COURT FILE NO.: CV-22-00680400-00CL
DATE: 20220817
ONTARIO
SUPERIOR COURT OF JUSTICE
(COMMERCIAL LIST)
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 IN THE MATTER OF RULE 14.05(2) OF THE RULES OF CIVIL PROCEDURE
AND IN THE MATTER OF A PROPOSED ARRANGEMENT OF CENTERRA GOLD INC.
BETWEEN:
Centerra Gold Inc.
Applicant
– and –
Entes Industrial Plants Construction
Objector
Kent E. Thomson, Derek D. Ricci, Maureen Littlejohn, Alexander D. Rose, Eliot N. Kolers,and Zev Smith, Counsel for the Applicant
Ryder Gilliland and Corey Groper, Counsel for Entes Industrial Plants Construction
Gebre LLC
Derek J. Bell, Katelyn Ellins and Emma Cosgrave, Counsel for Gebre LLC
HEARD: July 23, 2022
C. Gilmore, J.
Introduction
[1] The Applicant seeks a final order approving a Plan of Arrangement (“the Arrangement”) pursuant to subsections 192(3) and 192(4) of the Canada Business Corporations Act, R.S.C. 1985, c. C-44, as amended (“the CBCA”). An interim order to convene a special meeting of the shareholders and vote on a special resolution to approve the Arrangement was made on April 28, 2022. The shareholders overwhelmingly approved the Arrangement (97%).
[2] Entes Industrial Plants Construction (“Entes”) and Gebre LLC (“Gebre”) (together “the Objectors”) object to the Arrangement. The Objectors are unsecured creditors who have judgments against the Kyrgyz Republic (“the Republic”).
[3] The terms of the Arrangement required specific conditions precedent and steps taken on specific dates with the end of July 2022 as the closing deadline. As the matter came before me on July 28, 2022, I released brief reasons late in the evening on July 28, 2022 approving the Arrangement such that it could close on July 29, 2022, the last business day of July, 2022. In those reasons I set out my conclusions with respect to why the Arrangement should be approved and indicated that further, more comprehensive reasons would follow. These are those reasons.
Background Facts
[4] Centerra Gold Inc. (“Centerra”) is a Canadian-based mining company. Centerra’s flagship asset, the Kumtor gold mine (“Kumtor”) is located in the Republic. Centerra has had an acrimonious relationship with the Republic for many years, which culminated in May 2021 when the Republic appointed an external manager, Tengiz Bolturuk, over the Kumtor Project. Mr. Bolturuk seized control of the project and, in doing so, wiped out $1 billion dollars of shareholder value in one day. The Kumtor mine accounted for 70% of Centerra’s revenues.
[5] The Arrangement permits Centerra to extricate itself from a situation in which its major asset is located in a country ridden with corruption, gridlock and political upheaval. Over the past 30 years, the Republic has instituted criminal and civil proceedings against Centerra and its directors, officers and employees and Kumtor Gold Company CJSC (“KGC”), the wholly owned subsidiary of Centerra that owns the Kumtor Project. The goal of those proceedings was to pressure Centerra to renegotiate the terms of their relationship with the Republic.
[6] Other notorious examples of State corruption include: the Republic obtaining a $3.1B USD judgment against KGC four days after a claim was issued, the issuance of international arrest warrants against former executives of Centerra, the prosecution of executives in absentia, and the arrest and imprisonment of the President of Centerra for negotiating an agreement with the Republic that was approved by its own Parliament. Needless to say, the lack of due process is a significant issue in the Republic, as is the composition of a far from independent judiciary.
[7] After the seizure of the mine in May 2021, Centerra commenced international arbitration proceedings against the Republic and Kyrgyzaltyn JSC (“KZN”), a company owned by the Republic. Centerra also commenced Chapter 11 proceedings in the U.S. in relation to KGC and commenced proceedings against Tengiz Bolturuk to prevent him from having any further involvement with the mining project. Despite these steps, it became clear that the status quo was unsustainable and Centerra began to look for other options.
[8] Centerra’s options were limited. KZN owns 26.1% of Centerra’s shares and has two seats on its Board and so long as Centerra’s largest shareholder is still in the Republic, it cannot move forward with other growth opportunities.
