In Re Lightstream Resources Ltd, 2016 ABQB 665 (Lightstream), the Court of Queen’s Bench of Alberta (Court) confirmed that it had jurisdiction to remedy oppressive conduct while a business is restructuring under the Companies’ Creditors Arrangement Act (CCAA). The decision also provides insight as to when a court might exercise its equitable jurisdiction to remedy oppressive conduct in a CCAA proceeding.
Lightstream arose when the two largest unsecured noteholders of Lightstream Resources Ltd. (Lightstream), Apollo Global Management LP (Apollo) and GSO Capital Partners (GSO), completed a transaction (the Transaction) with Lightstream, exchanging their unsecured notes for secured notes. The Transaction excluded two smaller unsecured noteholders, Mudrick Capital Management (Mudrick) and FrontFour Capital Corp. (FrontFour and with Mudrick, together, the Applicants), who argued that their exclusion from the Transaction was oppressive. The Applicants had previously indicated to Lightstream of a desire to participate in a note exchange if one was undertaken. Lightstream reciprocally expressed interest in the Applicants’ participation if a note exchange went ahead. Ultimately, however, The Transaction only included Apollo and GSO.
The Alberta Court of Queen’s Bench confirmed that it had jurisdiction to remedy oppression by the debtor in a CCAA proceeding. In this instance, the Court deferred to the business judgment of Lightstream’s management and found the requested remedy was not appropriate in the circumstances. In the subsequent leave to appeal application, the Alberta Court of Appeal denied leave (2016 ABCA 401), finding that the Applicants’ position was bound to fail. Both decisions illustrate that a Court has wide jurisdiction to award remedies in CCAA proceedings, and that the CCAA exists to permit arrangements with creditors as quickly as possible, which affords debtors flexibility to arrange their affairs.
Lightstream is engaged in the upstream energy industry and ran into financial difficulty during the recent commodity price downturn. Apollo and GSO together held $465 million of Lightstream’s $800 Million in unsecured notes, while FrontFour and Mudrick held $32.2 million and $31.75 million, respectively.
Through 2014 and early 2015, the Applicants, GSO and Apollo all approached Lightstream about restructuring the unsecured notes. In early 2015, the Applicants discussed the possibility of a note exchange transaction with Lightstream. They were told that Lightstream had capacity to carry additional secured debt, but because it had sufficient liquidity and did not need to restructure its balance sheet, a note exchange was not being considered. Lightstream subsequently considered a number of alternative debt structures, including a note exchange. Lightstream management did consider the possibility that an exchange transaction might need to be tendered to all the unsecured noteholders as a matter of fairness.
In May 2015, Lightstream retained the Royal Bank of Canada (RBC), who advised that Lightstream would need additional liquidity in 2016 to address a liquidity shortfall in 2017. Apollo and GSO provided Lightstream with term sheets for a note exchange, on the condition that the note exchange was for Apollo and GSO only, and not for other noteholders. FrontFour became aware on May 19th that Lightstream was in talks with other creditors. Lightstream subsequently reassured FrontFour and Mudrick that: (i) it had been receiving more reasonable financing offers; (ii) no debt exchange was currently contemplated; and (iii) if an exchange was contemplated, the possibility would be offered to all holders of unsecured notes. Lightstream, Apollo and GSO subsequently exchanged $465 million of unsecured notes for $395 million of secured, second lien notes, and Lightstream issued an additional $200 million of secured notes. The Transaction was completed on July 2.
The Queen’s Bench Application
The Applicants both filed actions shortly after the Transaction closed claiming oppression by Lightstream. As holder of securities of the corporation (i.e. unsecured notes), the Applicants fell within the statutory provisions to claim oppression. They argued that: (i) it was improper to complete the Transaction with GSO and Apollo on an exclusive basis; (ii) Lightstream management had previously indicated that all unsecured noteholders would be offered the opportunity to participate in an exchange transaction; and (iii) the Transaction was a breach of the note indenture. They sought a remedy compelling Lightstream to allow them to participate in a debt exchange transaction on the same terms as Apollo and GSO. Such a remedy would place the Applicants in a better position as secured creditors should a restructuring fail.
As the Applicant’s claims were heard near the end of the Lightstream CCAA process, the application proceeded on a summary basis, because the Court did not “have the luxury of time for extended reflection”. Proceeding on a “summary basis” is a reference to the test for summary judgment. The summary judgment application follows several principles, including if there is a “reasonable prospect that the claim will succeed” and “whether a fair and just disposition can be made on the existing record.” In addition, when the dispute turns primarily on issues of law, summary judgment is often appropriate. As such, the court took the best view of the Applicants’ cases, relying primarily on their evidence. Moreover, the matter had to be dealt with prior to a vote on any compromise or exchange, to ensure that the Applicants were categorized properly for the purposes of voting on a plan put to the creditors.
The Court framed the issues as follows:
- Did the Court have jurisdiction in CCAA proceedings to recognize the Applicants’ claims as secured claims after granting of an initial order under the CCAA, and to make an order requiring Lightstream to issue additional secured notes to remedy allegedly oppressive conduct.
