Court File and Parties
COURT FILE NO.: CV-17-587401-00CL DATE: 2017-12-07 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 RGL RESERVOIR MANAGEMENT INC. AND 10504360 CANADA INC. AND INVOLVING RGL RESERVOIR MANAGEMENT GROUP INC., RGL RESERVOIR HOLDINGS INC. AND PACIFIC PERFORATING, INC.
RGL RESERVOIR MANAGEMENT INC. AND 10504360 CANADA INC. Applicants
BEFORE: Regional Senior Justice Morawetz
COUNSEL: Robert Chadwick, Brendan O’Neill and Ryan Baulke for the Applicants Jane Dietrich, for certain Secured Debtholders Andrea Lockhart, for the Existing First Lien Agents
HEARD and ENDORSED: November 29, 2017 REASONS DELIVERED: December 7, 2017
Endorsement
[1] On November 29, 2017, this motion was granted with reasons to follow. These are the reasons.
[2] This is an application brought pursuant to section 192(3) of the Canada Business Corporations Act (“CBCA”) for approval of a plan of arrangement (the “Plan of Arrangement”) proposed by RGL Reservoir Management Inc. (“RGL Management”) and 10504360 Canada Inc. (“RGL NewCo”, and together with RGL Management, the “Applicants”).
[3] In connection with the within application, RGL brings this motion pursuant to subsection 192(4) of the CBCA for an interim order (the “Interim Order”) that, if granted: (i) approves certain procedural matters regarding the calling, holding and conduct of the Secured Debtholders’ Meeting and the Shareholders’ Meeting (collectively, the “Meetings”) to vote on the proposed Arrangement; (ii) approves certain matters regarding the hearing of the application; and (iii) grants certain ancillary relief, including a limited stay of proceedings.
[4] The Applicants, together with RGL Reservoir Management Group Inc. (“RGL Group”) and RGL Group’s subsidiaries (“RGL” or the “Company”), are Canadian-based providers of sand control and flow control solutions for the oil and gas industry.
[5] The purpose of the proposed arrangement (the “Arrangement”) is to give effect to a recapitalization transaction (the “Recapitalization Transaction”), which includes, among others, the following key elements:
a. all Secured Debt in the aggregate principal amount of approximately $404,852,500, together with all accrued and unpaid interest, shall be irrevocably exchanged for (i) the Exchange Debt (as defined below) in the aggregate principal amount of $75 million and (ii) common shares of RGL NewCo (the “RGL NewCo Shares”) representing approximately 93% of the total number of RGL NewCo Shares issued and outstanding upon completion of the Recapitalization Transaction (subject to dilution) (the “Secured Debt Exchange Shares”);
b. RGL’s total indebtedness will be reduced by approximately $333 million and annual cash interest expense will be reduced by approximately $20 million;
c. the Existing Shares (as defined below) of RGL Group shall be deemed to be purchased for cancellation by RGL Group and simultaneously, in consideration therefor, RGL NewCo will issue RGL NewCo Shares representing approximately 7% of the RGL NewCo Shares issued and outstanding upon completion of the Recapitalization Transaction (subject to dilution) and the New Warrants;
d. all equity of RGL Group other than the Existing Shares (as defined below) shall be terminated and cancelled pursuant to the Plan of Arrangement; and
e. obligations to employees, customers, suppliers and governmental authorities will continue to be satisfied in the ordinary course.
[6] RGL has received substantial support for the Recapitalization Transaction from holders of the Secured Debt (the “Secured Debtholders”) and the holders of Existing Shares (the “Existing Shareholders”). In connection with the Recapitalization Transaction, RGL has negotiated a recapitalization and financing term sheet (the “Recapitalization Term Sheet”) with certain holders of approximately 60% of the Secured Debt, including with AI RGL (Luxembourg) S.Â.R.L (“Advent”) and CPPIB Credit Investments Inc. (“CPPIB”), both significant holders of the Secured Debt and RGL Group’s two largest Existing Shareholders. The Recapitalization Term Sheet served as the basis for the Plan of Arrangement.
[7] RGL has been examining its capital structure and leverage level for a significant period of time. Since mid-2017 the Company, with the assistance of its professional advisors and in consultation with Advent and CPPIB, has reviewed and considered potential transactions to reduce indebtedness and right-size RGL’s capital structure.
[8] RGL’s proposed schedule for the Meetings, certain related mailing, voting and participation timelines, the hearing of the application and implementation of the Arrangement, if approved, is described in full in the Affidavit of Hansine Kostelecky (the “Kostelecky Affidavit”).
[9] RGL Group is the parent corporation of RGL. RGL Management is the operating entity of RGL and is also the borrower under the Secured Debt Documents (as defined below). RGL Group is incorporated pursuant to the Business Corporations Act (British Columbia) (the “BCBCA”) and RGL Management is a corporation continued pursuant to the CBCA.
[10] RGL NewCo is incorporated pursuant to the CBCA. RGL NewCo was formed for the purpose of assisting in effecting the Arrangement and to become the new RGL parent company upon implementation of the Arrangement. RGL NewCo will not carry on business or have liabilities prior to the Effective Time other than in connection with the Arrangement.
