OTTAWA - An army of 500 lawyers was retained for the insolvency negotiations that led to the unprecedented government bailouts of General Motors and Chrysler, Ontario lawyers estimate.
One of the lawyers who was involved with a Canadian aspect of the GM
restructuring tells Law Times he knew he was watching history unfold
from the inside.
“There was a sense that we were all seeing something, and still are, seeing something that is historic,” says Tony DeMarinis, a partner and co-chair of the restructuring and insolvency practice at Torys LLP.
“It is extraordinary, it is exceptional, it’s extraordinary in every sense,” he adds.
DeMarinis acted for General Motors Acceptance Corporation in a related action with GM Canada bondholders in Nova Scotia, and was also one of the lawyers retained by the government of Canada in the complex negotiations.
He agrees with Justin Fogarty, a partner at Bennett Jones LLP and vice-chairman of the International Bar Association committee on insolvency and restructuring, that up to 500 lawyers were likely retained by the governments, automakers, bondholders, creditors, and unions involved in the talks.
The number includes an estimated 50 lawyers from Canada, primarily with major Toronto-based firms.
“It’s a hard number to estimate and my guess is probably nobody really knows, but my gut tells me that’s probably the right number,” says DeMarinis.
Both lawyers note that one of the central features of the massive restructuring for GM and Chrysler was the fact that both parent companies filed for bankruptcy protection only under the U.S. Bankruptcy Code - and did not file for protection under Canada’s Companies’ Creditors Arrangement Act for their Canadian subsidiaries.
In nearly all cross-border insolvencies and restructuring, U.S. parent firms file for protection under both Chapter 11 of the U.S. code and the Canadian bankruptcy protection legislation, Fogarty and DeMarinis say.
The reasons the automakers sought protection only in the US. included an urgent need to reach agreements quickly and the fact that most major bondholders and major creditors were based in the United States.
There was a danger as well that negotiating separate restructuring deals in Canada and the U.S. could lead to a cumbersome “patchwork” of agreements involving subsidiaries around the world.
“It’s much more rapid and cost-effective,” says Fogarty.
Another lawyer who is accomplished in the practice points to a major difference between Canadian and U.S. bankruptcy legislation.
The U.S. code allows companies to “repudiate” collective agreements as they try to reach a balance between banks, creditors, and their employees.
In Canada, court decisions based on the 1933 Companies’ Creditors Arrangement Act have led to a legal environment that does not allow companies to ignore collective agreements with their unions or unilaterally interfere with pension plans.
The insolvent companies are essentially compelled to bargain new agreements for the restructuring, including adjusted pension benefits if possible, likely with government approval required for long-term pension fund deficits.
“They (American firms) sometimes look at Canada as being a cost without a benefit, in terms of the process,” the lawyer said.
Even so, U.S. parent firms with Canadian subsidiaries usually seek protection in both countries.
“There are cases where there is no need to do restructuring in Canada, but if there is substantial minded management on both sides of the border and substantial assets on both sides of the border, and different stakeholders and creditors, the normal route is to file applications on both sides,” says Fogarty, who acted for unsecured creditors in the recent insolvency of AbitibiBowater.
DeMarinis and Fogarty disclosed an unusual development in the status of the Companies’ Creditors and Arrangement Act that has taken place under the government of Prime Minister Stephen Harper.
The Conservatives have yet to put into force amendments to the legislation that former Liberal prime minister Paul Martin managed to pass through Parliament in the last days of his government.
The amendments would have enshrined into the act the protection for collective agreements and pension plans that a series of court decisions had already established in case law.
But, nearly three years later, the Harper cabinet has not passed regulations to give the new legislation force.
Despite that, the Conservatives did follow through on a companion bill the Martin government passed at the same time - strengthened protection for employees during bankruptcies.
The ramifications of the auto bailout, particularly the multi-billion-dollar deal to save General Motors, are
enormous, the lawyers say.
Ontario and the government of Canada will get 12 per cent of GM shares in return for at least $10.5 billion. The U.S. government, throwing in billions more, will get 60 per cent of the new GM shares.
“Here is a situation where the role of government is now becoming involved in private enterprise,” says Fogarty. “It’s the largest restructuring ever.”
DeMarinis adds from his front-row seat: “There’s a sense that this really is an extraordinary story.”