- If the answer to the first issue is yes, should the Court exercise its discretion to do so?
The Court acknowledged that the CCAA is a broadly worded, remedial piece of legislation that confers the authority upon a court to make orders further to the statute’s purpose. Generally, the court has broad discretion to make orders it considers appropriate in the circumstances. Appropriateness under the CCAA is to be assessed by inquiring whether the order sought advances the policy objectives underlying the CCAA. The question is whether the order will usefully further efforts to achieve the remedial purpose of the CCAA, but the order must address the business at hand (i.e. the compromise or arrangement).
The CCAA allows the Court to import remedies from other statutory schemes. The Court referred to decisions which held that the corporate legislation such as the Canada Business Corporations Act (CBCA) and (Alberta) Business Corporations Act (ABCA) – which codify the oppression remedy – are pieces of legislation that “make provision for the sanction of compromises or arrangement between a company and its shareholders or any class of them” within the meaning of the CCAA. Therefore, a judge has the power to order remedies under the ABCA in a CCAA proceeding.
Accordingly, the Court confirmed that the oppression remedy is a tool available under the CCAA, but that it should only be utilized in appropriate circumstances. “Appropriate circumstances” will be those that accord with and further the purpose and objectives of the CCAA. The Court then instituted a two-part test to deal with the application: (1) was the conduct oppressive; and (2) if so, what is the appropriate remedy in the context of the CCAA?
Was the Transaction Oppressive?
Because they held identical notes to Apollo and GSO, received assurances from Lightstream’s management that the they would have an opportunity to participate in a note exchange, the Applicants argued that they had a reasonable expectation that they would be included in the Transaction. As a result, the failure to include them was oppressive.
In Mennillo v Intramodal Inc, 2016 SCC 51, the Supreme Court recently affirmed the two-part framework to be applied to oppression claims. The two questions are:
(i) Does the evidence support the reasonable expectation asserted by the claimant/applicant?
(ii) If so, does the evidence establish that the reasonably held expectation was violated by conduct that falls within the terms “oppression”, “unfair prejudice” or “unfair disregard” of a relevant interest of the claimant/applicant?
Shefsky v California Gold Mining Inc, 2016 ABCA 103 recently outlined the three governing principles which a court is subject to when exercising its broad equitable jurisdiction under the oppression remedy, namely:
- Not every expectation, even if reasonably held, will give rise to a remedy because there must be some wrongful conduct, causation and compensable injury in the claim for oppression.
- Not every interest is protected by the statutory oppression remedy. Personal interests, while potentially connected to a particular transaction, cannot be directly or indirectly protected. It is only a person’s interest as a shareholder, officer or director that are protected.
- The oppression remedy incorporates the business judgment rule, and courts must not second-guess the business judgment of directors. Rather, the court must decide whether the directors made decisions which were reasonable in the circumstances. Provided that directors acted honestly and reasonably, and made a decision in a range of reasonableness, the court must not substitute its own opinion for that of the Board.
(i) Reasonable Expectations
The Court applied the set of factors from BCE v 1976 Debentureholders, 2008 SCC 69 to determine whether a reasonable expectation exists: general commercial practice; the nature of the corporation; the relationship between the parties; past practice; steps the claimant could have taken to protect himself; any representations and agreements; and the fair resolution of conflicts between corporate stakeholders. Applying these factors, the Court made the following notable observations/comments:
- The Applicants knew that a selective exchange transaction was possible;
- The Applicants were sophisticated investment firms in the business of buying and trading securities on the secondary market and, if nervous, could have sold their position;
- The Applicants and Lightstream had some familiarity with each other, as the Applicants held a sizeable enough position of unsecured notes that they had access to Lightstream’s CFO and executives on a regular basis;
- Professional investors who work daily in a market rife with misinformation ought to beware;
- Lightstream selectively, and not on a pro-rata basis, repurchased $100 million of notes in 2014; and
- The Applicants chose not to sell their notes because of private and public assurances.
The Court noted that, on the evidence, the Applicants were repeatedly told that no exchange transaction was contemplated, but that if there was one, all unsecured noteholders would be able to participate. On the other hand, the Court also noted that the Applicants were also aware that a selective exchange transaction was possible. Ultimately, the Court found that, without hearing additional evidence from the relevant witnesses, it could not conclude that the Applicants were bound to fail on the issue of whether they held a reasonable expectation of an ability to participate in the Transaction. As such, the Court went on to consider whether the Transaction could be considered oppressive, assuming the Applications could demonstrate a reasonably held expectation.
(ii) Oppression, Unfair Prejudice or Unfair Disregard
If an expectation is reasonably held, the applicant/claimant must still establish that wrongful conduct falling within the meaning of the terms in the statute has occurred. When situations of conflict occur, it falls to the management to resolve the dispute in accordance with their fiduciary duty to act in the best interests of the company, viewed as a good corporate citizen.
