BlackRock Metals: Québec Court grants contested RVO, again

In 2020, the Superior Court of Québec considered for the first time a contested reverse vesting order (RVO) transaction, in the proceedings of Nemaska Lithium Inc. pursuant to the Companies’ Creditors Arrangement Act (CCAA). That RVO was granted, with leave to appeal twice denied¹. Now the Court has once again approved the use of this innovative restructuring tool, in the recent CCAA proceedings of BlackRock Metals².

What you need to know

• In late 2021, BlackRock Metals commenced CCAA proceedings. In January 2022, the Court approved a sale and investment solicitation process (SISP) in which BlackRock Metals’ existing secured lenders/debtor-in-possession lenders were approved as stalking horse purchasers. The bid was structured as a credit bid for which an RVO would be sought.
• Some shareholders opposed the approval of the stalking horse bid as the successful bid at the conclusion of the SISP, opposed the granting of the RVO, and sought to extend the SISP to have more time to bring forward a rival bid. 
• The Court granted the RVO, with these key findings: 1) it was inappropriate to extend the SISP to provide additional time to solicit bids; 2) RVOs have been deemed acceptable by the courts in many previous cases; 3) shareholders having no economic interest in an insolvent company have little to no say; and 4) that it was appropriate to grant the third-party releases in favour of the secured lenders, though releases should not be granted blindly or systematically.
• The BlackRock Metals decision has been appealed. Subject to the outcome of that process, this decision affirms the availability of this innovative restructuring tool while also cautioning against stretching its use too far. RVOs remain the exception to the rule.

Background

On December 23, 2021, BlackRock Metals Inc., BlackRock Mining Inc., BlackRock Metals LP and BRM Metals GP Inc. (collectively, BlackRock Metals) commenced CCAA proceedings. BlackRock Metals had attempted since 2008 to develop a metals and materials manufacturing business, with a mine in Chibougamau and a metallurgical plant to be located at the Port of Saguenay. The mine would supply vanadium, high-purity pig iron and titanium products. BlackRock Metals was unable to raise the necessary capital to start construction.

On January 7, 2022, the Court approved a sale and investment solicitation process (SISP) in which BlackRock Metals’ existing secured lenders and debtor-in-possession (DIP) lenders were approved as stalking horse purchasers. The bid was structured as a credit bid for which an RVO would be sought.

A group of shareholders opposed the approval of the stalking horse bid as the successful bid at the conclusion of the SISP, opposed the granting of the RVO, and sought to extend the SISP to have more time to bring forward a rival bid. 

Their objections included assertions that: 1) RVOs are not lawful, including the taking of shareholders’ property (i.e., shares) without compensation or a vote; 2) there is no authority in the CCAA for such orders; and 3) the broad third-party release contained in the RVO—namely, those in favour of the secured lenders—were inappropriate.

Decision

In granting the RVO, the Court touched on a range of issues and made several key findings:

Extension of SISP

It was inappropriate to grant an order pursuant to section 11 of the CCAA extending the SISP to provide additional time to solicit bids.

For a CCAA order to be considered appropriate, the Court must consider appropriateness, good faith, and due diligence. Further, the order must advance the policy and remedial objectives of the CCAA. In considering whether to deviate from an approved SISP on which parties have relied, more than monetary considerations (i.e., the potential for a higher recovery) are relevant. The integrity of the sale process is of considerable importance.

The Court held that the lack of interest from other bidders was evident. It noted that the shareholder group were not willing to put in a bid of their own, nor were they willing to pay the costs of an extended SISP process—they merely wished a prolonged opportunity for other bidders to come forward. The Court was critical of a “parallel SISP” that the shareholders conducted without authorization, hiring their own financial advisor to test the market at the same time the SISP was ongoing.

The Court concluded that the SISP had provided a level playing field and that any modification of the rules at the end of the process should not be made lightly. The remedial purposes of the CCAA were best served by rejecting the requested extension of the SISP.

The acceptability of RVOs

The Court noted numerous Canadian cases in which RVOs had been granted, including in the CCAA proceedings of Nemaska Lithium, Quest University³ and Harte Gold⁴.

The Court accepted that section 36 of the CCAA may provide authority for such orders, but in any event that section 11 is a basis for granting RVOs. The Court embraced the findings of the Ontario Court in Harte Gold that section 36(3) sets out a useful analytical framework for considering the appropriateness of an RVO and that RVOs ought to be granted sparingly in appropriate circumstances only.

The Court cited favourably prior findings that RVOs should not generally be employed to side-step creditor voting rights, to rid a debtor of a recalcitrant creditor, or merely because it is more convenient or beneficial for a purchaser. It noted that mining cases such as the one at hand often lend themselves to RVOs and proceeded to carefully review the factual circumstances that made use of an RVO appropriate in the present case—including the critical intangible assets (e.g., licences or permits) and important contracts (e.g., with local Indigenous groups) that may be difficult to transfer to an asset purchaser. 

Shareholders

The Court also noted that shareholders having no economic interest in an insolvent company have little to no say, and it reviewed the authority of the Court under the Canada Business Corporations Act to approve a transaction that results in the cancellation or loss of shares without a shareholder vote.

Third-party releases

The Court held that it was appropriate to grant the releases sought in the RVO in favour of the secured lenders, finding it commonplace to do so outside of a plan in the context of a sale transaction. Nonetheless, such releases should not be granted blindly or systematically.

The Court embraced the considerations for third-party releases set out in Lydian International⁵. The secured lenders’ participation was instrumental to BlackRock Metals’ restructuring, it was reasonable that the secured lenders would want to start with a clean slate, the releases were reasonably connected to and justified as part of the RVO transaction, and that transaction benefits BlackRock Metals’ stakeholders generally.

Conclusion

Leave to appeal the granting of the RVO has been sought by the objecting shareholder group. Subject to the outcome of this appeal process, the BlackRock Metals decision affirms the availability of this innovative restructuring tool while also cautioning against stretching its use too far. RVOs remain the exception to the rule, and where they are sought, their appropriateness in the circumstances must be established. Third-party releases reasonably connected to an RVO transaction likewise remain available.