LEXPERT MAGAZINE
|
OCTOBER 2017 33
ESSAR STEEL ALGOMA INC.
ET AL (RE), 2017
DECISION DATE: MARCH 6, 2017
In an effort to address a 2013 liquidity crisis,
Essar Steel Algoma Inc. (Algoma) entered
into a transaction in which it sold its com-
mercial port assets and leased its port lands
to Port of Algoma Inc. (Portco).
rough a chain of subsidiaries, Algoma
and Portco are both wholly owned by Essar
Global Fund Limited (EGFL).
e Port Transaction was carried out un-
der a Master Purchase and Sale Agreement
(the MPSA) whereby Portco agreed to pay
Algoma $171.5 million for conveyance of its
port assets and as prepaid rent for the lease
of the port lands. Under the MPSA, Algoma
and Portco entered the following agreements
to effect the transaction: (a) a lease of the port
lands from Algoma to Portco for 50 years; (b)
the Cargo Handling Agreement, a take-or-
pay contract under which Portco agreed to
provide cargo handling services to Algoma
for an initial term of 20 years and Algoma
committed to pay for a minimum volume of
cargo at the Port each year ($36 million per
annum); and (c) the Shared Services Agree-
ment, under which Algoma agreed to pro-
vide all the services and employees necessary
for Portco to fulfill its obligations under the
Cargo Handling Agreement in return for a
payment of $11 million annually. e Cargo
Handling Agreement contained a change-of-
control provision requiring Portco's consent
to a change of control of Algoma.
e $171.5 million payable by Portco to
Algoma under the MPSA was primarily
funded by a $150-million term loan by GIP
Primus, LP and Brightwood Loan Services
LLC (collectively, GIP) to Portco. e term
loan, secured by all of Portco's assets, was
structured so that Portco's revenue under
the Cargo Handling Agreement, less its pay-
ments to Algoma under the shared services
agreement, would provide Portco with a con-
sistent stream of revenue to repay GIP.
e structure of the Port Transaction was
largely driven by the stipulations of GIP,
which was not prepared to lend directly to
Algoma given its recent insolvencies. GIP
would only lend to an entity with sufficient
assets that were separate and distinct from
Algoma, namely Portco.
In 2015, Algoma was granted protection
from its creditors under the Companies'
Creditors Arrangement Act. In 2016, Algo-
ma's monitor was authorized to commence
an oppression proceeding against EGFL,
Portco and other related entities under sec-
tion 241 of the Canada Business Corpora-
tions Act in relation to the Port Transaction.
e monitor sought to set this aside, alleging
that it was unfairly prejudicial to and unfairly
disregarded the interest of Algoma's trade
creditors, employees, pensioners and retirees.
GIP was granted standing as a party, as the
relief sought by the monitor threatened GIP's
security in its $150-million loan to Portco.
At the outset of the trial, the defendants
and GIP moved to strike the claim on the
basis that: (i) the monitor, an officer of the
court, should not be permitted to advance
the claim; and (ii) the action was properly
a derivative action, which cannot be com-
menced without leave.
Ontario Superior Court Justice Frank
Newbould dismissed the motion, holding
that: (i) a CCAA monitor, on the same ba-
sis as a trustee in bankruptcy, can be granted
complainant status to advance an oppression
claim; and (ii) this was not a derivative ac-
tion, as the relief sought by the monitor was
not solely for the benefit of the corporation.
On the allegations of oppression, Justice
Newbould held that the expectations relied
upon can be established by direct evidence or
by reasonable inferences drawn from circum-
stantial evidence, finding that the reasonable
expectations of Algoma's trade creditors,
etc., were that "Algoma would not deal with
a critical asset like the Port in such a way as
to lose long-term control over such a strategic
asset to a related party on terms that permit-
ted the related party to veto and control Al-
goma's ability to do significant transactions
or restructure and which gave unwarranted
value to the third party."
He also found that the Port Transaction
itself, and the change of control provision in
the Cargo Handling Agreement in particu-
lar, violated these reasonable expectations.
Justice Newbould refused to grant the pri-
mary relief — a transfer of Portco's shares to
Algoma — sought by the monitor because
doing so would have compromised GIP's se-
curity interest. He ordered that the lease, the
Cargo Handling Agreement, and the Shared
Services Agreement should remain in force
until GIP's term loan had matured and been
paid in full, at which time Algoma can termi-
nate the material contracts with Portco and
regain control and ownership of the Port.
e trial decision appeal was heard in Au-
gust 2017 and is currently under reserve.
Clion Prophet, Nicholas Klug, Michael
Watson, Marco Romeo, Delna Contractor
and Brent Arnold of Gowling WLG acted
for the monitor.
Patricia Jackson, Andrew Gray, Jeremy
Opolsky, Alexandra Shelley and Davida
Shiff of Torys LLP acted for Essar Global
Fund Limited, Essar Ports Algoma Holdings
Inc., Algoma Port Holding Company Inc.,
and Port Of Algoma Inc.
Peter Griffin, Monique Jilesen and Mat-
thew Lerner of Lenczner Slaght LLP rep-
resented GIP Primus LP and Brightwood
Loan Services LLC.
Eliot Kolers and Patrick Corney of Stike-
man Elliott LLP acted for Essar Steel Al-
goma Inc.
John MacDonald and Alex Cobb of Os-
ler, Hoskin & Harcourt LLP represented
Deutsche Bank AG.
Joseph Latham and David Conklin of
Goodmans LLP acted for the Ad Hoc
Committee of Essar Algoma Noteholders.
Karen Ensslen of Ursel Phillips Fellows
Hopkinson LLP represented the retirees.
Robert Centa of Paliare Roland Rosen-
berg Rothstein LLP acted for USW and its
Local 2724.
Alexandra Teodorescu of Blaney McMur-
try LLP represented USW Local 2251.
A LOOK AT AN ONTARIO SUPERIOR COURT DECISION IN RELATION TO ALGOMA'S BANKRUPTCY PROCEEDINGS,
WHICH ADDRESSED IMPORTANT ISSUES CONCERNING THE ROLE OF A CCAA MONITOR, THE SCOPE OF A DERIVATIVE
ACTION, AND THE LEGAL TEST FOR AN OPPRESSION CLAIM
BIG SUITS
| RECENT LITIGATION OF IMPORTANCE |