Court File and Parties
SUPERIOR COURT OF JUSTICE – ONTARIO (COMMERCIAL LIST)
RE: IN THE MATTER OF A PROPOSED ARRANGEMENT OF XPLORE INC. AND 16029167 CANADA INC.
BEFORE: Kimmel J.
COUNSEL: Rob Chadwick / Bradley Wiffen/ Erik Axell for the Applicants, Xplore Inc. and 16029167 Canada Inc.
Linc Rogers / Kevin Wu, for Stonepeak Falcon Fibre Inc.
Kevin Zych / Joshua Foster, Committee of Consenting Lenders
Meena Alnajar, UBS AG and Barclays Bank PLC
Bevan Brooksbank, for Counsel for Hughes Network Systems LLC
Zev Smith, for Telesat (IOM) Limited
HEARD: September 19, 2024
ENDORSEMENT (final order cbca Plan approval)
The Application
1Xplore Inc. and 16029167 Canada Inc. ("ArrangeCo" and, together with Xplore Inc., the "Applicants") seek a final order (the "Final Order") pursuant to sections 192(3) and (4) of the Canada Business Corporations Act, R.S.C. 1985, c. C-44 ("CBCA"), approving their proposed arrangement (the "Arrangement"). Xplore Inc. is the intermediate parent of the Xplore Group. ArrangeCo is a wholly-owned subsidiary of Xplore Inc. Each of Xplore Inc. and ArrangeCo is a CBCA corporation.
2This application is supported by an evidentiary record comprised of the following affidavits (with their appended exhibits):
a. An affidavit of Geoff Lowe, the Chief Financial Officer of Xplore Inc. and an officer and director of ArrangeCo;
b. Three affidavits of William E. Aziz, an experienced restructuring consultant and financial advisor with thirty-six (36) years of experience as a business and restructuring professional and as a director of both private and public companies. He is the President of Blue Tree Advisors Inc., a company that was retained by Xplore Inc. to provide services as the Chief Transaction Officer of the Xplore Group.
c. An affidavit of Erik Axell appending the September 18, 2024 non-appearance letter of the CBCA Director.
3Among the exhibits to the affidavits are two CBCA Valuation Opinions and a Fairness Opinion.
4Capitalized terms not otherwise defined in this endorsement shall have the meanings ascribed to them in the Applicants' factum filed in support of this motion.
5This application builds upon two prior orders of this court: the Preliminary Interim Order of this court dated June 3, 2024 (the "Preliminary Interim Order") with reasons released June 6, 2024 (see Xplore Inc. (Re), 2024 ONSC 3251, "Preliminary Order Reasons"); and the Interim Order of this court dated August 1, 2024 (the "Initial Order") with reasons dated August 19, 2024 (see Xplore Inc. (Re), 2024 ONSC 4593, "Initial Order Reasons").
6Responding records were filed by two of the Satellite Providers who sought to amend the Preliminary Interim Order and were opposed to the granting of the Initial Order.
7By the time of the fairness hearing on September 19, 2024, all opposition to the Final Order sought had been resolved. The requested Final Order is supported by the secured creditors and the equity holders of Xplore. It is no longer opposed by the Satellite Providers or any other unsecured creditor or other stakeholder. The support of the Secured Debtholders and Affected Equity Holders and the lack of any opposition to this Arrangement were important factors in the court's decision to grant the final order approving the Arrangement and the CBCA Plan in respect of Xplore Inc. and ArrangeCo.
8After considering the written and oral submissions of the parties, including from the earlier motions, the court advised the parties at the hearing on August 19, 2024 that the requested order would be granted, with one requested change which was made and a revised form of order submitted later that day. These are the court's reasons for granting that order.
Background
9Founded in 1998, the Xplore Group employs 1,085 employees and provides internet access to more than 300,000 subscribers across Canada over three technology platforms: (a) fixed wireless (the “Fixed Wireless Business”); (b) satellite (the “Satellite Business”); and (c) fibre to premises (the “Fibre Business”).
10The background to this application is described in the Interim Order Reasons, at paras. 6-18. The Arrangement and the comprehensive recapitalization and investment transaction (the "Recapitalization Transaction") to be implemented pursuant to a CBCA plan of arrangement ("CBCA Plan") are described at paragraphs 19-26 of the Interim Order Reasons.
