Change of control provision and sale of significant assets unfairly prejudicial

Ontario civil | Business Associations | Specific matters of corporate organization | Shareholders

E Global, part of E group of companies, acquired steel company A Ltd.. E Global entered into Restructuring Support Agreement (RSA) with A Ltd. and pledged $250 to $300 million cash investment. Five of A Ltd.’s eight directors were affiliated with E group. RSA was amended to provide $150 million funded largely by loan from third parties, not E Global. Refinancing included transfer of A Ltd.’s port assets, without which A Ltd. could not function economically, to E Global subsidiary P Inc.. Port Transaction involved A Ltd. selling Port assets excluding land to P Inc. and A Ltd. leasing land to P Inc. for 50 years. A Ltd. and P Inc. entered into Cargo Handling Agreement (CHA) which required P Inc.’s consent to change of control of A Ltd.. A Ltd. received Companies’ Creditors Arrangement Act (CCAA) protection. Monitor brought oppression proceedings under CBCA. Claims regarding Port Transaction allowed. Reasonable expectations of trade creditors, employees, pensioners and retirees of A Ltd. were that A Ltd. would not deal with critical asset like Port in way as to lose long-term control over asset to related party on terms that permitted related party to control A Ltd.’s ability to do significant transactions or restructure and which gave unwarranted value to third party. These reasonable expectations were violated by Port Transaction and change of control veto provided to P Inc., and thus E Global, in Port Transaction. Port Transaction and third party loan would not have been necessary had E Global lived up to its obligations under RSA. E Global acted in bad faith. Port Transaction and change of control provision were unfairly prejudicial to interests of A Ltd.’s trade creditors, employees, pensioners and retirees. Change of control provision gave P Inc. and thus E Global effective control over who might acquire A Ltd.. Any buyer of A Ltd. business would require CHA to be assigned to it in order to be able to operate steel mill. Thus veto of P Inc. under CHA was effectively veto of E Global over any change of control of A Ltd. business. Business judgment rule did not provide defence.
Ernst & Young Inc. v. Essar Global Fund Ltd. (2017), 2017 CarswellOnt 4049, 2017 ONSC 1366, Newbould J. (Ont. S.C.J. [Commercial List]).

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