Endorsement
Court File No.: CV-25-00738246-00CL
Date: 2025-03-04
Ontario Superior Court of Justice – Commercial List
In the Matter of an Application under section 192 of the Canada Business Corporations Act, R.S.C. 1985, c. C-44, as amended, and Rules 14.05(2) and 14.05(3) of the Rules of Civil Procedure
And in the Matter of a Proposed Arrangement of Sherritt International Corporation and 16743714 Canada Inc., and involving Sherritt International Oil and Gas Limited, Sherritt International (Bahamas) Inc., Sherritt Power (Bahamas) Inc., SICOG Oil and Gas Limited, Sherritt Utilities Inc., Canada Northwest Oils (Europe) B.V., 672538 Alberta Ltd., 672539 Alberta Ltd., SI Supply & Services Limited, SI Finance Ltd., Dynatec Technologies Ltd., 1683740 Alberta Ltd., OG Finance Inc., Power Finance Inc., SBCT Logistics Ltd., SIC Marketing Services (UK) Limited and The Cobalt Refinery Holding Company Ltd.
Re: Sherritt International Corporation and 16743714 Canada Inc., Applicants
Before: Osborne J.
Counsel: Robert J. Chadwick, Caroline Descours, Carlie Fox and Josh Sloan, for the Applicants
Heard: March 4, 2025
Introduction
The Applicants, Sherritt International Corporation (“Sherritt” or the “Company”) and 16743714 Canada Inc. (“714” and together with Sherritt, the “Applicants”) have brought this Application pursuant to section 192 of the Canada Business Corporations Act (“CBCA”), for approval of a plan of arrangement (the “Arrangement”).
Defined terms in this Endorsement have the meaning given to them in the Application materials unless otherwise stated.
The Applicants are CBCA corporations. As further described below, the principal purpose of the proposed Arrangement is to amalgamate the Applicants and restructure certain debt obligations to stabilize the Company’s financial position.
The Interim Order and Meetings
Today, the Applicants bring this motion under s. 192(4) of the CBCA for advice and directions from this Court by way of an interim order (the “Interim Order”) which would direct the Applicants to hold two special meetings: the first in respect of Senior Secured Noteholders, and the second in respect of the Junior Noteholders, each to, among other things, consider and vote on the CBCA Plan. The Interim Order sought today also deals with the necessary notice and other mechanical requirements for the proposed meetings.
The Applicants rely on the affidavit of Yasmin Gabriel, the Chief Financial Officer of Sherritt and a director of 714, sworn March 3, 2025, together with exhibits thereto.
Background and Financial Position
Sherritt, together with its direct and indirect subsidiaries and joint ventures (collectively, the “Sherritt Group”), is a publicly traded Canadian resource company engaged primarily in mining, fertilizer and power generation businesses. Among other things, it uses hydrometallurgical processes to mine and refine nickel and cobalt, two metals integral to energy transition. The Sherritt Group is the largest independent energy producer in Cuba.
Sherritt has faced a number of challenges for a significant period of time, including high debt levels, the decline of spot prices for nickel and cobalt (which spot prices are a key driver of earnings of the Sherritt Group), and various challenges in Cuba. Sherritt will also face the upcoming maturity of significant debt obligations in 2026. All of these challenges are reflected in the depressed trading price of Sherritt’s Existing Notes, which have for a considerable period of time traded at a significant discount to par.
As of December 31, 2024, the Company had approximately $357 million of aggregate principal noted in revolving credit facility obligations, comprised of approximately $221.3 million of Senior Secured Notes, $66.7 million of Junior Notes, and $69 million in obligations under the Revolving Bank Facility. Collectively, these debt obligations yielded an annual interest expense for Sherritt in 2024 of approximately $32 million.
Following an extensive review of potential strategic alternatives, Sherritt has determined that the proposed Transaction is the best alternative for the Company in the present challenging circumstances.
The Transaction
The Transaction will result in, among other things, an exchange of the Company’s 8.50% senior second lien secured notes due November 30, 2026 (the “Senior Secured Notes”) at par, and the Company’s 10.75% unsecured PIK option notes due August 31, 2029 (the “Junior Notes” and together with the Senior Secured Notes, the “Existing Notes”) at 50% of par, in each case for Amended Senior Secured Notes with the maturity date of November 30, 2031, subject to certain conditions, at an annual interest rate of 9.25%, and certain additional amended terms (the “Amended Senior Secured Notes”).
