Court File and Parties

Court File No.: 15-CV-0011169-00CL Date: 20160516 Superior Court of Justice – Ontario Commercial List

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

Before: Newbould J.

Counsel: Ashley Taylor and Kathryn Esaw for the Applicants Lou Brzezinski and Alexandra Teodorescu, for the USW Local 2251 Massimo (Max) Starnino, for USW and its Local 2724 Naomi Greckol-Herlich, for the Essar Algoma retirees Derrick Tay, Clifton P. Prophet and Nicholas Kluge, for the Monitor Evan Cobb, for the board of directors of Essar Algoma Jeremy Opolsky, for the Subject Bidder L. Joseph Latham, for the Ad Hoc Committee of Essar Algoma Noteholders John J. Salmas, for Wilmington Trust, National Association

Heard: May 13, 2016

Endorsement

[1] The United Steelworkers Local Union 2251 (“Local 2251”), supported by the USW and its Local 2724 and the retirees, applies for an order qualifying the Subject Bidder [1] as a Phase II Bidder, as that term is defined in the sale and solicitation process (“SISP”) approved by this Court on February 10, 2016.

[2] The SISP provides for a two stage bidding process. Phase I provided for bidders to deliver to Evercore Group LLC, the Financial Advisor, by April 1, 2016 a non-binding letter of interest to finance, purchase or invest in Essar Algoma's business or property. The LOI was required to meet a number of criteria.

[3] If a bidder was accepted as a Qualified Phase 1 bidder, that bidder was accepted as a Phase II Bidder who after a due diligence process was entitled to make a formal offer to purchase or make an investment in Essar Algoma or its property and business. In order to be a Qualified Phase II Bid, the Phase II Bidder was required to meet a number of criteria.

[4] The Subject Bidder made a Phase I Bid but was ultimately determined not to have met the conditions required to become a Phase II Bidder. The union contends that it was not properly consulted in the decision to exclude the Subject Bidder from the Phase II process and that the only appropriate remedy is to permit the Subject Bidder to participate in the Phase II process as a Phase II Bidder.

[5] The SISP was heavily negotiated by the stakeholders, including representatives of the union and the retirees. It provides for consultation on the various steps by Essar Algoma with the Chief Restructuring Advisor (“CRA”), the Financial Advisor and the Monitor. In some matters it provides for consultation with the Consultation Parties, which includes the USW and the retirees.

[6] One of the criteria for a Phase I Bid to be a Qualified Phase I Bid was satisfactory evidence of a bidder’s financial ability to complete a transaction. The SISP provided for Essar Algoma, the CRA, the Financial Advisor and the Monitor to determine this issue. More particularly, the SISP provided that the criteria to be met included:

(viii) Written evidence of ability to consummate the proposed transaction, that will allow the Applicants, in consultation with the CRA, the Financial Advisor and the Monitor, to make a determination as to the Phase I Bidder’s financial and other capabilities to consummate the proposed transaction including, among other things, the following (the “Financial Wherewithal Information”):

(C) proof of any debt or equity funding commitments that are needed to close the contemplated transaction and any such other form of financial disclosure or credit-quality support information or enhancement reasonably acceptable to the Applicants, in consultation with the CRA, the Financial Advisor and the Monitor, demonstrating that such Phase I Bidder has the ability to close the contemplated transaction; and…

[7] The SISP provided that The Monitor would determine what information with respect to the Phase I Bids would be provided to the Consultation Parties. It provided for the assessment of the Phase I Bids by Essar Algoma in consultation with the CRA, the Financial Advisor, the Consultation Parties (which included the USW) and the Monitor. More particularly it provided:

19. Following the Phase I Bid Deadline, the Applicants, in consultation with the CRA, the Financial Advisor, the Consultation Parties and the Monitor, will assess the Phase I Bids received by the Phase I Bid Deadline and determine whether such bids constitute Qualified Phase I Bids. The Applicants, in consultation with the CRA and the Financial Advisor, with the approval of the Monitor, may waive compliance with any one or more of the requirements specified above and deem such non-compliant bid to be a Qualified Phase I Bid.

20. The Applicants, in consultation with the CRA, the Financial Advisor and the Consultation Parties, with the approval of the Monitor, may reject any Phase I Bid if it is determined that such bid does not constitute a Qualified Phase I Bid, is otherwise inadequate or insufficient, or is otherwise contrary to the best interests of the Applicants and their creditors and other stakeholders.

[8] The Subject Bidder submitted a Phase I Bid on Friday, April 1, 2016, the deadline for the Phase I Bids. A copy was provided to counsel to Local 2251 and Local 2724.

[9] Between April 4 and 7 the Financial Advisor made inquiries with the Subject Bidder concerning its bid and, in particular, requested proof of the sources of funds for the debt and equity components of the bid, including information on the entity funding the equity component.

[10] On Wednesday, April 6, 2016, counsel to the Applicants, the CRA and Evercore, and the Monitor and its counsel, had a call with counsel for Local 2251 and Local 2724 regarding, among others, the Subject Bidder's bid. The discussion included a review of the concerns that adequate proof of financial wherewithal had not been provided and the concerns regarding the Subject Bidder's ability to close a transaction. Local 2251 and Local 2724 were informed that Evercore had contacted the Subject Bidder seeking evidence of its financial wherewithal and its ability to effect the transaction.

