ONTARIO SUPERIOR COURT OF JUSTICE COMMERCIAL LIST

COURT FILE NO.: CV-15-11169-00CL

DATE: 20151207

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 ESSAR STEEL ALGOMA INC., ESSAR TECH ALGOMA INC.,

ALGOMA HOLDINGS B.V., ESSAR STEEL ALGOMA (ALBERTA) ULC,

CANNELTON IRON ORE COMPANY AND ESSAR STEEL ALGOMA INC. USA

Applicants

BEFORE: Newbould J.

COUNSEL: Ashley Taylor, for the Applicants

Derrick Tay and Clifton P. Prophet, for the Monitor Ernst & Young, Inc.

Marc Wasserman and Andrea Lockhart, for Deutsche Bank

Massimo Starnino and Debra McKenna, for USW and Local 2724

Lou Brzezinski, for USW Local 2251

Karen Ensslen, representative counsel for the Applicants’ retirees

L. Joseph Latham, for the Ad Hoc Committee of Essar Algoma Noteholders

Shayne Kukulowicz and Ryan C. Jacobs, for the Ad Hoc Committee of Junior Secured Noteholders

Sara-Ann Van Allen and John J. Salmas, for Wilmington Trust, National Association

HEARD: December 3, 2015

KERP ENDORSEMENT

[1] The applicants were granted protection under the CCAA in an Initial Order on November 9, 2015. On November 16, 2015 a DIP loan was approved, with the order settled on November 19, 2015, which provided tight timelines for the entire process, including strict timelines for a SISP process.

[2] The applicants have now moved for the approval of a a key employee retention plan (“KERP”) offered to certain management employees of Essar Steel Algoma Inc. (“Algoma”) said to be deemed critical to a successful restructuring and a charge on the current and future assets, undertakings and properties of the applicants to secure the obligations under the KERP. The KERP is supported by all those who appeared at the hearing save for the unions who opposed it.

The KERP

[3] The KERP covers 23 management personnel. The maximum aggregate amount which may become payable under the KERP is $3,468,027. This includes a $250,000 reserve for additional cash retention payments in the discretion of the board of directors, subject to approval of the Monitor.

[4] Under the KERP, a cash retention payment will be paid to the KERP participants upon the earliest of the following events: (a) implementation of a plan of compromise or arrangement sanctioned by the Court; (b) completion of a sale (or liquidation) of all or substantially all of the assets and operations of Algoma approved by the Court; (c) termination of a KERP participant’s employment by Algoma without cause; and (d) December 31, 2016.

[5] In order to receive payments under the KERP, a KERP participant cannot have resigned, been terminated with cause or failed to perform his or her duties and responsibilities diligently, faithfully and honestly in the opinion of his or her direct supervisor and the special committee of the board of directors.

[6] The cash retention payment will be an amount equal to a percentage of the KERP participant’s annual salary. The KERP participants are categorized in four tiers, with the retention payment corresponding to 100%, 75%, 50% or 25% of annual salary respectively for each of the four tiers.

[7] The list of KERP participants and the amounts of the cash retention payments offered to them were formulated by Algoma’s management with the assistance of the applicants’ legal counsel and other professional advisors, and with the assistance of a report prepared by a third party human resources firm, and in consultation with the Monitor. The KERP has been recommended by the special committee of the board of directors and approved by the board of directors of Algoma.

Analysis

[8] At the outset, the unions appearing requested an adjournment of the motion to further consider the requested relief. I declined the adjournment. The motion was served on November 26, 2015 and the confidential information regarding the persons and the amounts to be promised to them under the KERP was provided to counsel for the unions on November 30 after a confidentiality agreement was signed. That information is straightforward and easily understood.

[9] I understand the anxiety in Sault Ste. Marie caused by the difficulties being experienced by Algoma and the importance to the employees of the survival of Algoma. It would be preferable to have the luxury of considering all of the many issues in this CCAA proceeding in a relaxed atmosphere without time pressures. However that is not possible. The difficulty in this case is that the timelines are tight and the risk of senior management leaving the applicants, which I will discuss further, requires a quick decision on the KERP. Notice that the KERP would be sought was disclosed at the outset but deferred, and to delay this matter any further increases the risks that the KERP is intended to address. Moreover, taking into account the process that was followed by the applicants, it is questionable whether more that is relevant could be said on behalf of the unions than has been said on their behalf in their affidavit and factum filed at the hearing of the motion.