[11] RGL Reservoir Holdings Inc. (“RGL Holdings”) and Pacific Perforating, Inc. (“Pacific Perforating”) are both guarantors under the Secured Debt Documents (defined below) and are involved in these proceedings. RGL Holdings and Pacific Perforating are wholly owned subsidiaries of RGL that are incorporated under the BCBCA and the laws of Delaware, respectively. RGL has certain other subsidiaries not involved in these proceedings.
[12] RGL’s authorized capital structure consists primarily of two classes of common shares, both of which are issued by RGL Group and have identical rights (the “Existing Shares”). RGL’s two largest Existing Shareholders are Advent and CPPIB with each holding approximately 70% and 25% of the Existing Shares, respectively.
[13] The Existing Shares are subject to the Second Amended and Restated Shareholder Agreement by and among, inter alia, Advent and RGL Management (the “Shareholder Agreement”) which is expected to be terminated pursuant to the Plan and in accordance with the terms of the Shareholder Agreement.
[14] RGL Management is the borrower under a credit agreement dated August 14, 2014 which was amended by the amendment agreement dated March 11, 2016 (the “Secured Debt Documents”). The parties and terms of the Secured Debt Documents are described in the Kostelecky Affidavit. As at November 20, 2017, there was approximately $404,852,500 of principal amount of Secured Debt outstanding under the Secured Debt Documents.
[15] On December 19, 2017 and December 31, 2017, approximately $5,300,900 and $1,800 of interest is due and payable in respect of the Secured Debt Documents. Approximately $865,000 of amortization payments are also due and payable on December 31, 2017. RGL does not intend to make these payments as amounts due in respect of the Secured Debt Documents will form part of the Arrangement.
[16] RGL has a stock option plan described in further detail in the Kostelecky Affidavit. In connection with the Recapitalization Transaction, all holders of Options will be provided the opportunity to exercise their Options and receive Existing Shares in exchange in advance of the implementation of the Arrangement.
[17] RGL and its advisors commenced discussions in August, 2017 with certain of its significant Secured Debtholders, Advent and CPPIB to explore potential consensual transactions to improve the Company’s capital structure.
[18] In November of 2017, RGL, Advent and certain of the significant Secured Debtholders developed and finalized the Recapitalization Term Sheet. During this time, the parties determined that the best available option for implementing the Recapitalization Transaction, including having regard to the need to implement the transaction by the end of 2017 for various corporate, tax and business reasons, was pursuant to an arrangement under the CBCA.
[19] The Plan of Arrangement includes releases in favour of the RGL, the Secured Debtholders and certain related parties. Details of the releases and the released parties are set out in the Kostelecky Affidavit.
[20] Dissent rights have been provided to shareholders.
[21] Perella Weinberg Partners L.P. (“PWP”) was engaged by RGL to provide to the board of directors of RGL Group with financial advice, and, in connection with the Plan, an opinion (the “Fairness Opinion”). In the Fairness Opinion, PWP concludes that, as of the date of the Fairness Opinion: (i) the Recapitalization Transaction, if implemented, is fair from a financial point of view to RGL Management; (ii) the consideration to be received by Existing Shareholders is fair from a financial point of view to the Existing Shareholders; and (iii) the Existing Shareholders would be in a better financial position under the Recapitalization Transaction than if RGL were liquidated.
[22] If the Recapitalization Plan is approved by affected creditors and shareholders, it is expected that approval of the Arrangement will be considered by this Court at the return of the within application on December 14, 2017.
[23] The 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”))
[24] The 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.
[25] With respect to the first criteria, 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).
[26] 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), 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).
[27] I 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.
[28] I am also satisfied that the proposed Plan of Arrangement has been put forward in good faith and in furtherance of a valid business purpose. The successful implementation of the Recapitalization Transaction will strengthen RGL’s financial position by reducing RGL’s outstanding indebtedness by approximately $333 million and RGL’s annual cash interest costs by approximately $20 million, thereby improving RGL’s capital structure and liquidity.
[29] In 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.”
[30] Further 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).
[31] In this case, I am satisfied that the Secured Debt Documents fall within the definition of a “debt obligation” as “other evidence of indebtedness or guarantee of a corporation” and thus each constitutes a “security” for purposes of the CBCA. The Applicants submit that the exchange of the debt obligations under the Secured Debt Documents pursuant to a CBCA plan of arrangement is permitted under the arrangement provisions of the CBCA and that the Arrangement falls within the broad definition of “arrangement” under section 192. I accept this submission.
[32] With respect to the solvency requirement, section 192(3) of the CBCA requires that a corporation seeking approval of an arrangement must not be insolvent.
[33] Canadian 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).
[34] RGL NewCo does not have any liabilities and is solvent. Further, the transaction is expected to reduce RGL’s outstanding indebtedness by approximately $333 million and there will be no payments under the Exchange Debt required until 2024, such that following the transaction, RGL will be better capitalized and capable of paying its liabilities as they become due. The solvency requirement under subsection 192(3) is therefore satisfied.