In particular, the Senior Secured Notes will be exchanged for the Amended Senior Secured Notes in the principal amount equal to the principal amount of Senior Secured Notes outstanding as at the Effective Date. Holders of Senior Secured Notes will be paid in cash. All accrued and unpaid interest outstanding will be calculated at the contractual non-default rate up to but not including the Effective Date.
Each Senior Secured Noteholder that is an Early Consenting Senior Secured Noteholder will receive its Senior Secured Noteholder Early Consent Consideration. Initial Early Consenting Senior Secured Noteholders will receive a cash payment equal to 4% of the principal amount of Senior Secured Consent Notes. Each Early Consenting Senior Secured Noteholder that is not an Initial Early Consenting Senior Secured Noteholder will receive 3%.
The Junior Notes, together with all accrued and unpaid interest to the Effective Date, will be exchanged for Amended Senior Secured notes in a principal amount equal to 50% of the principal amount of Junior Notes outstanding on the Effective Date.
Each holder of Junior Notes that has voted in favour of the CBCA Plan or otherwise supported it in a manner acceptable to the Applicants will be an Early Consenting Junior Noteholder. Each will receive its Junior Noteholder Early Consent Consideration as additional consideration for the exchange of its Junior Notes, in the form of additional Amended Senior Secured Notes in a principal amount equal to 5% of the principal amount of Junior Consent Notes.
The proposed Transaction does not affect Sherritt’s shareholders, the Revolving Bank Facility Lenders, or any other obligations of the Company outside the Existing Notes. The Sherritt Group will continue to satisfy its obligations to employees, suppliers, customers and governmental authorities in the ordinary course of business.
The Revolving Bank Facility provides for credit in the aggregate amount of $100 million. It matures on April 30, 2026. As at December 31, 2024, approximately $69 million had been drawn. The Revolving Bank Facility Lenders have agreed with the Company that it will pursue the CBCA Transaction, and those parties will work together to implement the Revolving Bank Facility Amendments to allow for the implementation of the proposed CBCA Transaction.
The Company is pursuing the Arrangement with the support of the Initial Consenting Noteholders. They collectively hold approximately 42% of the Senior Secured Notes. The Initial Consenting Noteholders and Sherritt have entered into a Support Agreement pursuant to which the Initial Consenting Noteholders have agreed to support the Transaction and vote in favour of the Arrangement.
The Company has also entered into Exchange Agreements with the Initial Consenting Noteholders for an exchange of approximately $17.1 million of their Amended Senior Secured Notes for newly issued Common Shares, consisting of approximately 19.9% of the Company’s Common Shares to be effected immediately following, and conditional upon, the implementation of the CBCA Plan. The Company submits that it does not require approval of that Subsequent Exchange Transaction.
Sherritt is of the view that it is in the best interests of the Company and its stakeholders to complete the CBCA Transaction given that, if approved and completed, it would extend the maturity of significant debt obligations in the form of the Senior Secured Notes, the aggregate outstanding principal of which is approximately $220 million. The maturity of that obligation will be extended from November, 2026 up to 2031, subject to certain conditions.
In addition, the outstanding principal debt of the Company will be reduced by approximately $32 million. Annual interest costs will be correspondingly reduced, assuming the completion of the Junior Notes Exchange. The proposed Subsequent Exchange Transaction will further reduce the Company’s debt by approximately $17.1 million and reduce its annual interest expense by an additional amount of approximately $2 million.
The Applicants submit that these Transactions will result in a more sustainable capital structure that the Sherritt Business can support in the context of volatile commodity prices and challenging business conditions.
Impact on Subsidiaries and Stakeholders
The proposed CBCA Plan does affect non-CBCA entities. Certain direct or indirect wholly owned subsidiaries of Sherritt are Existing Notes Guarantors that are affected by the CBCA Plan in that they will remain as guarantors of the Amended Secured Notes to the extent that Existing Notes are exchanged for Amended Secured Notes. Those subsidiaries are organized under the laws of various jurisdictions. In addition, and as part of this CBCA Transaction, SICOG’s guarantee issued in respect of the Existing Notes will be cancelled and related security interests will be released.
