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CORPORATIONS - Oppression remedy - Standing - Complainant - Grounds - Conduct that unfairly disregards the interest of any security holder, creditor, director or officer

Tuesday, January 30, 2018 @ 9:07 AM  

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Appeal by the defendants from trial judgment granting the respondent a remedy for oppression. Ernst & Young Inc. (Ernst & Young) was the court-appointed Monitor during the restructuring proceedings of the respondent, Essar Steel Algoma Inc. (Algoma), under the Companies’ Creditors Arrangement Act (CCAA). The supervising CCAA judge authorized the Monitor to commence an action for oppression against Algoma’s parent, Essar Global Fund Limited (Essar Global), and the remaining appellants, namely other companies owned directly or indirectly by Essar Global (Essar Group). The action arose in the context of a recapitalization of Algoma and a transaction between Algoma and Port of Algoma Inc. (Portco), two companies indirectly owned by Essar Global, in which Algoma’s port facilities were conveyed to Portco in 2014 (Port Transaction). The outcome of the Port Transaction was that all Port assets were transferred from Algoma to Portco, the Port lands were leased to Portco for 50 years, and Portco obtained change of control rights. The Port Transaction effectively provided Portco with the ability to veto any change in control of Algoma’s business. The appellants GIP Primus, L.P. and Brightwood Loan Services LLC (GIP) were arm’s length lenders who loaned Portco US$150 million to effect the transaction. The Monitor alleged that the Essar Group had exercised de facto control over Algoma and had engaged in a course of conduct that consistently preferred the interests of the Essar Group and in particular, Essar Global, to those of Algoma and its stakeholders. The oppression occasioned was exacerbated by the fact that the borrowed monies raised through the Port Transaction were a substitution for monies Essar Global had promised to contribute as equity in Algoma. The trial judge held that the reasonable expectations of Algoma’s trade creditors, employees, pensioners, and retirees were violated by the Port Transaction itself and the change of control veto provided to Portco, and thus Essar Global, in the Port Transaction. He concluded that the Port Transaction was itself unfairly prejudicial to, and unfairly disregarded, the interests of Algoma’s trade creditors, employees, pensioners, and retirees. He found the change of control clause in a Cargo Handling Agreement, which gave Essar Global control over who could be a buyer of the Algoma business, was oppressive and also harmful to the restructuring process. He found that Essar Global received an unreasonable benefit from the Port Transaction and that it was an exercise in self-dealing. The appellants advanced two main grounds of appeal: first, that the Monitor lacked standing to bring an oppression claim; and second, that the alleged harm was to Algoma and therefore the appropriate redress was a derivative action.

HELD: Appeal dismissed. The Monitor took the action as an adjunct to its role in facilitating a restructuring and proceeded with the oppression action in the interests of the restructuring consistent with the objectives of the CCAA. The derivative action and the oppression remedy were not mutually exclusive and there could be circumstances giving rise to overlapping derivative actions and oppression remedies where harm was done both to the corporation and to stakeholders in their separate stakeholder capacities. A prima facie case had been established for the Monitor to commence an oppression claim. At law, the Monitor was at liberty to bring an action for oppression. There was prima facie evidence of personal harm to the pensioners, employees, retirees, and trade creditors. The Court and the Monitor were faced with prima facie evidence of oppression, including bad faith and self-dealing. The trial judge did not err in his analysis of reasonable expectations. He considered both subjective expectations and whether the expectations were objectively reasonable. The trial judge’s conclusion that Essar Global’s conduct was wrongful and harmful was supported by the evidence. Essar Global’s conduct created a situation where Algoma had no choice but to accept the Port Transaction. There was no palpable and overriding error in the trial judge’s understanding of the recapitalization requirements or in the trial judge’s conclusion that Algoma’s Board was precluded from relying on the business judgment rule. The trial judge did not err in striking out the control clause in the Cargo Handling Agreement and in granting Algoma the option of terminating the Port agreements upon repayment of the GIP loan.

Ernst & Young Inc. v. Essar Global Fund Ltd., [2017] O.J. No. 6723, Ontario Court of Appeal, R.A. Blair, S.E. Pepall and K.M. van Rensburg JJ.A., December 21, 2017. Digest No. TLD-January292018003