[35] RGL Management was continued under the CBCA and RGL NewCo was incorporated under the CBCA and thus are “corporations” as defined in section 2(1) of the CBCA. RGL is therefore entitled to avail itself of the arrangement provisions under section 192 of the CBCA.
[36] The third criteria is whether it “is practicable” to effect the Arrangement under any other provision of the CBCA.
[37] Counsel 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).
[38] The purpose of the Arrangement is to effect the Recapitalization Transaction, which involves numerous steps that are to occur in the order set out in the Plan of Arrangement and in a manner that is advantageous to RGL and its stakeholders. It is in the best interests that the Recapitalization Transaction be implemented in a timely manner prior to December 31, 2017 for a variety of corporate, tax and business reasons and the CBCA Arrangement provides for the most efficient means of achieving this objective. In addition, outside of a Plan of Arrangement, the Secured Debt Documents would require the consent of 100% of the Secured Debtholders to effect the exchange the Secured Debt for the Secured Debt Exchange Shares.
[39] RGL has elected to proceed by way of a statutory plan of arrangement under section 192 of the CBCA as the most efficient and practicable means of completing the Recapitalization Transaction. Given that value is being preserved for shareholders, I am satisfied that it is appropriate to use the CBCA to effect this Arrangement in respect of both the Secured Debt and the Existing Shares, together under the Arrangement.
[40] I 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.
[41] Staff of the CBCA Director was provided with notice that RGL would be seeking advice and directions from this Court by way of Interim Order, and was provided with draft copies of the Notice of Application, Notice of Motion, proposed Interim Order, Plan of Arrangement, Information Circular and Kostelecky Affidavit. The CBCA Director did not appear.
[42] In 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.
[43] Finally, Canadian courts have previously approved CBCA plans of arrangement in a number of cases that involved non-CBCA corporations that were guarantors of certain debt obligations of the applicant under existing credit and/or note obligations, including, inter alia, Aurcana, Banro and Mood Media. Such plans of arrangement approved by the Court affected the applicable applicant’s non-CBCA subsidiaries insofar as those subsidiaries were guarantors of the applicant’s debt obligations that were the subject of the arrangement.
Disposition
[44] I am satisfied that this motion should be granted.
[45] Pursuant to the proposed Initial Order, RGL also seeks the limited stay of proceedings until and including the earlier of (i) January 31, 2018, (ii) the date the CBCA proceedings are terminated, and (iii) the Effective Date, staying all rights, remedies and proceedings that may be exercised, commenced or proceeded with by the Secured Debtholders, the Existing First Lien Agent, or any other person party to a contract with any of the Applicants, against or in respect of RGL, or any of the present or future property, assets, rights or undertakings of RGL, in connection with matters relating to these proceedings, the proposed Arrangement, or any defaults under the Secured Debt Documents.
[46] I am satisfied that the Court has the jurisdiction under subsection 192(4) of the CBCA as well as under its inherent jurisdiction to grant a stay of proceedings in order to prevent the disruption of and to facilitate RGL’s ongoing business.
[47] Turning now to the specifics of the interim order, counsel submits that the Proposed Interim Order establishes a fair and reasonable process for approval of the Arrangement and that the Proposed Interim Order will enable meetings of the Secured Debentureholders and the Existing Shareholders to be called, held and conducted in a procedurally fair manner. Counsel specifically referenced the requirement of an affirmative vote of at least 66 2/3% of the votes cast (i) by the Secured Debentureholders and (ii) by the Existing Shareholders, in each case present in person or represented by Proxy and entitled to vote at the applicable meeting. I accept this submission.
[48] Counsel also submits that the Proposed Interim Order is consistent with previous orders that have been issued in respect of other statutory plans of arrangement, including Tembec Arrangement Inc. et al, Court File No. 08-CL-7367; Sherritt International Corporation, Court File No.: CV-16-11426-00CL; and 9171665 Canada Ltd. and Conacher Oil and Gas Limited, Court File No.: 1501-00574. I accept this submission.
[49] In Abitibi-Consolidated, the Court found that the wording of section 192(4) of the CBCA provides the Court with a broad discretion to exercise its powers and that this discretion ought to be exercised in furtherance the provision’s purpose “[t]o facilitate an arrangement and, at the very least, to allow for it to be subject to a meaningful approval process.”
[50] It seems to me that the proposed stay of proceedings during the pendency of this application is a limited stay and is necessary in order to prevent the Secured Debtholders and parties to RGL’s other contracts from taking any steps during these proceedings, by reason of or as result of these proceedings, the proposed Arrangement or any defaults under the Secured Debt Documents, that may jeopardize RGL’s efforts to complete the Recapitalization Transaction for the benefit of its stakeholders. The proposed stay of proceedings does not otherwise affect the payment of amounts owing or satisfaction of obligations outstanding to trade creditors, customers, employees or governmental authorities, all of which will continue to be paid or satisfied in the ordinary course during the course of these proceedings.
[51] The motion is granted and the Interim Order shall issue in the form attached to Tab 3 of the Motion Record.