[10] There is no express statutory jurisdiction in the CCAA for a court to approve a KERP. However, the courts have routinely held that the general power under section 11 of the CCAA gives jurisdiction to authorize a KERP and grant a charge to secure the applicants’ obligations under the KERP. In Grant Forest Products Inc., (Re), (2009), 2009 42046 (ON SC), 57 C.B.R. (5th) 128, I considered the factors to be considered in determining whether a KERP should be approved. These were summarized by Morawetz J. (as he then was) in Cinram International Inc., (Re), 2012 ONSC 3767 at para. 91 as follows:

91….The Court in Re Grant Forest Products Inc. considered a number of factors in determining whether to grant a KERP and a KERP charge, including:

a. whether the Monitor supports the KERP agreement and charge;

b. whether the employees to which the KERP applies would consider other employment options if the KERP agreement were not secured by the KERP charge;

c. whether the continued employment of the employees to which the KERP applies is important for the stability of the business and to enhance the effectiveness of the marketing process;

d. the employees' history with and knowledge of the debtor;

e. the difficulty in finding a replacement to fulfill the responsibilities of the employees to which the KERP applies;

f. whether the KERP agreement and charge were approved by the board of directors, including the independent directors, as the business judgment of the board should not be ignored;

g. whether the KERP agreement and charge are supported or consented to by secured creditors of the debtor; and

h. whether the payments under the KERP are payable upon the completion of the restructuring process.

[11] In my view, the KERP should be approved for the following reasons:

(i) The evidence is that the KERP participants are critical to a successful restructuring of the applicants. Their institutional knowledge and experience would be very difficult, if not impossible, to be replaced during the relative short time in which the restructuring is contemplated. Without the KERP and the security provided by the KERP charge, there is concern that the KERP participants are likely to consider other employment options prior to the completion of the applicants’ restructuring proceedings.

(ii) The unions contend that there is no evidence that any of the KERP participants have been approached by any other potential employers. Regardless of whether that is the case, it is no reason not to approve a KERP. The issue is whether there is a sufficient risk that persons may leave their employ, not whether there has been an approach by some other employer. See Grant, supra, at para. 14.

(iii) In this case, many of the management covered by the KERP are not from Sault Ste. Marie. They are obviously mobile and understandably would be concerned about their future in that city with a steel company that is under CCAA protection and not for the first time. The risk of their leaving for some other more certain future cannot be ignored, and it would be in no one’s interest for them to leave Algoma at this critical time in which efforts are being made to restructure the business.

(iv) Management of Algoma took into account the difficulty of replacing the KERP participants during the stay period, taking into account the remoteness of Sault Ste. Marie. Algoma has been trying to recruit for some of these positions for the past year without success.

(v) The process to establish the KERP and those who should be covered by it was a thorough process. Outside HR personnel were consulted, legal counsel provided advice and the special committee of the board of directors as well as the board itself considered and approved the KERP. The Monitor provided input to Algoma in formulating the KERP and was invited to the meetings of the special committee and the board when the KERP was considered in detail, including whether the entitlements of certain participants should be changed from what management had proposed.

(vi) The business acumen of the board of directors, including the special committee of the board, should not be ignored unless there is good reason in the record to disregard it. See Grant, supra, at para. 18.

(vii) The KERP is not opposed by the various classes of noteholders, who will become junior to the KERP charge. They have worked with the applicants and have agreed to certain terms that will give them protection from their main concerns. While their concerns have not been completely answered, they are satisfied that it is in the best interests of Algoma that the KERP be approved.

(viii) The KERP is not opposed by the DIP lenders who are satisfied with the settled terms.

(ix) The Monitor supports the KERP.

[12] Counsel for the USW contends that the terms of the individual contracts of employment of each of the KERP participants should be disclosed to them as there may be non-competition provisions that would prevent the executives from leaving Algoma. Disclosure of all of the terms of employment is not required to deal with this issue. Of the 23 employees covered by the KERP, only eight have an employment agreement. The template for this agreement has been provided in confidence. There is a non-competition clause but it is questionable whether it would be enforceable and it clearly does not prevent all possible jobs that might be available elsewhere. Six of the eight employees in question are not from Sault Ste. Marie. To run the risk that the eight management employees in question would not leave Algoma because of this clause and to ignore the business judgment of the board and the special committee to the board because of this clause would be foolhardy.

[13] It is also said that the terms of the employment agreements should be reviewed to determine whether these employees would be entitled in any event to the amounts provided for in the KERP. This is completely answered by the terms to be agreed by the KERP participants that any amounts paid under the KERP will result in a corresponding reduction in any non-KERP claim that the participants may be entitled to.

[14] It is contended by the USW that the KERP was planned and approved without any input from the unions. I would not on that basis refuse to approve the KERP. Whether a particular person in a management role is important enough to be covered by a KERP agreement in an insolvency, or what the size of the KERP payment should be, is something that is the purview of management and the board of directors of a company. What useful input could be provided by the unionized employees is not apparent on the record, and no case provided to me suggested that the unionized employees should be consulted on such a decision.

[15] It was contended on behalf of local 2251 that the collective agreement provides for a steering committee on which the union has an important role and that the steering committee will work with the President and CEO and senior management towards achievement of the company’s business goals and in particular how they relate to the facilities, manning objectives including attrition and other matters which impact the company’s employees. It is contended that this is broad enough to require the steering committee to have been involved in the implementation of the KERP for the senior executives of the company.

