The highly publicized announcement by Nortel Networks Corporation (together with its subsidiaries and affiliates, “Nortel”) of its intention to sell certain of its businesses has provided an opportunity for the Ontario Superior Court of Justice to settle the state of the law in Ontario (and, hopefully, across Canada) on the sale of all or substantially all of an entity’s assets within a Companies’ Creditors Arrangement Act (“CCAA”) proceedings.
This issue has become increasingly important as conducting a going concern sales process within a CCAA proceeding has over the past several years become increasingly common. In certain circumstances, including where businesses are highly complex and knowledge intensive or there is extensive risk of successor liability, other traditional types of Canadian insolvency proceedings, such as receiverships or bankruptcies, are not preferable.
In early January, Nortel Networks Corporation and several of its Canadian, American and European subsidiaries commenced major insolvency proceedings in three different jurisdictions, constituting one of the most highly complex cross-border proceedings to date. In June 2009, Nortel announced that it had entered into a stalking horse sale agreement for one its core businesses and that it intended to pursue sales of its other businesses.
On June 29, 2009, the Canadian companies sought approval to enter into the stalking horse sale agreement with Nokia Siemens Networks and conduct an auction process for the business from the Ontario Superior Court of Justice (the “Court”). The Court approved the process and, in doing so, followed well-established law that the CCAA should be given a broad and liberal interpretation including for the preservation of the going concern for the benefit of all stakeholders. Further, the Court accepted Nortel’s submission that, by extension, such preservation may take place through a sale of the business. In doing so, the Court indicated that the continuation of a business under the debtor’s stewardship should not be the deciding factor in determining the appropriateness of this use of the CCAA.
At the motion before the Court, we argued, on behalf of Nortel, that the Court should consider a number of factors in determining whether a sale under the CCAA, in absence of a plan, should be approved:
(a) is a sale transaction warranted at this time?
(b) will the sale benefit the whole “economic community”?
(c) do any of the debtors’ creditors have a bona fide reason to object to a sale of the business?
(d) is there a better viable alternative?
The Court accepted these submissions and went on to consider the circumstances specific to Nortel. In doing so, the Court observed the following:
(a) Nortel has been working diligently for many months on a plan to reorganize its business;
(b) in the exercise of its business judgment, Nortel has concluded that it cannot continue to operate the business successfully within the CCAA framework;
(c) unless a sale is undertaken at this time, the long-term viability of the business will be in jeopardy;
(d) the sale agreement continues the business as a going concern, will save at least 2,500 jobs and constitutes the best and most valuable proposal for the business;
(e) the auction process will serve to ensure Nortel receives the highest possible value for the business;
(f) the sale of the business at this time is in the best interests of Nortel and its stakeholders; and
(g) the value of the business is likely to decline over time.
Since approval of the sale process by the Court, Nortel went on to conduct a successful auction of its business and, on July 28, 2009, the Court (along with the United States Bankruptcy Court for the District of Delaware) approved a sale transaction from which Nortel was able to generate proceeds of US$1.13 billion, well in excess of the Nokia Siemens Networks US$650 million initial bid.
The guidance provided by the Court and the framework presented therein should be welcomed both for its clarification of the state of the law in Canada and for the flexibility that is provided to a CCAA applicant in attempting to generate maximum value for its various stakeholders.