President Trump’s tariffs: Monetizing assets in restructuring scenarios

Torys’ Canadian and New York offices will be providing regular briefs on the legal ramifications of the tariffs and other cross-border policy developments on the horizon.

Despite ongoing government-to-government negotiations, tariffs remain a looming concern for Canadian companies. Even if a trade deal is reached, uncertainty may remain, representing a new normal for Canadian companies engaged in cross-border trade.

In scenarios in which this uncertainty gives way to financial distress, contingency planning around restructurings may become prudent for management and boards of directors. For companies that experience tariff-related cost increases that imperil cash flow and solvency, it will be advantageous to get ahead of events. Certain assets, whether core or non-core, may be relatively straightforward to monetize whether inside or outside of formal restructuring proceedings. Other assets, however, due to existing liabilities, intertwined contractual relationships or other reasons, may be more difficult to monetize outside of formal restructuring proceedings. Such proceedings and the court orders made in them are powerful tools to effectively deal with troublesome liabilities and contracts. These tools may be required to unlock the value of those assets and provide companies with insurance for cash flow difficulties in times of economic uncertainty in which economy-wide forces are largely beyond a company’s control.

The benefits of asset sales

By design, Canadian businesses have been provided with the necessary tools to restructure under statutes such as the Companies’ Creditors Arrangement Act (CCAA). The CCAA, which applies to insolvent companies, permits the sale of assets, including real, personal and intangible property, to a purchaser free and clear of most charges, liens, interests and restrictions of any kind, including secured and unsecured indebtedness and litigation claims, with the interests of creditors protected by the requirement that the proceeds of the sale be subject to the same charges, liens, interests or restrictions as the original asset.

This tool can be very valuable to restructuring companies and the sale of a part of a business may be what is required in order to preserve the rest of the business in conjunction with a CCAA plan, for example. Releases for officers, directors and other third parties may also be available in this context. To further enhance the chances of success, a restructuring company may identify a potential purchaser prior to the restructuring or the commencement of a sale process within a restructuring, with such purchaser acting as a “stalking horse”. These restructurings may be facilitated by reaching agreements with creditors to support the company. In this way, the restructuring creates a window for negotiations with key stakeholders, which are best conducted prior to the start of formal restructuring proceedings as part of a “pre-pack”, or pre-negotiated restructuring on terms supported by creditors. Resulting transactions and the court orders approving them can be structured creatively with a view to maximizing value and the potential for successful outcomes, the prospects of which are enhanced by early and prudent planning.

The approval of asset sales

What are the circumstances under which courts will approve the sale of assets in restructuring proceedings, most notably under the CCAA?

In deciding whether a sale of substantial assets should be approved, courts will assess the following considerations:

1. whether the sale process that was conducted in connection with the proposed asset sale was effective in obtaining the best price for the asset and sufficient effort was expended to do so;
2. whether that process was conducted fairly and with integrity;
3. whether the process adequately considered the interests of creditors and other stakeholders;
4. the effect of the transaction and asset sale on creditors and other stakeholders;
5. whether the consideration received for the assets is fair and reasonable;
6. whether the transaction and asset sale will further the company’s restructuring efforts; and
7. whether the court-appointed monitor or other court-appointed official is supportive of the process.

There is a lot of work to be done by management and boards of directors around tariff-related planning. Contingency planning for potential financial distress and the consideration of restructuring options should be a component of this planning, including an assessment of opportunities to monetize assets in order to improve cash flows and improve balance sheets with the goal being the preservation of the overall business.

 
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