11Following lengthy deliberations and careful consideration of the Recapitalization Transaction with their legal and financial advisors, the Board and the Independent Committee unanimously approved the Recapitalization Transaction and the CBCA Plan and authorized the submission of the CBCA Plan to the Secured Debtholders and the court for their respective approvals.
12The Arrangement was approved by the Secured Debtholders that voted on the Arrangement Resolution at the Meeting held on September 11, 2024 pursuant to the Interim Order. Secured Debtholders holding more than 95% of the outstanding principal amount of the Secured Debt voted to approve the Arrangement. No First Lien Debtholder or Second Lien Debtholder voted against the Arrangement Resolution.
The Purpose of the Arrangement
13The purpose of the Arrangement is to give effect to a Recapitalization Transaction that will significantly deleverage Xplore Inc.'s approximate $1.7 billion in principal amount of Secured Debt, and will reduce its annual cash interest costs by approximately $120 million at current interest rates. The mechanics are set out in the CBCA Plan and described in the Circular as well as in the affidavits. The Recapitalization Transaction that will be implemented through the CBCA Plan involves a series of reorganization steps to convert existing debt and equity into new equity and debt. The key elements of the CBCA Plan are summarized at paragraphs 11 to 13 of the Applicants' factum.
14The Recapitalization Transaction will also enable Xplore Inc. and its affiliates (collectively, the "Xplore Group") to access up to $600 million of new debt and equity financing through the New Money Term Loans, New Preferred Equity Issuance and New Common Equity Issuance, which will be funded by Secured Debtholders and its equity sponsor, Stonepeak. This is intended to enable the implementation of a sustainable, long-term capital structure for the Xplore Group. This will provide the liquidity and funding needed to operate and expand the Fibre Business and capitalize on government-sponsored programs in that area.
15The Recapitalization Transaction is predicated upon an Arrangement that involves a securities exchange and amalgamation of Xplore Inc., which has and will continue to operate as a going concern. This is not an asset sale or liquidation of Xplore Inc.
The Satellite Business Division
16The Recapitalization Transaction is conditional upon a solution that puts an end to certain uneconomic aspects of Xplore's Satellite Business, specifically the existing agreements with its satellite providers (the "Satellite Agreements") and the unsecured obligations of Xplore Inc. under those agreements (the "Satellite Obligations"). The Secured Debtholders that are compromising a significant amount of their Secured Debt and advancing additional funds have insisted upon this as a condition of the Recapitalization Transaction. The CBCA Plan provides that the Satellite Obligations and Satellite Agreements will be transferred to ResidualCo on the Effective Date and Xplore Inc. will be released and discharged from all monetary and non-monetary obligations under the Satellite Agreements (the "Satellite Business Division"). The ability to isolate and divide off Xplore's Satellite Business and separate it from its Fixed Wireless Business, from both a practical and financial perspective, is a unique feature of Xplore's Business.
17The only identified alternative to the CBCA Plan was for Xplore Inc. to pivot to a Companies Creditors' Arrangement Act, R.S.C. 1985, c. C-36 ("CCAA") proceeding and CCAA plan of arrangement and compromise. The ability to do this was preserved in the Interim Order, but it was considered to be a more lengthy and expensive process that carried additional business risks for the Xplore Group, and that would likely produce a less economically favourable outcome for some or all stakeholders, and no better economic outcome for any stakeholder.
18At the time the Initial Order was made, two of the three the Satellite Providers were opposed to the Interim Order and indicated that, if they were given a vote, they would vote against the CBCA Plan, or any subsequently proposed CCAA Plan, that separated out of the Satellite Obligations and the Satellite Agreements under the proposed Satellite Business Division and singled them out for different treatment than other unsecured creditors (whose contracts and obligations will continue to be honoured). They were assured by the court that they would be given the opportunity to voice their opposition and have it considered at this fairness hearing.
19During the intervening period between the Preliminary Interim Order and the fairness hearing, Xplore Inc. has been in negotiations with the Satellite Providers. It reported to the court just prior to the fairness hearing that it had reached agreements with all three of the Satellite Providers that it believes achieve the objectives of the Xplore Group and reflect the current economics of the Satellite Business. The key terms of these agreements in principle include that: (a) Xplore Inc. and the applicable Satellite Provider will enter into new definitive documentation that will govern their go-forward business relationship; (b) the applicable Satellite Agreements and Satellite Obligations will be transferred to ResidualCo in accordance with the CBCA Plan; and (c) the applicable Satellite Provider will not oppose the Arrangement or the completion of the Recapitalization Transaction.