[9] In November 2021, Centerra reached an agreement in principle with KZN and the Republic. In January 2022, Centerra issued a press release disclosing the basic terms of the Arrangement. Negotiations and draft documents related to the Arrangement were openly addressed in the Management Information Circular related to the Arrangement. The Arrangement was formally entered into on April 4, 2022 and has been approved by the Republic’s Cabinet of Ministers, President and Parliament. Indeed, the Republic has already reported the Arrangement to its media as being a complete deal and recited the payments expected to be made to complete the Arrangement.
[10] The Arrangement is the result of lengthy and difficult negotiations. It was arrived at after a year of consultation with legal and financial experts, Centerra’s Board and Special Committee, two fairness opinions and a formal valuation. 97% of Centerra’s shareholders voted in favour of the Arrangement.
[11] The Arrangement will allow Centerra to completely divorce itself from a fractious and untenable situation. The Arrangement provides that Centerra will repurchase its shares in KZN, cancel them and transfer to KZN its ownership in KGC. KZN’s nominees will also be removed from Centerra’s Board. Centerra will pay $50M USD to KGC to resolve an intercompany balance (“the intercompany payment”) and a $13.9M CDN cash payment to KZN. There will be simultaneous releases including a release of billions of dollars worth of claims against Centerra, its employees and directors currently before the Republic’s courts.
[12] Centerra submits that the approval of the Arrangement is urgent in light of political instability in the Republic and operational issues which have emerged at the site, including cracks in the pit wall. Centerra is legitimately concerned that if mine conditions cause harm to the operation or its employees, Centerra will be blamed even though it has not been on site for over one year.
[13] The Arrangement is opposed by the Creditors, who own judgments against the Republic. They submit that the Arrangement was devised for a legitimate business purpose but was also intended to thwart them as creditors. The Creditors sought to block the Arrangement so that the KZN shares in Centerra would be available to satisfy their arbitral awards against the Republic. Alternatively, the Creditors seek to have the Sheriff of the City of Toronto garnish payments that Centerra is required to make to KGC and KZN under the Arrangement.
[14] In June 2022, Entes filed a notice of garnishment based on its award against the Republic and sought payment on the grounds that amounts to be paid to KZN or KGC are amounts payable to the Republic.
[15] Gebre sought a default judgment against the Republic on July 16, 2022 without notice to Centerra. It also sought relief by way of declaration that KZN was the “alter ego” of the Republic. The relief was granted on an ex-parte basis but in an addendum to his reasons, Justice McEwen made it clear that his reasons were not intended to have any effect on any party other than the Republic and KZN. Specifically, they were not intended to have any effect with respect to Centerra’s arguments in relation to the Arrangement.
[16] Centerra denies that the Arrangement was devised for other than a legitimate business purpose. It is essential that the Arrangement is approved and closed as negotiated. Doing otherwise may result in the Republic simply taking over the Kumtor mine, leaving Centerra with one foot in the Republic and no ability to control what happens there. Further, such a situation would expose Centerra to possible liability on the mine site and leave the millions of dollars worth of claims and judgments held by the Republic against Centerra unresolved.
[17] Finally, Centerra’s position is that paying the garnishments sought by the Objectors would result in them paying the amounts owed twice as, if the garnishment amounts were paid, Centerra would still be required to pay the amounts owing under the Arrangement Agreement.
Legal Analysis
1. Does the Arrangement Meet the Required Tests?
[18] In BCE v. 1976 Debentureholders, 2008 SCC 69, [2008] 3 S.C.R. 560 (“BCE”), the Supreme Court set out the purpose of the arrangement provisions under the CBCA and the principals for court approval of arrangements.
[19] The Court must first be satisfied that the statutory requirements for an arrangement have been met as follows:
(i) the proposed arrangement is an “arrangement” as defined in s. 192(1) of the Act;
(ii) it is not practicable to effect the proposed arrangement under any other provision of the Act;
(iii) the corporation is solvent; and
(iv) the Director has been notified.
[20] It is not disputed in this Application that Centerra is solvent and that the Director has been notified. Centerra has also complied with the terms of Justice Kimmel’s interim order by securing overwhelming support from its shareholders.
[21] Gebre complains that the test under BCE is not met because this is not an “arrangement” in that no merger or acquisition is occurring and Centerra’s shareholders’ rights are not being arranged.