[16] I doubt that this provision of the collective agreement goes so far as contended to require union input into the terms of employment of the company’s executives, which is what the contention of the union amounts to. However, if it is thought that the collective agreement was breached by the process leading to the KERP, a grievance could presumably be taken under the collective agreement. That is independent of the considerations to be given by a CCAA court in deciding whether to approve a KERP. A CCAA proceeding is not the place for grievances under collective agreements.

[17] It was also contended by the USW that the total amount of the KERP, being $3.4 million was excessive, taking into account the amount of the special pension shortfall payments that were deferred for the month of November. Counsel declined to say what a reasonable amount would be, saying it was a matter of discretion for the Court. In my view, the tying together these two separate issues is not appropriate. Whether the special pension payments should be deferred is a different issue and one that will be dealt with at a future date. The judgment of the board of directors and the special committee of the board should not be disregarded because of this issue.

[18] It was contended on behalf of the retirees the that the terms of the KERP provide for payment when there has been a completion of a sale or liquidation of the assets of Algoma and that the KERP should not pay out in the event of a liquidation as it is in the interests of all stakeholders that the company or its business be reorganized rather than liquidated. I would not change this provision. The management to be protected by the KERP are being incentivized to stay in Sault Ste. Marie to assist in the SISP and it would only be after that process that a liquidation might take place if a SISP were not successful. It is in the interests of the KERP participants, along with all stakeholders, that Algoma survive and not be liquidated, and to deny them their KERP payment after they stayed to attempt to save Algoma from liquidation would not be appropriate.

[19] In accordance with terms worked out by the applicant with the secured lenders, the applicants will not make or distribute any payments in respect of any claim of a KERP participant against the applicants (including any claims for termination, severance and change of control entitlements, but not including claims for payment pursuant to the KERP, claims for wages and vacation pay, or claims in respect of pension plans administered by the applicants) without first obtaining court approval of such payments on notice to the Service List. The KERP letters will have complimentary provisions worked out by the parties.

Sealing order requested.

[20] The applicants requested that the list of KERP participants and the information regarding their income and amounts of their proposed KERP payments be sealed. This information was contained in a confidential supplement to the third report of the Monitor. This request is supported by the Monitor. The unions oppose the request.

[21] In Sierra Club of Canada v. Canada (Minister of Finance), 2002 SCC 41, Justice Iacobucci adopted the following test to determine when a sealing order should be made

A confidentiality order … should only be granted when:

(a) such an order is necessary in order to prevent serious risk to an important interest, including a commercial interest, in the context of litigation because reasonable alternative measures will not prevent the risk; and

(b) the salutary effects of the confidentiality order, including the effects on the right of civil litigants to a fair trial, outweigh the deleterious effects, including the effects on the right to free expression, which in this context includes the public interest in open and accessible court proceedings.

[22] Sealing orders are routinely granted in KERP cases, and found to meet the Sierra Club tests. In Canwest Global Communications Corp., (Re), (2009), 2009 55114 (ON SC), 59 C.B.R. (5th) 72, Pepall J. (as she then was) stated the following, which is entirely apt to this case of Algoma:

52 In this case, the unredacted KERPs reveal individually identifiable information including compensation information. Protection of sensitive personal and compensation information the disclosure of which could cause harm to the individuals and to the CMI Entities is an important commercial interest that should be protected. The KERP participants have a reasonable expectation that their personal information would be kept confidential. As to the second branch of the test, the aggregate amount of the KERPs has been disclosed and the individual personal information adds nothing. It seems to me that this second branch of the test has been met. The relief requested is granted.

[23] See also Canwest Publishing Inc., (Re), (2012), 2010 ONSC 222, 63 C.B.R. (5th) 115.

[24] In this case, it is contended by the union that under Ontario law, disclosure is made of salary information for public servants who make in excess of $100,000 per annum. Thus as this is a very public restructuring process and there is significant public interest in the outcome of these proceedings, the salary information for individual KERP participants should be disclosed. I do not agree. Persons who choose to work as public servants understand the rules of disclosure relating to their employment. Persons who work in the private sector take employment with the expectation that their income is private information. There are exceptions under securities legislation requiring disclosure of the income of the top earning executives of companies whose shares are publicly traded. I would not extend these statutory requirements to the KERP participants.

[25] The union also contends that they may wish to test the necessity of including individuals in the list of KERP participants and need the particular financial information of each for that purpose. I agree with the Monitor that it would not be appropriate to consider each individual person. The process of selecting the participants and the amounts to be paid to them as incentives to stay and assist the restructuring was a robust process as discussed, and it is not in these circumstances helpful for public discussion about whether any particular person should be included. The impact of such disclosure in the workplace would not be helpful. I agree with Justice Pepall in Canwest that individual personal information adds nothing when the aggregate is disclosed.

[26] The sealing order requested by the applicants is granted.

Newbould J.

Date: December 7, 2015