20The achievement of this commercial resolution to the objections of the Satellite Providers is a credit to the hard work of all involved and their willingness to work towards an agreement that reflects the commercial realities of the situation while preserving the ability of Xplore Inc. to carry on business as a going concern. That outcome has required compromises by some stakeholders for the ultimate benefit of all stakeholders. This is one of the recognized advantages of an arrangement under the CBCA, in appropriate circumstances:
The practical logic that supports this narrow interpretation of section 192(3)1 is that, even if it could be said that a company is technically insolvent at the initiation of the arrangement process, if the arrangement itself has been accepted by the target group of security holders any insolvency will be cured and the broader deleterious potential impacts of that insolvency can be avoided. That logic tends to presuppose a relatively narrow process focused on the arrangement of a specific debt or debts held by specific security holders.
William C. Kaplan, K.C., Stays of Proceedings Under the Canada Business Corporations Act: A Question of Balance; 2011 ANNREVINSOLV 6 (Editor: Janis P. Sarra), at p. 4.
21Here the Arrangement is focused on the specific debts of the Secured Debtholders, however its impacts admittedly extended beyond them to the Satellite Providers because of the Satellite Business Division that is an essential component of the CBCA Plan.
Analysis
22"In order to grant final approval of a CBCA arrangement, the Court must be satisfied that: (a) there has been compliance with all statutory and court-mandated requirements; (b) the application has been put forward in good faith; and (c) the arrangement is fair and reasonable" (Concordia International Corp (Re), 2018 ONSC 4165 ("Concordia Final Order Decision"), at para. 22).
23At the time the Interim Order was granted, the court was satisfied that the first two requirements had been met. These requirements were also considered to have been satisfied by the court when the Preliminary Interim Order was granted on an ex parte basis on June 3, 2024. These requirements remain satisfied for purposes of the Final Approval Order now sought.
Compliance with Statutory and Court Mandated Requirements
24Below is a summary of the factors that the Applicants have established to satisfy the court that the statutory requirements under the CBCA for the approval of the Arrangement have been met:
a. The Arrangement constitutes an “arrangement” within the meaning of s. 192(1) (b) (d) and (f) of the CBCA. It involves, among other things: (a) the exchange of securities of a corporation (the Secured Debt of Xplore Inc.) for securities of the corporation (the Takeback Term Loans issued by Xplore Inc.) and securities of another body corporate (the New Class A Common Shares issued by Stonepeak Holdings); (b) an amalgamation of two corporations (Xplore Inc. and ArrangeCo); and (c) the division of the Satellite Business and the Fixed Wireless Business.
b. The Applicants are not “insolvent” within the meaning of s. 192(2) of the CBCA. Upon completion of the Recapitalization Transaction, the principal amount of Xplore Inc.'s secured indebtedness will be reduced by more than $1.2 billion and Xplore Inc. will have aggregate secured indebtedness of approximately $430 million. Xplore Inc. will be in a financial position, from and after the Effective Date, to obtain up to $600 million of new debt and equity financing. As a result of its significantly deleveraged capital structure, materially lower cash interest expenses, access to additional committed equity financing and updated stated capital, Xplore Inc. will be able to pay its liabilities as they become due, and the realizable value of its assets will not be less than the aggregate of its liabilities and stated capital of all classes. Accordingly, Xplore Inc. will be solvent upon completion of the Arrangement.
c. It is not practicable for the Applicants to effect a fundamental change in the nature of the Arrangement under any other provision of the CBCA, given the complex nature of the Arrangement and the contractual requirement to obtain consent of 100% of the Secured Debtholders to complete the Recapitalization Transaction.
d. The Applicants have given the CBCA Director notice of this Application.
25Nothing material has changed since the court granted the Preliminary Interim Order and Interim Order. The Applicants made some minor permitted changes to the CBCA Plan following the Interim Order, after having obtained the necessary approvals. None of these impact the applicants' compliance with statutory and court mandated requirements.
26The only other update since the Interim Order was granted that is relevant to the satisfaction of the statutory requirements is that there is a further letter from the CBCA Director dated September 18, 2024 confirming, based on having received the material in support of this final hearing on the application, "that the staff of the Director has determined that the Director does not need to appear or be heard on the application".
The Application Has Been Put Forward in Good Faith
27An application for a CBCA arrangement has been brought in good faith when there is a valid business purpose for the arrangement: see Concordia (Re), 2017 ONSC 6357 ("Concordia Preliminary Interim Order Decision") at para. 40.
