SUPERIOR COURT OF JUSTICE – ONTARIO
RE: 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 CONCORDIA INTERNATIONAL CORP. AND Concordia Healthcare (Canada) Limited AND INVOLVING CONCORDIA LABORATORIES INC., S.A.R.L., CONCORDIA PHARMACEUTICALS INC., S.A.R.L., CONCORDIA INVESTMENTS (JERSEY) LIMITED, CONCORDIA FINANCING (JERSEY) LIMITED, AMDIPHARM HOLDINGS S.A.R.L., AMDIPHARM AG, AMDIPHARM B.V., AMDIPHARM LIMITED, AMDIPHARM MERCURY HOLDCO UK LIMITED, AMDIPHARM MERCURY UK LTD., CONCORDIA HOLDINGS (JERSEY) LIMITED, AMDIPHARM MERCURY INTERNATIONAL LIMITED, CONCORDIA INVESTMENT HOLDINGS (UK) LIMITED, MERCURY PHARMA GROUP LIMITED, CONCORDIA INTERNATIONAL RX (UK) LIMITED, ABCUR AB, MERCURY PHARMACEUTICALS LIMITED, FOCUS PHARMA HOLDINGS LIMITED, FOCUS PHARMACEUTICALS LIMITED, MERCURY PHARMA (GENERICS) LIMITED, MERCURY PHARMACEUTICALS (IRELAND) LIMITED, AND MERCURY PHARMA INTERNATIONAL LIMITED
concordia international corp. and concordia healthcare (canada) limited
Applicants
BEFORE: REGIONAL SENIOR JUSTICE G.B. MORAWETZ
COUNSEL: Robert J. Chadwick, Brendan O’Neill and Caroline Descours for the Applicants
Marc Wasserman and Michael De Lellis, for Ad Hoc Group of Secured Holders
Kevin Zych, for Ad Hoc Group of Crossover Holders
HEARD and
DETERMINED: October 20, 2017
REASONS: October 27, 2017
ENDORSEMENT
1On October 20, 2017, this motion was granted with reasons to follow. These are the reasons.
2This motion was brought by Concordia International Corp. (“CIC”) and Concordia Healthcare (Canada) Limited (“CHCL” and, together with CIC, the “Applicants”) on an ex parte basis for a preliminary interim order pursuant to section 192(4) of the Canada Business Corporations Act (“CBCA”).
3Although the motion was brought on an ex parte basis, counsel for the Ad Hoc Group of Secured Holders and for the Ad Hoc Group of Crossover Holders were in attendance.
Overview
4CIC, together with its subsidiaries (the “Concordia Group” or the “Company”), is a diverse, international specialty pharmaceutical company primarily focused on off-patent pharmaceutical products. The Concordia Group carries on business with sales in more than ninety countries and has a portfolio of more than 200 established, off-patent products.
5The Applicants are commencing these proceedings for the ultimate purpose of giving effect to a recapitalization transaction (the “Recapitalization Transaction”) involving the Secured Term Loans, the Secured Notes, the Secured FX Swaps, the Unsecured Bridge Loans and the Unsecured Notes (collectively, the “Affected Debt”), and the documents governing and/or related to the Affected Debt (the “Affected Debt Instruments”) and the common shares of CIC (the “Common Shares”), to be implemented pursuant to an arrangement (the “Arrangement”) pursuant to section 192 of the CBCA.
6In addition to the Applicants, these proceedings also involve the entities listed on Schedule “A” (collectively, the “Subsidiary Guarantors”), each of which is a wholly-owned direct or indirect subsidiary of CIC. The Subsidiary Guarantors collectively own a significant portion of the assets of the Company’s business and are guarantors under the Affected Debt Instruments.
7The evidence in support of this motion is set out in the Affidavit of David Price sworn October 19, 2017.
8In the summer of 2017, the Company and its advisors commenced discussions regarding transactions to improve the Company’s capital structure with certain of its stakeholders, including (i) the Secured Debtholders Committee, being a Committee of the Secured Debtholders; (ii) the Unsecured Debtholders Committee (together with the Secured Debtholders Committee, the “Debtholder Committees”), being a Committee of the Unsecured Debtholders; and (iii) each of the Secured Debtholder Committee’s and Unsecured Debtholders Committee’s respective financial and legal advisors (the “Debtholder Committee Advisors”).
9The Company believes that it needs to reduce its debt obligations in order to have a sustainable capital structure. The Company and its advisors are working to advance and finalize the terms of the Recapitalization Transaction on a consensual basis with the Debtholder Committees and the Debtholder Committee Advisors.
