’s shares and selected assets under the terms of a reverse vesting order. Under the terms of the transaction, Xediton would acquire the issued and outstanding shares of the parent company in consideration of a payment of $20 million. Under the reverse vesting structure, Valeo would transfer some of its unwanted liabilities and assets to a newly-incorporated entity, ResidualCo, prior to Xediton’s share purchase.

Under the transaction, a pension plan administered by Valeo would be transferred to ResidualCo and eventually wound down. Xediton would retain 36 of Valeo’s 60 employees. All employees not retained by Valeo would be paid their salary and vacation benefits before being transferred to ResidualCo, who would then terminate the employees’ contracts and assume the employer’s liabilities.

Much of the value provided by the transaction was generated through the reverse vesting structure. Through the share purchase, Xediton will acquire many of Valeo’s existing supply and distribution contracts, as well as Valeo’s licenses, permits and authorizations that are necessary to operate in the highly regulated pharmaceutical industry. None of these assets could have been transferred under a traditional asset sale.

Given the thorough SISP process, the Court accepted the Monitor’s opinion that Xediton’s offer was the most advantageous one for stakeholders. A sale or liquidation of Valeo’s assets, either through a receivership or bankruptcy, would generate a considerably smaller return for creditors and other stakeholders. There was also a benefit to Valeo’s employees, who would keep their jobs in the restructured company.

For those employees not retained in the new Valeo, the Court expected that they would receive compensation under the Wage Earner Protection Program Act, since the structure of the transaction appeared to meet the statutory requirements. Section 5(5) of WEPPA requires the Court to determine whether a former employer meets the criteria prescribed by s. 3.2 of the Regulations. In this case, the criteria are met, because ResidualCo was the “former employer” pursuant to WEPPA.

Since the transaction maximized recovery for creditors, maintained Valeo’s business operations, and did not unfairly prejudice any group of stakeholders, the Court concluded that the transaction should be approved.

Judge: Justice Collier

Professionals involved:

• Éric Vallières, Emile Catimel-Marchand and Tushara Weerasooriya of McMillan for Valeo Pharma

• Alain Tardif and Marc-Étienne Boucher of McCarthy Tétrault for Ernst & Young as Monitor

• Tony DeMarinis and William McNamara of Torys for the Interim Lender

• Gerald Kandestin, Jeremy Cuttler and Claudia Giroux of Kugler Kandestin for Accord Financial

• Cheryl Reicin of Mintz and D.J. Miller of Thornton Grout Finnigan for the Purchaser