The Court deferred to the board of directors’ business judgment and would not second-guess the directors on the issue of whether the Transaction was necessary or in the best interests of Lightstream. Lightstream’s financial advisors concluded that the Transaction would provide the company with liquidity until 2017. According to the minutes from the board meeting, “management confirmed that there was no requirement under either the unsecured note indenture or applicable U.S. securities laws to make the same offer to all unsecured note holders.”
Notwithstanding the above, the Court acknowledged that there was no evidence that the board was informed that the holders of a significant amount of unsecured notes (i.e. the Applicants) had been repeatedly told by Lightstream management that they would be included in the Transaction. If these assurances were made, the board should have been informed and may have or maybe should have made a different decision. As such, the Court also concluded on this issue that the Applicants were not bound to fail at trial, leaving open the question of an appropriate remedy.
The Court confirmed that a finding of oppression may give rise to equitable remedies aimed at rectifying oppression and putting the oppressed back in the position they would have been had the behaviour not occurred. Apollo and GSO argued that requiring Lightstream to issue additional securities and incur further debt would be an extraordinary, inappropriate remedy that was contrary to the Court’s function in supervising CCAA proceedings. This argument was accepted by the Court, which concluded that the appropriate remedy was damages. A damages award was adequate to compensate the Applicants for their losses, as investments have no intrinsic value beyond their financial return.
The Court importantly found that granting the remedy sought by the Applicants would be contrary to the scheme and object of the CCAA. Lightstream’s insolvency would be an inappropriate reason to grant an equitable remedy in favour of two creditors when it detrimentally affected other creditors and the corporation. The Court agreed with the Ontario Court of Appeal in Barnabe v Touhey that imposing what may be a fair remedy as between the parties to the action should not be imposed where that remedy would have the result of being unfair to the detriment of all other creditors of a bankrupt. As the CCAA is remedial legislation, the Court held that it would be contrary to its purposes to grant an equitable remedy which would adversely affect other creditors.
ABCA Recognizes the Nature of “Real-Time Litigation” under the CCAA and Dismisses the Applicants’ “Hopeless” Case
In his leave to appeal decision, Justice Wakeling agreed with Justice Macleod’s assessment that the Applicants’ position was without merit and bound to fail. He characterized these proceedings as “real-time litigation” and commented on the degree to which the Court relies on counsel when it is asked to make an important decision in a matter of hours. While he applied the general approach for granting leave to appeal applications, he confirmed that in exercising their gatekeeper role in the judicial system, courts will only sparingly grant leave in CCAA matters.
To decide whether to grant leave to appeal, a court of appeal will ask if there are “serious and arguable grounds that are of real and significant interest to the parties.” First, the question must be of sufficient importance to persons interested in the proper and efficient administration of a piece of legislation (in Lightstream, the CCAA). The answer to the question posed by the applicant must be important to the resolution of the appeal and determine a significant issue in the proceeding. The likelihood of an appellant’s success must also be high enough to justify a second hearing. If the answer is obvious, the appeal is considered frivolous. The court will also consider, particularly in CCAA proceedings, whether the time absorbed by an appeal will unduly hinder the process of CCAA proceedings.
Justice Wakeling agreed that the Applicants’ prospects of success were close to zero and the appeal was bound to fail. He agreed that ordering Lightstream to enter into the requested exchange would be manifestly unfair to Apollo and GSO. With the lion’s share of Lightstream’s unsecured notes, they were in a position to provide Lightstream with much needed liquidity and capital in exchange for an upgrade in their security status. Their ability to extract this on an exclusive basis was evidence of the strength of their bargaining position.
The Court of Appeal agreed that this was a decision for Lightstream’s management, recognizing that its leaders have access to the relevant data and skill set needed to make decisions in the corporation’s best interests. It is generally inappropriate for the Court to force Lightstream to assume debt against its wishes. That reason was enough to dismiss the Appeal. However, Justice Wakeling was also cognizant of the fact that proposed arrangements with Lightstream’s creditors were to be presented the next day and would need to be concluded by December 31, 2016, or a secured creditor could take other steps to protect their position. As such, allowing the appeal would hinder the progress of the CCAA proceedings.
Conclusions and Implications
The Lightstream decision confirms that Canadian courts have the jurisdiction under the CCAA to both: (i) incorporate and apply the oppression remedy; and (ii) where appropriate, when oppressive conduct has occurred, an order requiring a corporation to issue additional securities can be made. However, such jurisdiction is limited and defined by the scheme and purpose of the CCAA. Lightstream suggests that this jurisdiction will be sparingly exercised, and courts will decline to do so where ordering such a remedy would result in creditors manoeuvering for a better position. We expect that a successful oppression claim brought in the context of CCAA proceedings will, at best, result in a monetary damages award, which may very well be worthless in many circumstances.
Further, appeals from decisions of judges supervising CCAA proceedings are only to be sparingly granted. Leave to appeal is unlikely to be granted where there is a critical timeline working towards an arrangement with creditors. Appeals may unduly hinder the progress of CCAA proceedings and the statute’s purpose. The outcome of the Lightstream decisions affirm the underlying purpose of the CCAA – to allow for the successful restructuring of a debtor company’s obligations in as short a time as reasonably possible.