10It is the Company’s expectation that under the Recapitalization Transaction the Company’s outstanding indebtedness will be reduced by more than $2 billion.
11CIC did not make its October 7.00% interest Unsecured Notes Payment, due on October 16, 2017 and it does not intend to make the October Unsecured Bridge Loan Payments at this time as the foregoing payments form part of the Affected Debt that is expected to be affected under the Recapitalization Transaction.
12The Company does intend to continue to satisfy, in the ordinary course, its scheduled interest and amortization payments, as applicable, under the Senior Debt and all of its trade and employee obligations. As of September 30, 2017, the Company has approximately $342 million of cash on hand, giving it sufficient liquidity to satisfy these obligations.
13Part of the relief requested is a very broad stay of proceedings, which the Company believes is necessary to maintain the overall stability for their business and provide the Company and the Debtholder Committees with a meaningful opportunity to continue to advance and finalize the terms of the Recapitalization Transaction.
Summary of Facts
14CIC is the parent corporation of the Concordia Group. It was formed pursuant to the Ontario Business Corporations Act and has its registered and head office in Oakville, Ontario and its records office in Toronto, Ontario.
15In connection with the Recapitalization Transaction, it is anticipated that CIC will continue from the OBCA to the CBCA prior to the date that the Applicants seek a final order approving the Arrangement pursuant to a plan of arrangement (the “Plan of Arrangement”).
16CHCL is a corporation incorporated pursuant to the CBCA and has its head office in Oakville, Ontario. CHCL is a direct, wholly-owned subsidiary of CIC and does not carry on any operations or have any liabilities.
17The Company does operate through a number of direct and indirect subsidiaries of CIC around the world. Each of these Subsidiary Guarantors is organized under the laws of the jurisdiction set forth beside its name on Schedule “A”. In addition to CHCL and the Subsidiary Guarantors, CIC has a number of other subsidiaries around the world that are not involved in these proceedings and are not guarantors under the Affected Debt Instruments.
18As at October 19, 2017, the Company employed 443 employees worldwide, 165 of which were employed in the Concordia International segment (other than Mumbai), 33 of which were employed in the Concordia North American segment and 219 of which were employed at the Centre of Excellence. None of the Company’s employees are unionized. The Company employees 26 employees at its headquarters in Oakville, Ontario.
19The Company currently faces challenges posed by the decline in its operating performance, high leverage and foreign exchange risks. The Company has also faced certain regulatory challenges in recent years, and is currently subject to certain ongoing regulatory investigations being conducted by the United Kingdom Competition and Markets Authority (the “CMA”).
20CIC’s capital structure consists primarily of the Common Shares, the Secured Term Notes, the Secured Notes, the Secured FX Swaps, the Unsecured Bridge Loans and the Unsecured Notes.
21Since early 2016, the Company has been focusing on improving its business and operations and reviewed various alternatives to improve its capital structure.
22The Company believes that it needs to reduce its debt obligations in order to have a sustainable capital structure. The Company is of the view that, based on the size and nature of its existing capital structure, an arrangement is required to reduce its debt obligations. It is anticipated that the proposed Recapitalization Transaction will involve, among other things, the exchange of the Affected Debt Instruments for new debt instruments issued by CIC, other equity securities of CIC or a combination thereof, resulting in a reduction of the Company’s overall debt obligations by more than $2 billion. The existing Common Shares may be diluted as part of the Recapitalization Transaction. The extent of such dilution may be sizeable. It is also anticipated that all other obligations of the Company, including trade debt and employee obligations, will be left unaffected by the Recapitalization Transaction.
Analysis
23The present Arrangement proceedings have been commenced under section 192 of the CBCA. On the Application for Approval of the Arrangement under section 192 of the CBCA, the Applicants must satisfy the Court that:
(a) the statutory requirements have been fulfilled;
(b) the Arrangement is put forward in good faith; and
(c) the Arrangement is fair and reasonable.
24The Applicants submit that on an interim motion such as this, courts have generally limited their analysis to:
(a) the Applicants’ compliance with the statutory requirements of the CBCA; and
(b) the Applicants’ good faith in putting forward the Arrangement
(see: Re 8440522 Canada Inc., 2013 ONSC 2509 at para. 41 (“Mobilicity”) and Re 45133541 Canada Inc. (Arrangement relatif à) 2009 QCCS 6444, 2009 QCCS. 6444 at para. 53 (“Abitibi”))
25The CBCA requires the Applicants to establish that:
(a) the Arrangement constitutes an “arrangement” within the meaning of subsection 192(1) of the CBCA;
(b) the Applicants are not “insolvent” within the meaning of subsection 192(2) of the CBCA;
(c) it is not practicable for the Applicant to effect a fundamental change in the nature of the Arrangement under any other provision of the CBCA; and
(d) the Applicants have given the Director appointed under section 260 of the CBCA (the “CBCA Director”) notice of this Application.
