CITATION: Target Canada Co. (Re), 2015 ONSC 1487

COURT FILE NO.: CV-15-10832-00CL

DATE: 2015-03-05

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT, R.S.C., 1985, c. C-36, AS AMENDED

AND IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF TARGET CANADA CO., TARGET CANADA HEALTH CO., TARGET CANADA MOBILE GP CO., TARGET CANADA PHARMACY (BC) CORP., TARGET CANADA PHARMACY (ONTARIO) CORP., TARGET CANADA PHARMACY CORP., TARGET CANADA PHARMACY (SK) CORP., and TARGET CANADA PROPERTY LLC.

BEFORE: Regional Senior Justice Morawetz

COUNSEL: Jeremy Dacks, Tracy Sandler and Shawn Irving, for the Target Canada Co., Target Canada Health Co., Target Canada Mobile GP Co., Target Canada Pharmacy (BC) Corp., Target Canada Pharmacy (Ontario) Corp., Target Canada Pharmacy Corp., Target Canada Pharmacy (SK) Corp., and Target Canada Property LLC (the “Applicants”)

Jay Swartz, for the Target Corporation

D.J. Miller, for Oxford Properties Group Inc.

Jeff Carhart, for Hamilton Beach Corp. et al.

Alan Mark and Melaney Wagner, for the Monitor, Alvarez & Marsal Inc.

Leonard Loewith, for Solutions 2 Go et al.

Aubrey Kauffman, for Ivanhoe Cambridge Inc.

Ruzbeh Hosseini, for Amskor Corporation

Sean Zweig, for RioCan Management Inc. and Kingsett Capital Inc.

Lou Brzezinski and Alexandra Teoderescu, for Thyssenkrupp Elevator (Canada) Limited, Advitek, Universal Studios Canada Inc., Nintendo of Canada, Ltd., and Bentall Kennedy (Canada) LP Group

Melvyn L. Solmon, for ISSI Inc.

HEARD and RLEASED: March 5, 2015

eNDORSEMENT

[1] On February 11, 2015, Target Canada Co. (“TCC”) received Court approval to conduct a real estate sales process (the “Real Property Portfolio Sales Process”) to seek qualified purchasers for TCC’s leases and other real property, to be conducted by the Target Canada Entities in consultation with their financial advisor, Lazard Fréres & Co., LLC (the “Financial Advisor”) and their real estate advisor, Northwest Atlantic (Canada) Co. (the “Broker”), with the supervision and oversight of the Monitor.

[2] The Applicants bring this motion to approve a lease transaction agreement (the “Lease Transaction Agreement”) that has been negotiated in response to an unsolicited bid by certain landlords (Oxford Properties Corporation (“Oxford”) and Ivanhoe Cambridge Inc. (“IC”) and certain others, together the “Landlord Entities”).

[3] Under the Lease Transaction Agreement, TCC will surrender its interest in eleven leases (the “Eleven Leases”) to the Landlord Entities in consideration for the purchase price and certain other benefits.

[4] The Target Entities decided, after considering the likely benefits and risks associated with the unsolicited offer by the Landlord Entities, to exercise their right under the terms of the Real Property Portfolio Sales Process to withdraw the applicable leases from the bidding and auction phases of the process. The Target Canada Entities contend that the decision to exercise this right was made based on the informed business judgment of the Target Canada Entities with advice from the Financial Advisor and the Broker, in consultation and with the approval of the Monitor.

[5] The Applicants submit that the process by which the decision was made to pursue a potential transaction with the Landlord Entities, and withdraw the Eleven Leases from the bidding and auction phases of the Real Property Portfolio Sales Process, was fair and reasonable in light of the facts and circumstances. Further, they submit that the process by which the benefits of the Lease Transaction Agreement were evaluated, and the Lease Transaction Agreement was negotiated, was reasonable in the circumstances.

[6] The Applicants contend that the purchase price being offered by the Landlord Entities is in the high-range of value for the Eleven Leases. As such, the Applicants contend that the price is reasonable, taking into account the market value of the assets. Moreover, the Applicants submit that the estate of the Target Canada Entities will benefit not only from the value represented by the purchase price, but from the release of claims. That includes the potentially material claims that the Landlord Entities may otherwise have been entitled to assert against the estate of the Target Canada Entities, if some or all of the Eleven Leases had been purchased by a third party or disclaimed by the Target Canada Entities.

[7] The Target Canada Entities submit that it is in their best interests and that of their stakeholders to enter into the Lease Transaction Agreement. They also rely on the Monitor’s approval of and consent to the Target Canada Entities entering into the Lease Transaction Agreement.

[8] The Target Canada Entities are of the view that the Lease Transaction Agreement secures premium pricing for the Eleven Leases in a manner that is both certain and efficient, while allowing the Target Canada Entities to continue the Inventory Liquidation Process for the benefit of all stakeholders and to honour their commitments to the pharmacy franchisees.

[9] The terms of the Lease Transaction Agreement are set out in the affidavit of Mark J. Wong, sworn February 27, 2015, and are also summarized in the Third Report of the Monitor. The Lease Transaction Agreement is also summarized in the factum submitted by the Applicants.

[10] If approved, the closing of the Lease Transaction Agreement is scheduled for March 6, 2015.