[11] On April 7, 2016 the Subject Bidder provided some unsupported financial information to Evercore.

[12] On April 8, the Financial Advisor wrote to the Subject Bidder to advise that Essar Algoma, in consultation with the CRA and the Financial Advisor, and with the approval of the Monitor, had determined that the Subject Bid did not constitute a Qualified Phase I Bid. The letter further stated that Essar Algoma was exercising its discretion to waive the technical requirements of the SISP and to declare the Subject Bid a Qualified Phase I Bid, conditional upon the provision by the Subject Bidder of written evidence of its financial and other capabilities to consummate its proposed transaction, satisfactory to Essar Algoma in consultation with the CRA, the Financial Advisor and the Monitor, by no later than 5:00 p.m. on April 18, 2016. This was a decision open to Essar Algoma under section 19 of the SISP in consultation with the CRA and Financial Advisor and with the consent of the Monitor. The SISP did not provide for consultation with the USW on this decision.

[13] On April 14, 2016 counsel for Local 2251 told the Monitor that his client would like to meet the Subject Bidder on April 19th. On the same day he was advised by counsel to the Monitor that the Subject Bidder had not cleared the hurdle of establishing financial capability to execute a deal and that until it did, it was not entitled to meet with the unions or anyone else involved in the SISP process and the Monitor could not agree to the meeting.

[14] On April 18, 2016 the Subject Bidder provided to the Financial Advisor a letter and a one page spreadsheet containing a dated draft valuation of related corporations. Essar Algoma, in consultation with the CRA, the Financial Advisor and the Monitor, reviewed the documents provided on April 18 and determined that the documentation did not constitute sufficient evidence of the Subject Bidder having the financial capability necessary to consummate the proposed transaction and thus did not meet the requirements of the SISP.

[15] On April 20, 2016 the Financial Advisor notified the Subject Bidder that Essar Algoma, in consultation with the CRA and the Financial Advisor, and with the consent of the Monitor, had determined that the evidence of the Subject Bidder's financial and other capabilities provided by the April 18 deadline was not satisfactory and that its Phase I Bid was rejected.

[16] On a conference call on April 21, 2016 counsel for Essar Algoma advised counsel for Local 2251 that the Subject Bidder had not provided evidence of its financial wherewithal by the Phase I deadline but that this requirement had been waived on the condition that the Subject Bidder would provide this information by April 18, 2016. Local 2251 was advised that the information that had been received on April 18, 2016 from the Subject Bidder was unsatisfactory and therefore the Subject Bidder had been disqualified from the SISP.

[17] While it is not its primary argument, the union says that it should have been permitted to meet with the Subject Bidder when it asked to do so on April 14. Whether that is right depends on the terms of the SISP. One of the things bargained for by the union in the negotiations leading to the SISP was the right to meet with bidders in meetings to be supervised by representatives of the Monitor. This was provided for in both the Phase I and the Phase II process.

[18] The Subject Bidder was a Phase I Bidder. The SISP provided:

16. Phase I Bidders shall be advised that representatives of the USW and the Retirees are available to meet with them in respect of the formulation of their bid. Any communications between Phase I Bidders and the USW and/or the Retirees shall be supervised by representatives of the Monitor provided that the discussions shall remain confidential and shall not be disclosed without the consent of the parties to the discussion….

[19] This provision did not require that a Phase I Bidder be a qualified Phase I Bidder, with appropriate proof of the financial capability to close a transaction, in order to meet with the USW. It is said, however, that when the request was made by the union on April 14 to meet with the Subject Bidder, the SISP was in its Phase II stage and that the USW had the right to meet only Phase II Bidders as provided:

27. Phase II Bidders shall be advised that representatives of the USW and the Retirees are available to meet with them in respect of the formulation of their bid. Any communications between Phase I Bidders and the USW and/or the Retirees shall be supervised by representatives of the Monitor provided that the discussions shall remain confidential and shall not be disclosed without the consent of the parties to the discussion….

[20] I think this interpretation of the SISP is unduly technical and may be wrong. Under the letter of April 8 from the Financial Advisor to the Subject Bidder, Essar Algoma was exercising its discretion to waive the technical requirements of the SISP and to declare the Subject Bid a Qualified Phase I Bid, conditional upon the provision by the Subject Bidder of written evidence of its financial and other capabilities to consummate its proposed transaction, satisfactory to Essar Algoma in consultation with the CRA, the Financial Advisor and the Monitor, by no later than April 18, 2016. Technically the Subject Bidder was still a Phase I Bidder entitled to meet with the USW.

[21] More than that, however, the SISP process is of crucial importance to the USW and I do not view technical roadblocks being used to prevent the USW from meeting with the Subject Bidder at that time as being particularly helpful to the process. If the request had been made by the USW prior to the Subject Bid being submitted on April 1, the USW would have been entitled to meet with the Subject Bidder even though nothing would have been provided by the Subject Bidder at that stage about its financial ability to close any deal it intended to submit.