28A proposed transaction serves a "valid business purpose" if it provides positive value to the corporation in order to offset the fact that rights are being altered: see BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, [2008] 3 SCR 560, at para. 145.
29In the Interim Order Reasons, the court found that this Arrangement is in furtherance of the following valid business purposes: (a) reducing the Company's outstanding indebtedness and its annual interest costs; (b) improving the Company's capital structure; and (c) putting the Company on a strong financial footing in order to execute on its business plan moving forward. The Applicants have pursued the Arrangement in good faith in furtherance of these business purposes with the intention to benefit the general body of Xplore Inc.'s stakeholders. Nothing has changed since then that would cause me to change that assessment.
30In the Interim Order Reasons, the court considered and rejected (at para. 77) the Satellite Providers assertion that the CBCA Plan and the Arrangement were being used to unfairly prejudice their commercial and contractual rights rather than for the stated business purposes.
31I am satisfied that the application for the approval of the Arrangement has been put forward in good faith and for a valid business purpose.
The Arrangement is Fair and Reasonable
32This requirement for the approval of the Arrangement was not determined in the earlier Preliminary Order Reasons or Interim Order Reasons.
33In assessing the fairness and reasonableness of an arrangement, a court must be satisfied that (a) the arrangement has a valid business purpose, and (b) the objectives of those whose legal rights are being arranged are being resolved in a fair and balanced way. See BCE, at para. 138.
34The valid business purpose of the Arrangement has already been established (above and in the court's earlier endorsements). The balancing of those objectives with those whose legal rights are being arranged and the overall fairness of the Arrangement remains to be considered.
35In BCE, the Supreme Court of Canada articulated various factors that may be considered when assessing whether a plan is fair and reasonable, in light of the need to balance the corporation's ongoing interests with those of its securityholders (which is not limited to shareholders but may also include debtholders). These factors are: (a) whether a majority of securityholders voted to approve the arrangement; (b) the proportionality of the compromise between various securityholders and their position before and after the arrangement; (c) the repute of the directors and advisors who endorse the arrangement; (d) whether the plan has been approved by an independent committee; and (e) the presence of a fairness opinion. see BCE at paras. 149-152.
The Secured Debtholders and Affected Equity Holders
36The Arrangement was presented on the basis that it was only arranging the rights of the Secured Debtholders and Affected Equity Holders, all of whom overwhelmingly are in favour of its approval. Xplore's independent committee outside directors and its advisors also support and recommend the Arrangement.
37Xplore received valuation opinions from its investment banker Perella Weinberg Partners LP ("PWP") and from FTI Consulting Canada Inc. ("FTICA"), (collectively, the "CBCA Valuations") which indicate that (a) the enterprise value of Xplore Inc. is in the range of approximately $685 million to $832 million, and (b) the outstanding obligations under the Secured Debt (which are approximately $1.82 billion as of June 30, 2024 inclusive of accrued interest) exceed the enterprise value of Xplore Inc. by approximately $1 billion or more.
38FTICA's opinion is that:
a. In terms of the fairness, if implemented the Proposed Transaction is fair to Xplore from a financial point of view.
b. In terms of the stakeholders whose rights are being arranged under the Plan:
i. the First Lien Debtholders would be in a better position, from a financial point of view, under the Proposed Transaction than if Xplore was liquidated;
ii. the Second Lien Debtholders would be in a better position, from a financial point of view, under the Proposed Transaction than if Xplore was liquidated; and
iii. the Affected Equity Holders would not be in a worse position, from a financial point of view, under the Proposed Transaction than if Xplore was liquidated.
39The terms of the Recapitalization Transaction were negotiated over many months with these key economic stakeholders, who all agree that it represents the best and only viable option for the Xplore Group in its current circumstances. If the Arrangement is not completed, the likely outcome would be for the Recapitalization Transaction to be completed in a CCAA proceeding. Implementation through a CCAA process would lead to higher costs and greater risk for Xplore Inc. and its business, and greater risk to creditors and other stakeholders (for example employees and trade creditors) that are otherwise unaffected under the CBCA Plan.