All of this will, it is submitted, bring about substantial accretive benefits to stakeholders in large part, through the increased stability of Sherritt.
The Arrangement and the terms thereof are described in further detail in the Management Information Circular attached to the Affidavit of Mr. Gabriel as Exhibit “A”. All of that material is part of the Court record.
The Company has obtained a fairness opinion from Morrison Park Advisors Inc., in respect of the CBCA Transaction to the effect that it is fair, from a financial point of view, to the Company, that the Noteholders would be in a better position from a financial point of view under the CBCA Transaction than if the Company were liquidated, and that the consideration to be paid under the CBCA Plan to the Senior Noteholders and the Junior Noteholders is fair, from a financial point of view to those constituencies, respectively.
Following receipt of the fairness opinion, the Board unanimously determined that the proposed Arrangement is in the best interests of the Company and its stakeholders.
Regulatory and Procedural Matters
If a final order is granted in this Application, that order will constitute the basis for an exemption from the registration requirements of section 3(a)(10) of the United States Securities Act of 1933, as amended. The Applicants intend to rely on the orders of this Court for that exemption with respect to the Amended Senior Secured Notes.
The proposed meetings are scheduled for April 4, 2025 with a record date of November 13, 2024. The proposed Interim Order primarily deals with notice and voting mechanics. It is in a form substantially consistent with the Model Interim Order of the Commercial List issued by this Honourable Court in respect of similar plans of arrangement.
The proposed Interim Order further provides that for the Arrangement to be approved at the Noteholders’ Meetings, the respective Resolutions must be passed by an affirmative vote of at least 66 2/3% of the votes cast in respect thereof at the Senior Secured Noteholders’ Meeting and at the Junior Noteholders’ Meeting.
It further provides that the Applicants shall have the right to seek, as part of the Final Order to be sought in this Application or otherwise, that the Court treat all Noteholders as a single class for the purpose of voting on the CBCA Plan. To be clear, however, that relief is neither sought nor granted today.
Legal Principles and Analysis
In assessing whether to approve an Interim Order under section 192 of the CBCA, an applicant must demonstrate that it: 1) is acting in good faith in putting the proposed plan forward; and 2) satisfies the applicable statutory requirements.
Having regard to the record before the Court, I am satisfied that the Applicants are acting in good faith and that the statutory requirements are satisfied at this stage.
Section 192(3) of the CBCA provides that, where it is not practicable for a corporation that is not insolvent to effect a fundamental change in the nature of an arrangement under any other provision of the CBCA, the corporation may apply for an order approving an arrangement.
The Corporations Canada Policy on Arrangements - Canada Business Corporations Act, dated July 30, 2024 (the “CBCA Policy Statement”) at section 1.02 “endorses the position that the arrangement provisions of the [CBCA] are intended to be facilitative and should not be construed narrowly”.
Section 192 of the CBCA aims, in the context of debt restructuring, to “provide a broad procedure aimed at facilitating the restructuring of corporations”: Re 45133541 Canada Inc., 2009 QCCS 6444, paras. 61 and 120; and Re Sherritt International Corporation, 2020 ONSC 5822, para. 28.
Sherritt, the parent company of the Sherritt Group, has its head office in Toronto. It was continued under the CBCA and its Common Shares trade on the TSX.
The proposed Arrangement is an “arrangement” within the meaning of section 192 of the CBCA, and the Applicants meet the statutory requirements to apply for approval.
Neither Applicant is insolvent. Both are able to pay their respective liabilities as they become due, and the realizable value of the assets of each is not less than the aggregate of its corresponding liabilities and stated capital of all classes of shares. Our courts have held that the solvency requirement is satisfied where either at least one of the applicant companies is solvent or where the applicants will be solvent after the arrangement is implemented.
714 is a wholly owned subsidiary of Sherritt and is also a CBCA company with the registered head office in Toronto. It does not currently carry on operations or have material assets or liabilities. The intention is that it will amalgamate with Sherritt pursuant to the CBCA Plan.
Notice to the CBCA Director is required pursuant to section 192(5), and has been provided. By correspondence filed with the Court, the Director has confirmed that it does not need or intend to appear or be heard on the Application.