[22] I disagree. The exchange of the KZN shares for consideration and shares of KGC falls within section 192(1)(f) of the CBCA in that it involves an exchange of securities for money or securities of anther corporation.
[23] I also disagree with Gebre’s suggestion that the transactions within the Arrangement could be achieved outside of the CBCA. While the Arrangement is somewhat unique, it is a convenient and practical way of effecting the required severance of ties with the Republic and KZN. In Olympia & York Developments Ltd. v. Royal Trust, 1993 CanLII 9428 (ON SC), 102 D.L.R. (4th) 149, Citibank opposed the proposed arrangement. The Court approved the arrangement and at paras 47-48, Justice Blair (as he then was), endorsed arrangements which flexibly incorporated “whatever tools and mechanisms of corporate law the ingenuity of their creators brings to the particular problem at hand.”
[24] The Arrangement is the result of many months of arduous negotiations with an intractable opponent. It has the approval of an independent Special Committee of Directors and the Board of Centerra, who have both determined that the Arrangement is in Centerra’s best interests. I find that the Arrangement has been put forward in good faith and that Gebre’s insinuations that the Arrangement was drafted to insulate Centerra and others from judgment creditors has no evidentiary foundation.
[25] The Arrangement serves a valid business purpose in that it is necessary to divorce Centerra from their untenable situation with the Republic. There is frankly no other alternative for Centerra. Even the Creditors concede this fact. The necessity of the Arrangement is an important factor in this case for the following reasons:
a. The current situation is causing harm to Centerra.
b. Being in a situation with “one foot” in the Kumtor mine has negative repercussions for Centerra in terms of developing new business prospects.
c. There is obvious value to Centerra in completing the Arrangement and allowing it to sever its ties with the Republic and KZN entirely.
d. Centerra may be subject to liability in the event of harm to employees given the recent information about pit wall cracks if the Arrangement does not close. Delay would mean the real possibility of the Republic abandoning the mine then blaming Centerra for any operational issues, even though Centerra has not been on site for over one year.
[26] With respect to whether the Arrangement is fair and reasonable, there are two main factors. First, Centerra shareholders have voted overwhelmingly in favour of the Arrangement. Second, Centerra’s Special Committee, legal and financial advisors and fairness opinions from reputable experts were all in favour of the Arrangement as being fair to those security holders whose rights were being arranged.
[27] Further, the Arrangement need not be perfect, but it must be within a range of reasonable choices in weighing conflicting interests.
[28] Given all the above, I find that the Arrangement:
a. Meets the statutory requirements.
b. Is an “Arrangement” under the CBCA.
c. Has been put forward in good faith.
d. Is the most practical option in the circumstances.
e. Has a valid business purpose.
f. Is fair and reasonable.
2. The Creditors’ Objections
[29] The Creditors seek to enforce their arbitral awards against the Republic through the KZN Centerra shares and the cash payment to KZN. The Creditors do so on the basis that KZN is the “alter ego” of the Republic and that garnishment is available.
[30] In Belokon et al. v. The Kyrgyz Republic, 2016 ONSC 4506 (“Belokon”), Entes and others brought applications to recognize and enforce arbitral awards against the Republic. Specifically, a declaration was sought that the Republic had an ownership interest in the Centerra shares held by KZN. The Application was dismissed.
[31] I agree with Centerra that nothing has changed since Belokon. There has not been a finding in either the Belokon decision of this Court, the arbitration or the U.S. Chapter 11 proceedings that the assets of KZN or KGC belong to the Republic. As I already articulated in my reasons on July 28, 2022, the Creditors can only execute against the Republic. Further, the Creditors retain all their rights to execute on their judgment in other ways, such as against the sale of gold by the Republic to other countries
[32] Gebre attempts to rely on a recent default judgment obtained (without notice to Centerra) that contains a declaration that KZN is the alter ego of the Republic. It did not obtain a declaration that the KZN Centerra shares are beneficially owned by the Republic. Justice McEwen issued an addendum to his judgment making it clear that any rights that Gebre asserts in relation to that declaration must be disregarded for the purposes of the approval of the Arrangement.