40From the perspective of these securityholders (First Lien Debtholders, Second Lien Debtholders and Affected Equity Holders), the Arrangement is procedurally and substantively fair and reasonable, having regard to the BCE criteria. This remains so despite certain unique features of this CBCA Plan that the Applicants have brought to the court's attention.
a. The First Lien Revolving Lenders and First Lien Term Lenders are being treated differently under the CBCA Plan in that they are not both receiving CVRs. Courts have previously approved plans of arrangement in the context of both CBCA and CCAA proceedings that provide different treatment to security holders within a single voting class. see Re Canwest Global Communications Corp., 2010 ONSC 4209, at paras. 4 and 5, 22 to 24; Sino-Forest Corporation (Re), 2012 ONSC 7050, at para. 66; Re Sherritt International Corporation, 2020 ONSC 5822, at paras. 6 and 39. The Applicants have satisfied me that the differential treatment for First Lien Revolving Lenders and First Lien Term Lenders under the CBCA Plan is reasonable and appropriate in the circumstances given that (a) it is the result of a resolution reached between the affected parties through arm's length and good faith negotiations that was unanimously supported by those parties voting on the Arrangement Resolution; (b) the value of the implicated CVRs is contingent in nature and does not form a significant portion of the overall value provided to First Lien Debtholders under the CBCA Plan; and (c) the resolution is beneficial to the Xplore Group as it ensures that the Company can keep in place the Extended Letters of Credit that it is required to post under various project and surety arrangements.
b. The CBCA Plan provides some additional consideration for certain Debtholders: (a) First Lien Debtholders and Second Lien Debtholders that submitted voting instructions in favour of the CBCA Plan prior to the Consent Deadline are entitled to receive the applicable Consenting Secured Debtholder Consideration under the CBCA Plan; and (b) First Lien Debtholders who backstop or fund the New Money Term Loans are entitled to Backstop Consideration and New Money Lender Consideration, as applicable. The Consenting Secured Debtholder Consideration was available to all Secured Debtholders who delivered voting instructions in favour of the CBCA Plan by the Consent Deadline. To provide certainty to Xplore Inc. and its stakeholders that the New Money Term Loans will be fully funded on the Effective Date, certain Initial Consenting First Lien Debtholders, as Backstop Lenders, will backstop the funding of the $70 million of New Money Term Loans allocated to First Lien Debtholders. All First Lien Debtholders who fund their pro rata share of the New Money Term Loans are entitled to receive New Money Lender Consideration. Early consent fees and consideration for backstopping and providing new financing are features that have been accepted by the court in other approved recapitalization transactions involving the compromise of debt. see Sino-Forest, at paras. 66-68; Ayr Wellness et al. CV-23-00709606-00CL, Endorsement of Kimmel J. dated December 22, 2023, at paras. 1(d) and 35; Concordia Final Order Decision, at paras. 6, 54 and 55. The evidence of the Applicants confirms that the additional consideration under the CBCA Plan is within the market range paid in similar recapitalization transactions completed in the United States and Canada.
The Satellite Providers
41The fairness and reasonableness of the CBCA Plan must also be considered from the perspective of the Satellite Providers. The treatment of the Satellite Providers under the CBCA Plan is explained by the Applicants as follows:
a. the Satellite Agreements and the Satellite Obligations will be transferred and assigned to a non-CBCA entity to be incorporated or designated by the Xplore Parties (as defined in the CBCA Plan, "ResidualCo");
b. ResidualCo will become solely responsible for all monetary and non-monetary obligations owing to the Satellite Providers under the Satellite Agreements; and
c. each Satellite Provider will receive a cash payment of $250,000 from Xplore Inc.
42The rights of the Satellite Providers are not technically being "arranged" under the CBCA Plan, but they are being singled out of the group of unsecured creditors for different treatment through the Satellite Business Division. This is unusual, in that CBCA plans often do not involve compromises of trade debt, although trade creditors can be impacted by stay orders (as the Satellite Providers were in this case under the Preliminary Interim Order; see also 43133541 Canada Inc (Arrangement relatif à), 2009 QCCS 6444 (Abitibi), at paras. 109-123).
43The Applicants point out that a plan of arrangement can involve a compromise for the greater good of the whole. In this respect:
[T]he court must be careful not to cater to the special needs of one particular group but must strive to be fair to all involved in the transaction depending on the circumstances that exist. The overall fairness of any arrangement must be considered as well as fairness to various individual stakeholders.
Trizec Corp., Re. [1994] A.J. No. 577 (A.B.Q.B.), at para. 36.