Section 192(4) of the CBCA authorizes the Court to make any interim or final order it thinks fit.
It is not incumbent upon the judge being asked to grant an interim order to carry out a detailed examination of the draft Information Circular that is to be distributed for its sufficiency. The Court does not approve or authorize the Information Circular (see Re First Marathon Inc., 1999 CarswellOnt 2295 (Ont. S.C.J. - Comm. List), paras. 9-11; Re 45133541 Canada Inc., 2009 QCCS 6440, paras. 23-24, 52). The Court at this stage is concerned with the approval and authorization of the mechanics for the notice and calling of the meeting for the proposed vote and for shareholders (or in this case, noteholders) to express their views and exercise their voting rights.
Nor does the Court have to undertake a detailed fairness analysis at this stage. It is enough that it be satisfied that there is sufficient indication of fairness to warrant the matter proceeding to a vote and fairness hearing. The purpose of the interim order is “simply to set the wheels in motion for the application process relating to the arrangement.” (Re Canopy Rivers Inc., 2021 ONSC 355, para. 2).
The CBCA Policy Statement recognizes that section 192 contemplates arrangements in which the primary purpose is the compromise of debt. See: CBCA Policy Statement at section 2.05: “The use of the term ‘security holder’ rather than ‘shareholder’ in section 192 of the Act clearly allows courts to entertain proposed arrangement transactions which alter debtholders’ rights.”
Canadian courts have granted orders under section 192 where the primary purpose of the proposed arrangement was the compromise of debt, including where such arrangements affected obligations under notes or other debt instruments. See, for example: Concordia, supra at paras. 28-32 citing, inter alia, North American Palladium, et al., Court File No. CV-15-11020-00CL (August 5, 2015); Abitibi, supra; Mobilicity, supra; Re Essar Steel Canada Inc., 2014 ONSC 4285; and Xplore Inc. (Re), 2024 ONSC 5250, para. 24(a).
Creditors are typically grouped for voting purposes according to their commonality of interest. Generally, creditors should vote as a common class so long as their rights “are not so dissimilar as to make it impossible for them to consult together with a view to their common interest: Re Canadian Airlines Corp., 2000 ABQB 705, paras. 17 and 18; leave to appeal refused 2000 ABCA 149.
The principles applicable to the commonality of interest assessment in the context of proceedings under the Companies’ Creditors Arrangement Act (the “CCAA”) are relevant for purposes of assessing voting classifications under the CBCA. In the Canadian Airlines CCAA proceedings, the court summarized the factors to be considered in determining whether creditors share a commonality of interest:
Commonality of interest should be viewed on the basis of the non-fragmentation test, not on an identity of interest test.
The interests to be considered are the legal interests the creditor holds qua creditor in relationship to the debtor company, prior to and under the plan as well as on liquidation.
The commonality of these interests are to be viewed purposively, bearing in mind the object of the CCAA, namely to facilitate reorganizations if at all possible.
In placing a broad and purposive interpretation on the CCAA, the court should be careful to resist classification approaches which would potentially jeopardize potentially viable plans.
Absent bad faith, the motivations of the creditors to approve or disapprove are irrelevant.
The requirement of creditors being able to consult together means being able to assess their legal entitlement as creditors before or after the plan in a similar manner.
See Canadian Airlines at paras. 17 and 31, and Re Sherritt International Corporation, 2020 ONSC 5822, paras. 35-41.
The classification exercise is an interests-based analysis to which the identity of the creditor is irrelevant. What is key is the commonality of interest, which considers only creditors’ legal entitlements in relation to the company being arranged, and not their broader commercial interests: Canadian Airlines at paras. 19 and 27.
The proposed Interim Order provides for the Senior Secured Noteholders to vote together, and also for the Junior Noteholders to vote together, provided that, notwithstanding these two separate meetings, the Applicants will have the right to seek, as part of the Final Order Application or otherwise, that they be treated as a single class for voting purposes. Moreover, if the CBCA Plan is amended to remove the Junior Notes Exchange, the Applicants will not be required to hold the Junior Noteholders’ Meeting in order to seek final Court approval of the Arrangement.
I am satisfied here that a single voting class of Senior Secured Noteholders is appropriate in the circumstances.
