CITATION: Essar Steel Algoma Inc. (Re), 2017 ONSC 5710

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

DATE: 20170926

SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

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 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: HAINEY J.

COUNSEL: Ashley Taylor and Sanja Sopic, for the Applicants

Jeffrey Levine, for Cliffs Mining Company

Shawn Irving, for Certain Term Lenders and DIP Lenders

Clifton Prophet and Delna Contractor, for the Monitor

Jennifer Teskey, for the Board of Directors of Essar Algoma

Jeremy Opolsky and Davida Shiff, for Essar Global Fund Limited

Massimo Starnino, for the USW and Local 2724

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

HEARD: September 1, 2017

ENDORSEMENT

Background

[1] The Board of Directors of Essar Steel Algoma Inc. (the “Board”) move for an order:

(a) directing Essar Steel Algoma Inc. (the “Company”) to resume regular reporting to the Company’s Board, composed of Kalyan Ghosh, Naresh Kothari, Jatinder Mehra, and Kishore Mirchandani (the “Directors”), and its committees, including the special committee of the Board, composed of Naresh Kishore and Kishore Mirchandani (the “Special Committee”);

(b) directing the Company to resume the regular holding of meetings of the Board, and its committees, including the Special Committee, and to provide all support and information necessary for the Board or the Special Committee to perform their respective governance functions;

(c) directing the Company to pay outstanding arrears of Board and Special Committee fees to the independent members of the Board;

(d) directing the Company to include counsel for the Board in any discussions relating to environmental or other matters where liability issues have arisen or may arise;

(e) directing the Company to comply with prior orders of the court with respect to the payment of the fees and disbursements of independent counsel to the Board; and

(f) ancillary relief necessary to ensure that the Board and its committees, including the Special Committee, are once again able to provide corporate oversight and governance to the Company.

[2] The grounds for the motion are as follows:

(a) The Company sought and obtained an initial order under the Companies’ Creditors Arrangement Act, as amended (the “CCAA”) on November 9, 2015 (the “Initial Order”).

(b) Both prior to and immediately after the commencement of the CCAA proceedings, the Board was responsible for the management of the business and affairs of the Company.

(c) In October 2015, prior to the Company’s filing under the CCAA, the Board approved the formation of the Special Committee, which was empowered to review, consider and evaluate any business or financial alternatives that might be available to the Company, including a potential CCAA filing, and to provide advice, guidance and approval with respect to the course of action ultimately determined by the Company.

(d) The Board and the Special Committee performed their respective functions for several months after the commencement of the CCAA proceedings.

(e) In mid-2016, the Monitor proposed an information sharing protocol (the “Information Sharing Protocol”) to preserve the confidentiality of sensitive information, during the sale and investment solicitation process (the “SISP”). The Information Sharing Protocol was put in place due to the involvement of the parent of the Company (the “Parent”) as a bidder for the Company.

(f) The Board and the Special Committee agreed to the Information Sharing Protocol. On July 19, 2016, Newbould J. made an endorsement (the “July Endorsement”) indicating that it was no longer appropriate for confidential information to be provided to the Special Committee because of the Parent’s intention to be a bidder for the Company.

(g) The Parent is no longer a bidder for the Company. The Company is proceeding with a transaction that contemplates a sale of the Company or its assets to the Company’s term lenders.

(h) The Board maintains that the Company’s management is in a conflict of interest.

(i) The Company has relied upon Newbould J.’s July Endorsement as a basis for not providing any information to the Board and the Special Committee, and has elected to discontinue all Board and Special Committee meetings and cease paying the normal fees due to the independent members of the Board.

(j) According to the Board, the Company’s management’s decision to usurp the Board and the Special Committee and therefore preclude the oversight that would normally come from those bodies is inappropriate, particularly given management’s own conflicts of interest.

(k) The Company has also stopped paying the accounts of independent counsel to the Board.

(l) The Board alleges that its power and responsibility to control the affairs of the Company have been usurped in a manner contrary to the best interests of the Company and regular corporate governance practices.

Facts

[3] Following the Initial Order, Newbould J. approved the Company’s SISP on February 10, 2016. His order authorized the Company, with the assistance of the Monitor, the Chief Restructuring Advisor to the Company (the “CRA”), and the Company’s Financial Advisor, to conduct the SISP. At the time the Monitor and the Company expressed concerns that leaks of confidential information might occur, particularly because the Parent was involved in the bidding process. As a result, the Monitor put in place the Information Sharing Protocol which was included in Newbould J.’s order dated May 16, 2016.