44Another relevant factor is the priority which a securityholder would receive in the event of liquidation. See Trizec at para. 43. In the restructuring context, "the fairness, reasonableness and equitable aspects of a plan must be assessed in the context of the hierarchy of interests recognized by insolvency legislation and jurisprudence". see Re Stelco Inc., 2006 CanLII 1773 (ON SC), at para. 15.
45The Secured Debtholders would have a deficiency claim that would be sufficient to carry a vote of unsecured creditors under a CCAA plan. The Satellite Obligations are unsecured obligations that would be overwhelmed by the secured debt in any other restructuring or insolvency scenario, leaving them with no chance of recovery.
46Most importantly, the Satellite Providers are not themselves opposed to the Arrangement any longer.
47In all of these circumstances, I am satisfied that the Arrangement does not leave them in a worse position than they would be under a CCAA plan or liquidation scenario; if anything, they are better off for receiving the cash payments provided for and the opportunity to enter into new agreements on commercial terms that are palatable to Xplore Inc. and to those who are providing it with its financing and capital to continue in business. They are being treated differently than other trade creditors, but it is for the overall benefit of the general body of stakeholders in circumstances where they are better off than they would be in any insolvency or liquidation scenario.
48Despite their initial opposition, the Satellite Providers appear to have come to this conclusion as well and were able to reach an acceptable commercial resolution with Xplore Inc. during the Stay Period.
The RVO
49The Satellite Business Division can only be accomplished with the court's assistance through an order analogous to what has become known as a "reverse vesting order" (an "RVO").
50RVO's have been used to facilitate share transactions under the CCAA and the BIA where a share transaction is considered to be necessary to achieve the desired value maximization for stakeholders (for regulatory, licencing or tax reasons), but where there are liabilities that the going forward entity is not able or willing to continue to honour and that need to be "vested out" for the transaction to proceed.
51Originally, two of the Satellite Providers were arguing against the proposed RVO structure, because they contended that the court could not approve it under the auspices of the CBCA and should not approve it because it would not result in a fair and reasonable balancing of their interests against the interests of Xplore Inc. and its other stakeholders. However, they have since changed their position and are no longer objecting to the court's approval of the Arrangement or the RVO.
52The withdrawal of their objection is significant from the perspective of the court's analysis of whether the Arrangement is fair and reasonable to them. However, the court still must be satisfied that the requested order approving the Arrangement and the required RVO can be made.
(a) Jurisdiction to Grant the RVO as Part of a CBCA Arrangement
53According to the parties, this is the first time that a court in Canada has been asked to approve an RVO in the context of a CBCA Arrangement. To do so, the court must have the jurisdiction to make the RVO in this context, and be satisfied that in the particular circumstances of this case it is appropriate to grant a final approval order that contains an RVO.
54Courts have granted RVOs in appropriate circumstances despite the fact that neither the CCAA nor the BIA contains express statutory authority for the granting of an RVO. In the CCAA context, the Court's jurisdiction to grant an RVO flows from its section 11 authority to "make any order that it considers appropriate in the circumstances." see Harte Gold (Re), 2022 ONSC 653, at para. 37, recently considered and affirmed by this court in Tacora Resources Inc. (Re), 2024 ONSC 4436 at para. 6.
55Under section 192(4) of the CBCA, the court has a similar authority to "make any interim or final order it thinks fit." As was observed in the Interim Order Reasons (at para. 62), the court's discretion under section 192(4) is broad and flexible, as it is under section 11 of the CCAA.
56As was observed by this court in Abitibi (at para.120):
In the context of a debt restructuring, Subsection 192(4) CBCA and the CCAA share similar goals, namely to provide a broad procedure aimed at facilitating the restructuring of corporations. Given the similarities in the objectives pursued by both laws, that Section of the CBCA, like the CCAA, ought to be interpreted liberally.
See also Sherritt, at para. 28.
57The court's observations in previous cases about the purposes, goals and effects of s. 192 of the CBCA can be instructive. From a principled perspective, the court should be satisfied that approving an RVO as part of a CBCA Arrangement is consistent with established purposes, goals and effects of s. 192 of the CBCA as articulated in the following authorities:
a. "Section 192 of the CBCA sets out the process for approval of complex corporate arrangements; it provides a mechanism to allow a corporation to alter individual rights to permit changes in corporate structure." 12178717 Canada Inc. v. Wilks Brothers LLC, 2020 ABCA 430 ("Calfrac"), at para 11.
b. "It 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." Concordia Preliminary Interim Order Decision , at para. 27; RGL Reservoir Management Inc. (Re), 2017 ONSC 7302, at para. 26.
c. The CBCA Director likewise "endorses the position that the arrangement provisions of the [CBCA] are intended to be facilitative and should not be construed narrowly." Industry Canada Policy Statement Concerning Arrangements under Section 192 of the CBCA at section 1.02.
