From the collapse of commodity prices starting in 2014, to the after-effects of the Supreme Court of Canada decision in Redwater, to the ongoing impact of the COVID-19 pandemic and the associated global reduction in oil demand, to the continuing challenges associated with access-to-market constraints, the oil and gas industry in Western Canada is facing unprecedented challenges and uncertainty. As a result of this uncertainty, industry participants are adopting measures designed simply for survival during these challenging times. Staffing reductions, asset sales and other forms of voluntary restructuring have become commonplace. In more dire circumstances, insolvent businesses are being restructured or liquidated in court supervised proceedings.
Despite this bad news, there is a silver lining for the industry in that opportunities now exist for consolidation of oil and gas assets among industry participants by way of distressed investing and M&A involving oil and gas businesses that are facing economic restructuring. Canadian corporate and insolvency laws recognize the shifting dynamic associated with insolvent companies and provide tools to facilitate transactions with insolvent counterparties.
Under the Canada Business Corporations Act and equivalent provincial corporations legislation, insolvent companies may propose an arrangement to holders of their financial debts which, if accepted by the requisite majority of affected creditors (and, in some instances, the shareholders) and approved by the court, will be binding on all affected holders of those debts. The scope of transactions that can be proposed to financial creditors in a corporate plan of arrangement is broad and includes a straight reduction of the affected financial debt, an exchange of affected debt for new debt, equity or other securities, or a combination thereof. It is also possible in a corporate plan of arrangement to provide for new equity or debt financing. Effectively any investing or M&A transaction can be accomplished through this process.
Canadian insolvency laws also allow for debtor companies to propose a plan of compromise or arrangement to creditors of the debtor company. The principal piece of Canadian insolvency legislation under which this can be done is the Companies’ Creditors Arrangement Act (the substantive equivalent to Chapter 11 in the US).
The powers of a debtor company and of the supervising court are materially broader under the CCAA than under Canadian corporations legislation. For example, proceedings under the CCAA include a broad stay of enforcement and other rights against the debtor company, permit the incurrence of priority interim (DIP) financing, allow for the compromise of all nature of debts (financial, trade, etc.), and include a number of restructuring powers such as the ability to disclaim (reject) unwanted contracts.
The CCAA, like corporations legislation, contemplates the presentation of a plan of compromise or arrangement to the creditors of a debtor company. As with plans under corporations legislation, under the CCAA, effectively any transaction, or combination of transactions, may be proposed, including debt for equity swaps, debt reduction, issuance of new equity, etc. If the plan is accepted by the requisite majorities of affected creditors (shareholder approval is invariably dispensed with) and approved by the supervising court, the CCAA plan is binding on the debtor and all of its affected creditors.
The presentation of a plan is not, however, the only means of restructuring a debtor company in CCAA proceedings. Under the CCAA, a debtor company may sell its property through a procedure similar to that contemplated in section 363 of Chapter 11 of the US Bankruptcy Code. Such a sale requires approval of only the CCAA court (not creditors or shareholders), and the CCAA sale procedures allow for both stalking horse agreements and credit bid transactions. While these types of transactions provide little flexibility to a buyer in negotiating the terms and conditions that form part of the sale, acquisitions can often be made at a discount to “market” prices for similar assets and will come with the benefit of certain associated liabilities having been expunged as part of the court supervised restructuring process.
These mechanisms (specifically corporate plans of arrangement, CCAA plans, DIP financing, and CCAA sales) represent extremely useful tools both for debtor companies looking to restructure or facilitate timely sales of their assets and for investors and acquirors targeting distressed Canadian companies or their assets.