[33] The Creditors are not security holders, nor do they have any legal interest in Centerra, but maintain that courts have considered third parties whose rights have been affected by an arrangement. They refer to cases such as 9171665 Canada Ltd (Re), 2015 ABQB 633, 617 A.R. 30 (plan not approved, in part, due to unfairness to secured lien noteholders), Canadian Real Estate Investment Trust (Re), 2018 ONSC 2519, 38 E.T.R. (4th) 247 (plan approved, despite an objection by SmartCentres with respect to Co-owners Agreements, the Court reiterated that courts have accommodated third party rights which may be affected by an arrangement), and Bravio Technologies Ltd. (Re), 2019 BCSC 2135 (parties asserting rights to the corporation’s securities).
[34] The creditors in this case do not have contractual, secured or shareholding rights in Centerra. As such, I find that the Creditors have no standing to oppose the Arrangement.
[35] Even where contractual counterparties had legal rights which were negatively affected by the Arrangement, courts have nonetheless approved the Arrangement. In Protiva Biotherapies Inc. v. Inex Pharmaceuticals Corp., 2007 BCCA 161, 67 B.C.L.R. (4th) 203 and Protiva Biotherapies Inc. v. Inex Pharmaceuticals Corp., 2006 BCSC 1729, 25 B.L.R. (4th) 293 the Court held that third parties cannot use their rights to veto arrangements in a manner that is disproportionate to the value of their rights.
[36] In any event, the subject shares are effectively inaccessible. KZN is the registered owner of 77,401,766 KZN Centerra shares. The majority of those shares are held in the Republic and therefore cannot be executed upon by the Sherriff in Ontario. Any shares held in Ontario (approximately 2.85M Centerra shares) are subject to a perfected lien interest pursuant to a Restated Pledge Agreement. As such the Ontario shares are beyond the reach of an unsecured creditor of the Republic.
[37] Entes has served Notices of Garnishment and seeks to garnish both the intercompany and cash payments contemplated by the Arrangement. Oddly, such garnishment payments could not be made unless the Arrangement was approved. The Creditors oppose such an approval.
[38] Garnishment is an equitable remedy which is not intended to leave the garnishee in a position of double jeopardy or having to pay twice. Moreover, Centerra should not be required to pay pursuant to the garnishment notice for the following reasons.
[39] First, the intercompany payment is not a debt owing by Centerra; it is a condition precedent to the Agreement. If the condition precedent is not met, the Republic would have no obligation to close. If Centerra makes the intercompany payment and pays the garnishment, it will have paid twice. This is the situation of double jeopardy which the Court dealt with in Wayfarer Holidays Ltd. v. Hotel Barcelo, 1993 CanLII 8571 (ON SC), 12 O.R. (3d) 208. In that case, the Court did not exercise its discretion to require a garnishment payment.
[40] Further, the intercompany payment is to be made to KGC, a subsidiary of Centerra. KGC will only become a subsidiary of KZN if the payment is made and the Arrangement is approved and completed. While the Republic has taken over the Kumtor mine, it cannot be said that Centerra exercises no further control over KGC. Centerra owned (prior to closing), 100% of KGC’s shares. As such, I reject Entes’ claims that the Republic has conducted a de facto expropriation of KGC from Centerra such that KGC no longer exists as a corporate entity.
[41] Finally, any garnishment of KGC offends the current worldwide stay of proceedings against KGC under Chapter 11 of the U.S. Bankruptcy Code. Comity for the jurisdiction of the U.S. Court with respect to the restructuring of KGC must be respected.
Orders and Costs
[42] Given all of the above, the order to approve the Plan of Arrangement made on July 28, 2022 is confirmed.
[43] The parties may provide written costs submissions within seven-days, starting with Centerra seven days from the release of these reasons. Costs submissions are limited to five pages, exclusive of any Bill of Costs. Case law references must be hyperlinked. Costs submissions are to be sent electronically to my assistant.
C. Gilmore, J.
Released: August 17, 2022
COURT FILE NO.: CV-22-00680400-00CL
DATE: 20220817
ONTARIO
SUPERIOR COURT OF JUSTICE
(COMMERCIAL LIST)
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 IN THE MATTER OF RULE 14.05(2) OF THE RULES OF CIVIL PROCEDURE
AND IN THE MATTER OF A PROPOSED ARRANGEMENT OF CENTERRA GOLD INC.
BETWEEN:
Centerra Gold Inc.
Applicant
– and –
Entes Industrial Plants Construction
Objector
Gebre LLC
REASONS FOR JUDGMENT
C. Gilmore, J.
Released: August 17, 2022