58In the CCAA and BIA context, RVOs have been used in recent years to implement going concern restructuring transactions in which it has been determined to be necessary and appropriate to "vest out" unwanted assets or liabilities of a debtor company so that the debtor company can then itself retain the business and assets to be used in the restructured business for the benefit of its stakeholders. Plasco Energy (Re), CV-15-10869-00CL, Endorsement of Justice Wilton-Siegel dated July 17, 2015.
59Although RVO's remain the exception rather than the norm, and have typically been granted in cases where there is ultimately no opposition, there are many examples of cases in which RVOs have been used to avoid the expense, delay and uncertainty of an asset sale where there are valuable assets, but some that might be difficult or impossible to transfer to a purchaser (such as licences and tax attributes) and where there are unwanted liabilities (rendering a traditional share sale undesirable for a purchaser). see Harte Gold at para. 71; Tacora, at para. 7; Just Energy Group Inc.(Re), 2022 ONSC 6354 at paras. 34, 40 and 41.
60The difficulty in transferring licences, the potential time and delay to obtain the necessary government approvals, and the desire to avoid disruption to Xplore Inc.'s business and operations and preserve tax attributes are all present in this case. These attributes were factored into the decisions of the Company, the independent committee of its Board and ultimately the significant economic stakeholders to proceed with the Recapitalization Transaction under the CBCA structured on the basis of a securities exchange and amalgamation. However, the remaining critical piece of the Recapitalization Transaction, the Satellite Business Division, is dependent upon the RVO structure that requires court approval and authorization.
61The similar wording to the analogous statutory provision under s. 11 of the CCAA and s. 192 of the CBCA and the broad and purposive approach that the court has taken to interpreting both statutes support the conclusion that this court has the jurisdiction to grant an RVO to facilitate a CBCA arrangement in the appropriate circumstances. That leads to the next question, of whether the circumstances of this case are appropriate.
(b) The Requirements for Granting an RVO
62In Harte Gold, Penny J. held (at para. 38) that scrutiny of a proposed reverse vesting transaction may be informed by certain delineated enquiries:
a. Why is the RVO necessary in this case?
b. Does the RVO structure produce an economic result at least as favourable as any other viable alternative?
c. Is any stakeholder worse off under the RVO structure than they would have been under any other viable alternative? and
d. Does the consideration being paid for the debtor’s business reflect the importance and value of the licences and permits (or other intangible assets) being preserved under the RVO structure?
63These enquires can inform the scrutiny of an RVO structure in the context of a CBCA Plan as well. In this case, the answers to the questions of necessity, the economics of this as opposed to a CCAA plan or liquidation scenario and the preservation of the value of the licences and tax attributes for the continuing business going forward (as summarized in the Applicants' factum at paragraphs 51-56) support the approval of the RVO.
64The Applicants contend that the completion of the Recapitalization Transaction is necessary for the continued existence of the Xplore Group and the continued existence is in the best interests of Xplore and its broad range of stakeholders (secured and unsecured creditors, suppliers, employees, customers and the like). Xplore Inc. has significant liquidity challenges that are constraining its ability to operate the business and capitalize on growth opportunities. The current situation is not sustainable and Xplore Inc. needs to complete the Recapitalization Transaction to comprehensively address its capital structure and funding needs.
65The Consenting Lenders are not prepared to convert more than 80% of the Secured Debt into equity, and the Consenting Lenders and Stonepeak are not prepared to commit significant new debt and equity financing, without addressing the uneconomic Satellite Agreements that would impair the liquidity and profitability of the recapitalized Company going forward. The Secured Debtholders and Stonepeak require the certainty of an RVO and have insisted upon it as a condition of the Recapitalization Transaction.
66The Applicants acknowledge that the Recapitalization Transaction, including the RVO, could have been pursued under either the CCAA or the CBCA. They have selected the CBCA as the more efficient, less expensive and less risky approach. It facilitates the completion of the Recapitalization Transaction in an efficient and cost-effective manner with minimal disruption to the Xplore Group's business operations and its customers, employees and other stakeholders.
