ROFRs in the CCAA Process

Written By Donald E. Greenfield, Laurel Lui Maclean and Nazeef Muhammad

CCAA Impact on Third Party Rights

Generally, ROFRs have been honoured in Companies' Creditors Arrangement Act (CCAA) proceedings, as a ROFR is a substantive right and it has been held that a Court cannot permanently strip a third party of its substantive rights under the CCAA.

However, courts may interfere with third party and creditor rights under s. 11 of the CCAA and this power may impact the application of ROFR's in CCAA cases. Re Metcalfe & Mansfield Alternative Investments II Corp. (Metcalfe), a 2008 Ontario decision that involved the restructuring of the entire Canadian market in asset-backed commercial paper, supports an "open-ended and flexible" approach to third party rights in the CCAA process and appears to support the proposition that third party rights may be compromised if:

1. such compromises are essential to the restructuring of the debtor;
2. the compromised rights are rationally related to the purpose of and necessary for the plan;
3. the plan cannot succeed without compromising the rights;
4. the parties who receive the benefit of the compromises are contributing to the plan; and
5. the plan will benefit the debtor company and its creditors.

Although Metcalfe involved creditors, these considerations may resonate where a third party purchaser of assets in a CCAA process seeks to avoid ROFRs.

Package Sales

In many cases of a sale of a package of assets in CCAA proceedings a ROFR exemption will be available, for example because the sale is of all or substantially all of the debtor's assets. Where an exemption is not available, it will be necessary to determine whether the sale of a ROFR-encumbered asset as part of the package triggers the ROFR. The law in this area, primarily developed outside the context of the CCAA, is mixed. Budget Car Rentals Toronto Ltd. v. Petro-Canada Inc. and Gulf Canada Ltd. (Budget) (Ontario) supports the proposition that the package sale does not trigger the ROFR. See also Southland Canada Inc. v. Zarcan Equities Ltd.) (Alberta). However, Budget has been criticized by academic writers and was rejected in Apex Corp. v. Ceco Developments Ltd (Apex), where Brooker J. concluded that a ROFR from which there was no express exemption was not defeated by the fact that the sale was a package sale; this decision was upheld in the Court of Appeal of Alberta. Both Budget and Apex imply a good faith requirement that may not be met by a package sale which is designed or appears to be designed to defeat or frustrate a ROFR.

This brings us to the situation of a proposed sale of assets in CCAA proceedings where one of the assets is subject to a ROFR and an express ROFR exemption is not available: A Court acting under authority of the CCAA has found that a ROFR was not triggered when the encumbered asset was being sold as part of a package. In a very short Saskatchewan Court of Queen's Bench decision in Re Bear Hills, Kyle J. held that the ROFR was not triggered. Kyle J. did not rely on any blanket exception for package sales; instead, his reasons suggest that in CCAA proceedings a Court may take into account additional considerations such as the welfare of the business and its employees in deciding whether the ROFR is engaged. These considerations are consistent with those set out by the Ontario Court of Appeal in Metcalfe.

It is unclear whether Kyle J., in deciding that the ROFRs were not triggered, as opposed to being unenforceable, relied on non-CCAA precedents such as Budget and Southland or on his discretion under the CCAA. The consideration of commercial reasons unique to the CCAA process suggest that a Court may be willing to interfere with ROFR rights to facilitate an orderly and effective plan of compromise or arrangement. A Court operating under the CCAA may be more likely to adopt the reasoning in Budget (as opposed to that in Apex) to achieve its purposes under the CCAA. It may well be easier for a Court in a CCAA proceeding to find the requisite degree of good faith on the basis that the package sale transaction has not been constructed for the sole purpose of stripping the ROFR holder of its right, but rather to meet the purposes and objectives of the CCAA.