[4] The Information Sharing Protocol suspended the sharing of substantive information concerning the SISP and transactional details with the Board and restricted the information provided on these matters from the CRA to the Special Committee although it continued to receive confidential information regarding the Company’s business and operations including its financial statements.

[5] In July 2016, the Parent signed a term sheet indicating its intention to submit a formal bid for the Company’s assets.

[6] In response to these developments, Newbould J. made the July Endorsement as follows:

In light of the intention of the parent company of the applicants to be a bidder and buy the business, it is in my view no longer appropriate that any confidential information be given to the special committee.

[7] Following the July Endorsement, the Company, in consultation with the Monitor and the CRA, put in place governance arrangements for the Company. These arrangements (the “Existing Governance Arrangements”) were described in detail and reported to the Court, both in an affidavit sworn on August 17, 2016 by John Strek, the Senior Managing Director of the CRA, and in the Monitor’s Fifteenth Report, which provides, in part, as follows:

35. In compliance with the July 19 Endorsement, with the Monitor’s concurrence, the Special Committee was informed by counsel to Algoma and the CRA that there would no longer be meetings of the Board or the Special Committee and the Audit Committee was informed that there would no longer be meetings of that committee.

36. To ensure that there would be continuing oversight of Management’s decisions, a modified form of corporate governance (described in the August Strek Affidavit) was discussed with the Monitor and the CRA and, with their concurrence, was implemented by Algoma.

37. On August 11, 2016, Mr. Mirchandani filed an affidavit seeking clarification from the Court of the July 19 Endorsement. He appears to take issue with the position stated by counsel to Algoma that ‘it does not appear that there is an ongoing role for the Special Committee at this time and therefore the Company does not anticipate receiving any [legal] invoices for the time period commencing after July 19th’.

38. The Monitor supports the position of Algoma that, given the July 19 Endorsement, there should no longer be any meetings of the Board, the Special Committee or the Audit Committee.

[8] In his affidavit sworn on August 14, 2017, in response to this motion, Mr. Strek testified as follows at paras. 3 and 30-35:

3. As detailed below, Algoma’s operations and restructuring continue to be run by its senior management with assistance from the Court-appointed CRA and Evercore (as defined below) as overseen by the Monitor. The Board and the Special Committee have been effectively disengaged from their roles by orders of the then supervising CCAA judge, the Honourable Mr. Justice Newbould. The SISP has run its course, but the concerns that led to the disengagement of the Board and the Special Committee remain. I believe it is in Algoma’s best interests to maintain the status quo ordered by Justice Newbould and to continue to exclude the Board and the Special Committee from receiving confidential information related to the company’s operations or restructuring or from participating in any matters relating to Algoma’s restructuring.

4. The July 19 Endorsement reduced the role of the Board and the Special Committee even further than the Information Sharing Protocol. In light of the July 19 Endorsement, Algoma suspended all meetings of the audit committee and other committees of the Board as the members of the Special Committee were also members of the other committees and would have access to confidential information through those committees.

5. Algoma ceased paying the fees due to the members of the Board and the Special Committee following the July 19 Endorsement. …

6. In order to address corporate decision making where the board and the Special Committee could no longer receive confidential information, Algoma put in place the following corporate governance mechanism, with the approval and agreement of the CRA and the Monitor:

In consideration of Justice Newbould’s July 19, 2016 endorsement prohibiting the sharing of confidential information with the special committee (and also the Board) and stating that it is ‘no longer appropriate that any confidential information be given to the special committee’, where it is necessary from time to time to review various matters and issues with a third party that would otherwise have been subject to approval from the Board of Directors or other committees of the Board, the Company will meet and review with the CRA and the Monitor any and all such subject information, matters and issues which by definition would be or would incorporate confidential information subject to the Court’s endorsement.

33. This corporate governance mechanism (the “Governance Arrangement”) was disclosed to the Court and stakeholders in my affidavit sworn August 17, 2016…

34. As a result of these developments, the Board has been effectively disengaged from its role and from making any informed decisions for Algoma. Instead, decisions regarding Algoma’s restructuring and business operations which would historically have been made by the Board are made by management with input from counsel, the CRA and Evercore and agreement with the Monitor. In light of the Governance Arrangement, I do not believe that there is any basis for the statements in the affidavit of Mr. Mirchandani sworn July 21, 2017 in support of the Board’s within motion that Algoma’s decision-making authority has been relegated to a single director, Mr. Gosh.

