In an effort to address a 2013 liquidity crisis, Essar Steel Algoma Inc. (Algoma) entered into a transaction in which it sold its commercial port assets and leased its port lands to Port of Algoma Inc. (Portco).
Through a chain of subsidiaries, Algoma and Portco are both wholly owned by Essar Global Fund Limited (EGFL).
The Port Transaction was carried out under 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 Agreement, under which Algoma agreed to provide 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. The Cargo Handling Agreement contained a change-of-control provision requiring Portco’s consent to a change of control of Algoma.
The $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. The term loan, secured by all of Portco’s assets, was structured so that Portco’s revenue under the Cargo Handling Agreement, less its payments to Algoma under the shared services agreement, would provide Portco with a consistent stream of revenue to repay GIP.
The 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, Algoma’s monitor was authorized to commence an oppression proceeding against EGFL, Portco and other related entities under section 241 of the Canada Business Corporations Act in relation to the Port Transaction. The 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 commenced without leave.
Ontario Superior Court Justice Frank Newbould dismissed the motion, holding that: (i) a CCAA monitor, on the same basis as a trustee in bankruptcy, can be granted complainant status to advance an oppression claim; and (ii) this was not a derivative action, 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 circumstantial 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 permitted the related party to veto and control Algoma’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 particular, violated these reasonable expectations.
Justice Newbould refused to grant the primary relief — a transfer of Portco’s shares to Algoma — sought by the monitor because doing so would have compromised GIP’s security 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 terminate the material contracts with Portco and regain control and ownership of the Port.
The trial decision appeal was heard in August 2017 and is currently under reserve.
Clifton Prophet, Nicholas Kluge, 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 Matthew Lerner of Lenczner Slaght LLP represented GIP Primus LP and Brightwood Loan Services LLC.
Eliot Kolers and Patrick Corney of Stikeman Elliott LLP acted for Essar Steel Algoma Inc.
John MacDonald and Alex Cobb of Osler, 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 Rosenberg Rothstein LLP acted for USW and its Local 2724.
Alexandra Teodorescu of Blaney McMurtry LLP represented USW Local 2251.