The CBCA does not require a shareholder vote in respect of an arrangement proposed pursuant to section 192, and the CBCA Policy Statement provides at section 3.10 that the appropriate level and type of stakeholder approval is a matter of judicial discretion. In the present case, the Common Shares of Sherritt are not affected, with the result that the shareholders are not being asked to vote on or approve the CBCA Plan. That is consistent with the view expressed in the Policy Statement to the effect that the Director is of the view that, as a minimum, all security holders whose legal rights are affected are entitled to vote.
Early Consent Consideration
This Court has previously held that payment of early consent consideration is fair and reasonable in appropriate circumstances, including, as here, where early consent consideration is made available to debtholders wishing to become a consenting debtholder prior to a determined date, where there is no prejudice to debtholders in being put to an early election, or where there is a rational purpose for such early consent consideration.
It is submitted that the proposed early consent consideration is appropriate here given (i) all Noteholders will have the opportunity to be eligible to receive the applicable early consent consideration on a reasonable timeline (the Early Consent Deadline is 5:00 p.m. (Toronto time) on March 25, 2025), and (ii) it is being offered for the valid and rational purpose of increasing confidence and early voting in respect of the CBCA Plan. See: Sino-Forest Corp., Re, 2012 ONSC 7050, paras. 66-68; Concordia International Corp. (Re), 2018 ONSC 4165, paras. 17 and 55; and Xplore Inc. (Re), 2024 ONSC 5250, paras. 40(b) and 76.
Canadian courts have granted orders in a number of cases approving early consent consideration in respect of CBCA arrangements under section 192. The early consent consideration to be paid to the Noteholders that support the CBCA Plan by the applicable Early Consent Date on the terms set forth in the Plan is consistent with similar early consent consideration previously approved by this Court in the context of CBCA arrangements. See: Bellatrix Exploration Ltd., et al, Court File No. CV-19-618131-00CL, Interim Order at paras. 28-29; Concordia Interim Order at paras. 29-30; Sherritt International Corporation et al, Court File No. CV-20-636938-00CL, 2020 Interim Order at para. 26; Millar Western Forest Products Ltd., et al, Court File No. CV-17-11720-00CL, Interim Order at para. 22; and Xplore Inc. (Re), 2024 ONSC 5250, para. 40(b).
Stay of Proceedings
Finally, the proposed Interim Order contains a limited stay of proceedings to be in effect until the earlier of the Effective Date and the date this proceeding is terminated in connection with any default under the Existing Notes or cross default in respect thereof, or matters relating to this proceeding or the proposed Arrangement.
I am satisfied that such a stay is appropriate and is authorized under section 192(4), in that it would operate so as to prevent actions that would adversely impact the business of the Applicants or the pursuit and implementation of an arrangement. See: Re 45133541 Canada Inc., 2009 QCCS 6444 (“Abitibi”); Concordia (Re), 2017 ONSC 6357, Interim Order; 2016 Sherritt Interim Order; 2020 Sherritt Interim Order; Millar Western Interim Order; and Xplore Inc., Re, Preliminary Initial Order.
The proposed stay here is limited in both time and scope. I am satisfied that it is necessary to protect the value of the Sherritt Business and will facilitate the successful completion of the Arrangement for the benefit of the applicants and their stakeholders. I observe that it does not apply to the Revolving Bank Facility Lenders, and does not affect the payment of amounts owing or the satisfaction of other obligations outstanding to those parties, trade creditors, customers, employees or governmental authorities all of which will continue to be satisfied in the ordinary course.
Next Steps and Conclusion
I also observe that the Applicants anticipate seeking final approval of the Arrangement and the CBCA Plan from this Court on April 9, 2025. In advance of that hearing, the Applicants will file a supplementary Application Record with evidence of, among other things, the results of the votes at the Noteholders’ Meetings.
I am satisfied that the steps proposed to be taken pursuant to the draft Interim Order are appropriate.
Having considered both the written and oral submissions of counsel, I am satisfied that it is appropriate for the requested Interim Order to be granted.
Order to go in the form signed by me today, with immediate effect and without the necessity of formal issuance and entry, although a formal order may be taken out by any interested party, if so required.
Osborne J.