35. Since their disengagement, the Board and the Special Committee have taken no active steps in the restructuring and have not cooperated with requests for assistance in connection with certain administrative matters. …

[9] Following the filing of Mr. Strek’s affidavit sworn August 17, 2016, the Monitor’s Fifteenth Report and the affidavit of Mr. Mirchandani referenced above, Newbould J. made no directions or changes to the Existing Governance Arrangements. The Company has made and implemented all decisions in these CCAA proceedings since the July Endorsement in accordance with the Existing Governance Arrangements.

[10] In the intervening time, the Parent’s involvement in the Company’s CCAA proceedings has continued, including its involvement in matters connected with the completion of a restructuring transaction. On March 6, 2017, Newbould J. heard motions by Local 2251 and by Essar Capital Limited (“ECL”), another subsidiary of the Parent. Local 2251 asked the Court for an order permitting it to engage in discussions with Ontario Steel Inc. and ECL asked the Court for an order reopening the SISP. In his endorsement dated March 6, 2017, dismissing both of these motions, Newbould J. held as follows at para. 24:

[24] What is going on here is causing great difficulty in this CCAA process coming to a successful conclusion. This is made clear by the affidavit of Mr. Strek, the managing director of the CRA. Algoma needs to restructure itself in order to position its business to successfully manage the volatility of the steel industry. Among other things, the Applicants need to significantly deleverage their capital structure in order to reduce interest costs, decrease raw material costs, decrease annual pension costs, and revise labour costs to be competitive with the Applicants’ direct competitors. The term sheet between Ontario Steel and Local 2251 that Local 2251 sought to promote through its motion in July, 2016 did not contemplate any amendments to Algoma’s collective agreements or post-employment benefits. Mr. Strek is of the view that so long as Local 2251 thinks that Essar Global has a role to play in the restructuring proceedings, it is unlikely that it will engage in serious negotiations with the participating lenders who are behind the accepted bid. It is hard not to credit the CRA’s view.

[11] On May 23, 2017, Newbould J. heard Algoma’s motion for an order approving an amendment to the DIP Agreement and an order directing the appointment of a restructuring committee. In dealing with Algoma’s request for the creation of a restructuring committee, Newbould J. observed as follows at paras. 27 – 32 of his May 30, 2017 endorsement:

[27] Due to a prior order in this CCAA proceeding made on July 19, 2016, no confidential information is being given to the special committee of the board of directors of Algoma. Since then, no meetings of the audit committee have been held. Algoma also decided to cease holding board meetings or meetings of the special committee and to stop paying fees to the members.

[28] Algoma is not proposing to appoint the members of the Restructuring Committee to its board of directors. Thus they will have no governance authority. It is said however that the establishment of the Restructuring Committee would restore a more typical governance structure to Algoma’s decision making process to ensure that informed and prudent decisions are being made by Algoma through this part of the CCAA proceedings.

[29] I have considerable difficulty with the request for a Restructuring Committee. Algoma has had a Chief Restructuring Advisor, CDG Group, from the outset of this CCAA proceeding. Mr. Strek was the person from CDG that fulfilled that role until last month when on April 17, 2017 Robert Del Genio, the managing member of CDG, was added to the team and the CDG monthly fees were increased from US$125,000 to US$200,000.

[30] There would be considerable overlap of the duties of the Chief Restructuring Advisor and the Restructuring Committee. Included in the proposed duties of the Restructuring Committee are (i) analyzing and considering all alternatives that may be available to Algoma to successfully complete the restructuring and emerge from the CCAA proceedings as a going concern; (ii) establishing and overseeing such processes and work plans as it considers appropriate to effect the restructuring; and (iii) overseeing discussions and negotiations with Algoma’s creditors, unions, retirees and other stakeholders.

[31] A restructuring advisor is to advise on restructuring. The responsibilities of the Chief Restructuring Advisor in this case include the obligation to work collaboratively with the senior management and other Algoma professionals in evaluating and implementing strategic and tactical options through the restructuring process and to perform a number of management services including performing due diligence on Algoma, assist Algoma’s management with any reporting to or negotiations with stakeholders, including the unions, customers, suppliers and the court approved representative counsel for the retirees.

[32] I do not see how the proposed Restructuring Committee will alleviate the work of management …

[12] Newbould J. dismissed the request for the formation of a restructuring committee and left the Company’s Existing Governance Arrangements unchanged.