26With respect to the first criteria, counsel submits that, under section 192(1) of the CBCA, an “arrangement” includes a number of possible transactions, for example, an exchange of securities of a corporation for property, monies or other securities of the corporation or property, monies or securities of another body corporate. The definition of “arrangement” is not limited to the transactions listed in section 192(1). The essential characteristic of an arrangement is a “fundamental change which could not be otherwise achieved under the CBCA” (see BCE Inc. v. 1976 Debentureholders, 2008 SCC 69 at paras. 124-125 (“BCE”); and Re Fairmont Hotels & Resorts Inc., [2006] O.J. No. 5591 (S.C.J. [Comm. List]) at para. 5).
27Counsel to the Applicants submits that Canadian courts have recognized that section 192 of the CBCA is a flexible statutory provision capable of “incorporating whatever tools and mechanisms of corporate law the ingenuity of their creators bring to the particular problem at hand” (see: Re Masonite International Inc. (2009), 2009 CanLII 40563 (ON SC), 56 C.B.R. (5th) 42 (Ont. S.C.J. [Comm. List]) at para. 20 and Fairmont Hotels & Resorts Inc., supra at paras. 1 and 5).
28The proposed Arrangement is expected to include the exchange of the Secured Debt and Unsecured Debt, each comprised of various note and loan obligations, in exchange for new debt, equity of CIC, or a combination thereof.
29I am satisfied that the proposed Arrangement falls within the category of “arrangement” contemplated by section 192 of the CBCA and that the Applicants are in compliance with the statutory requirements of section 192 of the CBCA.
30In arriving at this conclusion, I have taken into account the words of the Alberta Court of Appeal in Savage v. Amoco Acquisition Co. (1988), 1988 ABCA 148, 87 A.R. 321 (C.A.) at para.5 (“Amoco”).:
“The category of “arrangement” we think exists primarily to deal with proposals that do not quite fit other categories…. To give the words of the section the narrow interpretations suggested would defeat that purpose. Accordingly, we say that “exchange” in section 185.1 includes a compromise, and that the section generally deals with proposals that are much more than a simple offer to acquire the shares of another. So long as the proposal is not a sham, that section is available.”
31Further Canadian courts have granted orders under section 192 in a number of cases where the primary purpose was the compromise of debt (see, for example: North American Palladium, et al., Court File No. CV-15-11020-00CL (August 5, 2015); Mega Brands, et al. Court File No. 500-11-038398-109 (Que. Sup. Ct.) (March 22, 2010); Abitibi, supra; Tembec Arrangement Inc., et al, Court File No. 08-CL-7367 (February 27, 2008); Mobilicity, supra; Re Essar Steel Canada Inc., 2014 ONSC 4285; and Postmedia Network Inc., et al., Court File No. CV-16-11476-00CL (September 12, 2016).
32In this case, I am satisfied that the Affected Debt Instruments fall within the definition of a “security” and, as applicable a “debt obligation” as “other evidence of indebtedness or guarantee of a corporation” and thus each constitutes a security for the purposes of the CBCA.
33With respect to the solvency requirement, section 192(3) of the CBCA requires that a corporation seeking approval of an arrangement must not be insolvent.
34Canadian courts have held that the solvency requirement is satisfied where at least one of the applicant companies is solvent or where the applicant will be solvent after the arrangement is implemented (see: Amoco, supra at para. 5; Re Essar Steel, supra at paras. 38 and 39, and Mobilicity, supra at para. 53).
35I am satisfied that CHCL does not have any liabilities and is solvent.
36The third criteria is whether it “is practicable” to effect the Arrangement under any other provision of the CBCA.
37Counsel submits that the Canadian courts have adopted a low threshold of impracticability and that the test is one of “practicability” and not “impossibility” (see: Re Essar Steel, supra at para. 40; Mobilicity, supra, at paras. 61-62; and Re Masonite, supra, at paras. 16-25).
38I am satisfied that the proposed Arrangement consists of a number of complex or multi-step transactions. In my view, the transactions can be accomplished far more efficiently by means of a plan of arrangement. Accordingly, I am satisfied that it would be impracticable for the Applicants to pursue the Arrangement under any other provision of the CBCA.
