Ontario Court Approves Of Use Of Reverse Vesting Transactions And Provides Guidance For Future Transactions

• Published date: 15 February 2022
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Financial Restructuring, Corporate and Company Law, Insolvency/Bankruptcy, Contracts and Commercial Law
• Law Firm: Stikeman Elliott LLP
• Author: Mr Guy Martel, Danny Duy Vu, Lee Nicholson and William Rodier-Dumais

The Ontario Superior Court of Justice (Commercial List) (the "Court") in Re Harte Gold Corp.,¹ issued its first published decision on the use of reverse vesting orders ("RVOs") finding that the Companies' Creditors Arrangement Act ("CCAA") provides courts with clear jurisdiction to issue RVOs and further detailing criteria by which courts should consider the appropriateness of RVOs in future transactions²

• Over the course of the past 2 years, RVOs have become increasingly popular in the context of insolvency proceedings, as they allow for the completion of going concern sale transactions in a timely and efficient manner by effectively allowing the transfer or issuance to a buyer of all of the shares of a debtor company while vesting out unwanted assets, contracts and liabilities to an entity formed for the purpose of the transaction.
• In early 2022, after having completed a competitive sale and investment solicitation process (the "SISP"), Harte Gold Corp. ("Harte Gold" or the "Company") proposed to complete a going concern sale transaction (the "Sale Transaction") pursuant to a reverse vesting structure, whereby its first ranking secured creditor would subscribe for new shares in the Company (while the existing shares would be cancelled), and certain assets, contracts and liabilities would be vested out of the Company to newly formed entities (the "ResidualCos").
• After having considered appropriateness of the Sale Transaction (including its proposed structure), the Court issued a RVO and provided detailed reasons on the court's jurisdiction to grant RVOs and the criteria by which courts should evaluate RVOs in the future, noting, however, that practitioners should not regard the employment of RVO structures as the "norm" in future transactions.

Background

Last year, we provided a report on the increasing use of RVOs to effect restructuring transactions across Canada (Read More). At the time, while RVOs had been used in numerous transactions in provinces across the country, mostly in uncontested matters, only courts in British Columbia³ and Quebec⁴ had published reasons on the court's jurisdiction to grant RVOs. In the matter of Re Harte Gold Corp., the Ontario Superior Court of Justice (Commercial List) was the latest court to endorse the use of RVOs to complete restructuring transactions in CCAA proceedings and provided further guidance for other courts to rely upon in future transactions.

The Harte Gold Transaction

Harte Gold, a public company which operated a gold mining operation...