[13] The Monitor addressed this issue in its Thirty-Fourth Report dated August 11, 2017 as follows as para. 28:

28. The Existing Governance Arrangements have been acceptable to this Court to date. The Monitor is of the view that there have been no changes to the Applicants’ circumstances which would merit changing those Arrangements. The Monitor is of the further view that based on the facts and for the reasons articulated in the Strek Board Affidavit, any reengagement of Algoma’s Board of Directors at this juncture in the restructuring could create conflict, uncertainty, and disruption with corresponding detrimental effects on the completion of a restructuring transaction.

Issues

[14] I must determine the following issues:

(a) Should the Company resume regular meetings of and regular reporting to the Company’s Board and its committees and pay outstanding and future Board and committee fees to the Company’s Directors?

(b) Should the Directors be entitled to representation and involvement in respect of any negotiation or settlement of claims or potential liabilities to which the Directors may be exposed, and should the Company continue to pay legal fees for the Board’s legal representation in accordance with the Initial Order?

Positions of the Parties

[15] The Board submits that its authority should not be usurped because the test for the removal of directors pursuant to s. 11.5 of the CCAA has not been met. Further, it submits that the July Endorsement does not provide the basis for either the removal of any of the Company’s Directors or the suspension of the Board’s normal governance activities. The Board also submits that its counsel should be paid its outstanding fees and disbursements and should be included in any discussions that may involve possible liability on the part of the Directors.

[16] The Company and the Monitor submit that the July Endorsement and Newbould J.’s subsequent rulings make it clear that the Court has approved the Existing Governance Arrangements and there has been no change in circumstances justifying a change to those governance arrangements. They do not oppose paying the Board’s counsel’s fees and disbursements with respect to their potential environmental liability.

Analysis

[17] Section 11 of the CCAA gives the court broad power to “as it may see fit, make any order that it considers appropriate in the circumstances”. In my view, this allows me to make an order maintaining the status quo with respect to the Company’s governance arrangement if I am satisfied that it is in the best interests of the Company and its stakeholders to do so. It is not necessary to remove any of the Directors pursuant to s. 11.5 of the CCAA to accomplish this.

[18] I agree with the submissions of the Company and the Monitor that Newbould J. was well aware that neither the Board nor the Special Committee had been operating since his July Endorsement. I interpret his endorsement dated May 30, 2017 as implicit approval of this governance arrangement. At paras. 27 – 32 of his endorsement, Newbould J. made it clear that he was well aware of the Existing Governance Arrangements and that he did not consider the establishment of the proposed Restructuring Committee to be necessary to assist with the management of the Company.

[19] In dismissing the motion to establish a Restructuring Committee Newbould J. concluded that “it makes little or no sense to create another body of restructuring advisors that will likely create disruption.”

[20] I have concluded from the wording of his endorsement that Newbould J. was satisfied with the Existing Governance Arrangements and that was the main reason that he declined to order the establishment of a Restructuring Committee.

[21] Although the Parent is no longer a bidder for the Company and the Directors agree that the Board and the Special Committee will continue to have no involvement in the sale of the Company or its assets, I am concerned about the Monitor’s view that “Any reengagement of Algoma’s Board of Directors at this juncture in the restructuring could create conflict, uncertainty, and disruption with corresponding detrimental effects on the completion of a restructuring transaction”. In my view, events have overtaken the time when the major concern was that the Parent was a bidder for the Company. The current state of the restructuring transaction and the Monitor’s views persuade me that the status quo should be maintained and the Board and the Special Committee should not be reengaged as this could disrupt and jeopardize the successful completion of the Company’s restructuring.

[22] For these reasons I intend to follow the admonition of counsel to the Monitor, Mr. Prophet, who submitted that, “If it is not broken, don’t fix it”. It is clear from Newbould J.’s endorsement and the evidentiary record before me that the Company’s Existing Governance Arrangements are not broken.

[23] The Board’s motion to reengage the Board and the Special Committee is therefore dismissed.

[24] I do, however, agree with the Board’s submission that its counsel should be paid its fees and disbursements for representing the Directors in connection with their potential liability as members of the Board. This is not to be confined to only potential environmental liability but to any type of potential liability the Directors might face. Section 42 of the Initial Order mandates this in any event. Board counsel is also to be included in any discussions relating to any potential liability on the part of the Directors. The Board’s motion with respect to this issue is therefore granted.

Conclusion

[25] The Board’s motion to reengage the Board and Special Committee is dismissed and its motion to require payment of its counsel’s fees and disbursements and to involve its counsel in discussions concerning the Directors’ potential liability is granted

Costs

[26] As there has been divided success on this motion, I make no order as to costs.

HAINEY J.

Date: September 26, 2017