39I also note that the Applicants have given notice to the CBCA Director and that the CBCA Director has confirmed that “the staff of the Director has determined that the Director does not have standing to review or take a position on this application as there is no arrangement to be reviewed at this time”.
40I am also satisfied that the Applicants have brought this application in good faith and for no improper purpose. There is evidence that the Applicant are proceeding with the Arrangement for a valid business purpose, specifically a reduction of more than $2 billion of debt in order to put the Company in a sound financial footing.
41I do note that the proposed Arrangement does affect the interest of non-CBCA entities, including Subsidiary Guarantors. The Applicants point out that while the Subsidiary Guarantors are not CBCA corporations, they are all wholly-owned direct or indirect subsidiaries of CIC and will be consenting participants to the Recapitalization Transaction.
42In support of its argument that the CBCA Arrangement can affect the interests of non-CBCA entities, counsel submits that Canadian courts have previously approved arrangements involving non-CBCA corporations, including Mega Brands; Aurcana; Banro Corporation et al., Court File No. CV-17-11700-00CL (February 22, 2017) and Mood Media Corporation, Court File No. CV-17-11809-00CL (May 18, 2017). I accept this position.
Disposition
43I am satisfied that this motion should be granted.
44Turning now to the specifics of the preliminary interim order, counsel submits that the CBCA permits the granting of an interim order such as the proposed preliminary interim order to facilitate an arrangement. Further, the courts have granted orders which have stayed any enforcement steps under agreements to which the Applicants or related entities were a party.
45In support of the submission, counsel referenced preliminary orders in Re Essar Steel, Lightstream Resources Ltd., et al. Court File No. 1601-08725; Tervita Corporation, et al. Court File No. 1601-12176 (September 14, 2006) (Alberta) and Post Media Network Inc., et al, Interim Order Granted August 5, 2016).
46I also note that the proposed interim order provides full comeback rights, permitting any party who objects to the stay of proceedings to return before the court on seven business days’ notice to the Applicants.
47The draft order provides for “full pivot” rights. This clause makes it clear that, if circumstances arise, these proceedings can be continued under the Companies’ Creditors Arrangement Act (“CCAA”).
48There is also a provision in the draft order with respect to a swap obligation. The provision allows for a closing-out of this obligation, on the same basis that swaps can be closed out pursuant to the CCAA.
49Finally, in my view, where there is an expectation of debt compromise, the parties should not hesitate to incorporate structures or processes that are found in the CCAA and the Bankruptcy and Insolvency Act (the “BIA”). The CCAA and the BIA can provide guidance to the Applicants as to appropriate procedures to be followed in dealing with affected parties.
50I am satisfied that the draft preliminary interim order is appropriate in these circumstances and that it will assist the Company working to advance and finalize the terms of the Recapitalization Structure and to return to court for an Interim Order and to ultimately seek approval of a proposed Arrangement.
51The motion is granted and the Preliminary Interim Order shall issue in the form attached to Tab 3 of the Motion Record.
Regional Senior Justice G.B. Morawetz
Date: October 27, 2017
Schedule A
SUBSIDIARY GUARANTORS
- Concordia Laboratories Inc., S.a.R.L. – Luxembourg
- Concordia Pharmaceuticals Inc., S.a.R.L. – Luxembourg
- Concordia Investments (Jersey) Limited – Jersey
- Concordia Financing (Jersey) Limited – Jersey
- Amdipharm Holdings S.a.R.L. – Luxembourg
- Amdipharm AG – Switzerland
- Amdipharm B.V. – Netherlands
- Amdipharm Limited – Ireland
- Amdipharm Mercury Holdco UK Limited – United Kingdom
- Amdipharm Mercury UK Ltd. – United Kingdom
- Concordia Holdings (Jersey) Limited – Jersey
- Amdipharm Mercury International Limited – Jersey
- Concordia Investment Holdings (UK) Limited – United Kingdom
- Mercury Pharma Group Limited – United Kingdom
- Concordia International Rx (UK) Limited – United Kingdom
- Abcur AB – Sweden
- Mercury Pharmaceuticals Limited – United Kingdom
- Focus Pharma Holdings Limited – United Kingdom
- Focus Pharmaceuticals Limited – United Kingdom
- Mercury Pharma (Generics) Limited– United Kingdom
- Mercury Pharmaceuticals (Ireland) Limited – Ireland
- Mercury Pharma International Limited – Ireland