67There is a premium placed on the stability of the ongoing operations of Xplore Inc. given the highly competitive market that it operates in. The Secured Debtholders have a deficiency claim that would be sufficient to carry a vote of unsecured creditors under a CCAA plan, but a CCAA process would lead to higher process and funding costs, potential disruption to business operations, and worse outcomes for the Satellite Providers and likely to many other unsecured creditors and stakeholders that are otherwise unaffected by the Arrangement. Without the support of its Secured Debtholders, this CBCA Plan would not have been possible; but with their support, it makes sense that Xplore Inc. would take advantage of the benefits of restructuring under the CBCA if it can satisfy the necessary requirements.
68In the circumstances of this case, where: (i) the Recapitalization Transaction has been demonstrated to be in the best interests of Xplore Inc. and its general body of stakeholders, and (ii) a higher value maximizing version of the same Recapitalization Transaction can be achieved under the CBCA than under the CCAA, and iii) there is no opposition to the proposed CBCA Plan and the Arrangement, I have determined that this is an appropriate case in which to use the court's broad jurisdiction and discretion to approve the RVO that is a necessary component of the Restructuring Transaction.
69Having said that, the court remains cognizant that the RVO structure is a unique blend of a share and asset deal in which the participating parties are privileged, by way of court order, to have the best of both worlds. It remains an extraordinary remedy, despite its extension here into the context of what is now an unopposed restructuring under the CBCA Plan. Each circumstance in which an RVO is approved is in the discretion of the court and dependent upon the particular circumstances of that case. This is a unique situation that is not intended to create a broad precedent for the expansion of the use of RVOs in other circumstances.
Releases and Waiver Provisions of the CBCA Plan
70The CBCA Plan contains third party Releases (and a corresponding injunction against the pursuit of released claims).
71The test for third-party releases in CCAA proceedings was recently summarized in Tacora, at para. 18 citing Lydian International Limited (Re), 2020 ONSC 4006, at para. 54:
The Court must ask: (i) whether the parties being released were necessary and essential to the restructuring of the debtor; (ii) whether the claims to be released are rationally connected to the purpose of the restructuring and necessary for it; (iii) whether the restructuring could succeed without the releases; (iv) whether the parties being released contributed to the restructuring; and (v) whether the releases benefit the debtors as well as the creditors generally.
72Following the same rationale, this court has exercised its discretion pursuant to section 192(4) of the CBCA to approve CBCA plans that include third party releases: see Concordia Final Order Decision, at para. 38 and 52; Ayr Wellness, at para. 48(c); RGL Reservoir Management Inc. (Re), 2017 ONSC 7496 at paras. 51-54.
73The Releases cover Xplore, Stonepeak and the Secured Debtholders and their directors, officers and affiliates. The Released Parties have been intimately involved in and contributed to the restructuring efforts, which have been hard fought and the product of intense negotiations. Further particulars of the justification for the Releases in this case are set out in paragraph 68 of the Applicants' factum. Notably, albeit not determinative, there is no opposition to the Releases.
74As in Tacora, this is one of those exceptional cases in which releases provide the necessary certainty to solidify a restructuring transaction that allows these parties, many of whom will be involved in the continuing business of the Xplore Group going forward, to emerge with a clean slate: see Tacora citing Lydian, at paras. 23 and 24. The Releases contain appropriate carve outs for willful misconduct and do not release obligations under the CBCA Plan itself.
75The CBCA Plan also contains a Waiver Provision. The purpose of the Waiver Provision is to prevent a collateral attack on the CBCA Plan that would undermine the purpose of the Arrangement through the exercise of rights or remedies relating to matters that are comprehensively addressed under the CBCA Plan. It prevents a creditor from relying on the CBCA Plan and the CBCA process as an event of default that could unravel everything that has been negotiated and approved by the court. CBCA plans that include waiver provisions have been approved in other cases: see, for example, Calfrac, at para. 40; Concordia Final Order Decision, at paras. 40, 41 and 52.
Final Approval Order
76The Final Approval Order dated September 19, 2023 may issue in the form signed by me today.
Kimmel J.
Date: September 24, 2024
Footnotes
- The narrow interpretation of s. 192(3) referred to is that: so long as one of the applicant corporations to the arrangement is solvent and so long as the corporate entity that emerges from the arrangement is solvent, the provisions of section 192(3) do not prevent an arrangement from being proposed in respect to a corporation that is insolvent at the initiation of the process.