[11] One aspect of the Lease Transaction Agreement requires specific mention. Almost all of TCC’s retail store leases were subleased to TCC Propco. The Premises were then subleased back to TCC. The Applicants contend that these arrangements were reflected in certain agreements between the parties (the “TCC Propco Agreements”). Mr. Wong states in his affidavit that it is a condition of the Lease Transaction Agreement that TCC terminate any subleases prior to closing. TCC will also wind-down other arrangements with TCC Propco.

[12] The Applicants contend that the TCC Propco Agreements have been terminated in accordance with their terms and an early termination payment is now owing as a result of this wind-down by TCC to TCC Propco, which, they contend, will be addressed within a claims process to be approved in due course by the Court. The claim of TCC Propco is not insignificant. This intercompany claim is expected to be in the range of $1.9 billion.

[13] The relief requested by the Target Canada Entities was not opposed.

[14] Section 36 of the CCAA sets out the applicable legal test for obtaining court approval where a debtor company seeks to sell assets outside the ordinary course of business during a CCAA proceeding.

[15] In deciding whether to grant authorization, pursuant to section 36(3), the Court is to consider, among other things:

(a) whether the process leading to the proposed sale or disposition was reasonable in the circumstances;

(b) whether the Monitor approved the process leading to the proposed sale or disposition;

(c) whether the Monitor filed with the Court a report stating that in its opinion, the sale or disposition would be more beneficial to the creditors than a sale or disposition under a bankruptcy;

(d) the extent to which the creditors were consulted;

(e) the effects of the proposed sale or disposition on the creditors and other interested parties; and

(f) whether the consideration to be received for the asset is reasonable and fair, taking into account its market value.

[16] The factors listed in section 36(3) are not intended to be exhaustive, nor are they intended to be a formulaic check list that must be followed in every sale transaction under the CCAA (see: Re White Birch Paper Holding Co., 2010 QCCS 4915; leave to appeal refused 2010 QCCA 1950.

[17] The factors overlap, to a certain degree, with the Soundair factors that were applied in approving sale transactions under pre-amendment CCAA case law (see: Re Canwest Publishing Inc./Publications Canwest Inc., 2010 ONSC 2870, citing Royal Bank v. Soundair Corp., 1991 CanLII 2727 (ON CA), [1991] O.J. No. 1137 (C.A.) (“Soundair”)).

[18] I am satisfied, having reviewed the record and hearing submissions, that -- taking into account the factors listed in s. 36(3) of the CCAA -- the Lease Transaction Agreement should be approved. In arriving at this conclusion, I have taken the following into account: in the absence of any indication that the Target Canada Entities have acted improvidently, the informed business judgment of the Target Canada Entities (as supported by the advice of the Financial Advisor and the consent of the Monitor) that the Lease Transaction Agreement is in the best interests of the Target Canada Entities and their stakeholders is entitled to deference by this Court.

[19] I am also satisfied that the process for achieving the Sale Transaction was fair and reasonable in the circumstances. It is also noted that the Monitor concurs with the assessment of the Target Canada Entities.

[20] The Target Canada Entities, the Monitor and the Financial Advisor are all of the view that the consideration to be received by TCC is reasonable, taking into account the market value of the Eleven Leases.

[21] I am also satisfied that the Transaction is in the best interest of the stakeholders.

[22] The Applicants also submit that all of the other statutory requirements for obtaining relief under section 36 of the CCAA have been satisfied. Having reviewed the factum and, in particular, paragraphs 46 and 47, I accept this submission of the Applicants.

[23] As referenced above, the relief requested by the Applicants was not opposed. However, it is necessary to consider this non-opposition in the context of the TCC Propco Agreements. The Applicants contend that the TCC Propco Agreements have been terminated in accordance with their terms, and that the early termination payment now owing as a result of this wind-down by TCC to TCC Propco will be addressed within a claims process to be approved in due course as part of the CCAA proceedings.

[24] The Monitor’s consent to the entering into of the Termination Agreement, and the filing of the Third Report, do not constitute approval by the Monitor as to the validity, ranking or quantum of the intercompany claim. Further, when the intercompany claims are submitted in the claims process to be approved the Court, the Monitor will prepare a report thereon and make it available to the Court and all creditors. The creditors will have an opportunity to seek any remedy or relief with respect to the intercompany claim in the claims process.

[25] In my view, it is necessary to stress the importance of the role of the Monitor in any assessment of the intercompany claim. It is appropriate for the Monitor to take an active and independent role in the review process, such that all creditors are satisfied with respect to the transparency of the process.

[26] Finally, it is noted that the actual consideration is not disclosed in the public record.

[27] The Applicants are of the view that the specific information relating to the consideration to be paid by the Landlord Entities and the valuation analysis of the Eleven Leases is sensitive commercial information, the disclosure of which could be harmful to stakeholders.

[28] The Applicants have requested that Confidential Appendices “A” and “B” be sealed. Confidential Appendix “A” contains an unredacted version of the Lease Transaction Agreement. The Applicants request that this document be sealed until the closing of the transaction. The Applicants request that the transaction and valuation analysis as contained in Appendix “B” be sealed pending further order.

[29] No party objected to the sealing requests.

[30] Having considered the principles set out in Sierra Club of Canada v. Canada (Minister of Finance), 2002 SCC 41, [2002] 2 S.C.R. 522, I am satisfied that it is appropriate, in the circumstances, to grant the sealing relief as requested by the Applicants.

[31] In the result, the motion is granted. The approval and vesting order in respect of the Lease Transaction Agreement has been signed.

Regional Senior Justice G.B. Morawetz

Date: March 5, 2015