[22] It is also said that under the order approving the SISP, it was a requirement that both the Subject Bidder and the USW execute a consent form in a form and substance acceptable to Essar Algoma and the Monitor or as directed by the Court, and that no such consent was signed by the Subject Bidder or by the USW. I view this as an ex post facto argument. Such a concern was not raised at the time of the request of the USW for a meeting with the Subject Bidder and it easily could have been taken care of by providing a copy of the consent to the USW and the Subject Bidder and asking for it to be signed to permit the meeting to go ahead. There was nothing remarkable in the consent form.

[23] Having said that, I recognize that this entire SISP process is being driven by very tight timelines and that there have been other important matters taking the time of all concerned, not the least of which has been the Cliffs contract issue. There is many a slip between the cup and the lip and I do not at all ascribe any bad faith to the actors in this drama. It is far too easy in hindsight to pick things apart and a CCAA case with all of its hurly-burly complexity is a situation in which one should not engage in hindsight nitpicking of well-intentioned actions of the parties.

[24] The main complaint of the USW is that it was not consulted and given an opportunity to provide input into the decision to disqualify the Subject Bidder at the Phase I stage. Technically the USW might be right but as a practical matter it made no difference.

[25] The decision as to whether the Subject Bidder provided sufficient evidence of its financial ability to close the contemplated transaction was one for Essar Algoma to make, in consultation with the CRA, the Financial Advisor and the Monitor, under section 17 (viii) of the SISP. The USW had no role to play in that decision.

[26] It is true that under section 19 of the SISP, Essar Algoma was to consult with the USW to determine whether a bid constituted a Qualified Phase I Bid. There were, however, many factors other than a bidder’s financial capability that could play a part as to whether Phase I Bid was a Qualified Phase I Bid, and presumably it would be those other factors on which the USW had a right to be consulted in deciding whether a bid was a Qualified Phase I Bid. The right of the USW in section 19 of the SISP to be consulted could not have been intended to include a right to be consulted on the decision to be taken by others under section 17 (viii) of the SISP as to the financial capability of a Phase I Bidder.

[27] Under section 20 of the SISP, the USW was one of the Consultation Parties to be consulted on a decision to reject a Phase I Bid. In this case, technically perhaps Essar Algoma should have consulted with the USW after the financial information from the Subject Bidder was received on April 18 and it was determined by Essar Algoma, the CRA, the Financial Advisor and the Monitor that the Subject Bidder lacked the financial ability to consummate the proposed transaction.

[28] It would however have been a meaningless consultation as the USW had no role to play in the decision as to the financial capability of the Subject Bidder and it was that decision which led to the rejection of the Subject Bid. The union rightly points out that consultation is a two-sided process with the opportunity to have input and to exchange views on an issue. But in this case the union had no right to have input into the decision as to the financial capability of the Subject Bidder.

[29] So far as the decision that was made that the Subject Bidder lacked the financial wherewithal to close its intended transaction, this is a decision that a CCAA court is ill equipped to second-guess. Under our corporate law, a court should be loath to interfere with the good faith exercise of the business judgment of directors and officers of a corporation. See Peoples Department Stores Inc. (Trustee of) v Wise, [2004] 3 SCR 461, 2004 SCC 68 at para. 67 and Brant Investments Ltd. v. KeepRite Inc. (1991), 3 O.R. (3d) 289 (C.A.) at 320. This reluctance to interfere with the business judgment is even the more so in this CCAA proceeding in which the parties, including the USW, have agreed in the SISP that the decision is to be made not only by Essar Algoma but also by highly qualified professionals with great experience in restructuring, being the Financial Advisor, the CRA and the Monitor.

[30] In all of the circumstances, I see no grounds at all to interfere in the SISP process to declare that the Subject Bidder is a Phase II Bidder. The motion of Local 2251 is dismissed.

[31] While not an issue for decision, there has been a suggestion made by certain parties that the Information Sharing Protocol that was put in place by the Monitor was done because of a concern that the independent committee of the board of directors set up at the outset of this CCAA proceeding was not in fact independent. The Information Sharing Protocol provides that during Phase I and Phase II of the SISP, the CRA will provide high-level updates to the independent committee (restructuring committee) bi-weekly or more frequently as the CRA determines to be appropriate but no substantive reporting is to be made to the board such as the nature of the bid, names or number of bidders, status of due diligence efforts, or issues raised etc.

[32] The Monitor stresses that the Information Sharing Protocol was devised as a method to avoid any issue of whether the independent committee was in fact independent. The parties on this motion are agreeable to an endorsement being made that the Information Sharing Protocol was conceived and implemented by the Monitor to protect the integrity of the SISP and was not intended to be any reflection on the independence of the independent committee. That is an appropriate endorsement.

Newbould J. Date: May 16, 2016

Footnotes

[1] In light of the confidentiality provisions of the SISP process, the identity of bidders is to be kept confidential. The name of the bidder on this motion therefore is referred to the Subject Bidder. Any bidder is not to know the terms of any other bid and therefore details of points in dispute are not disclosed in this decision.