The Stalking Horse in Cross-border Insolvency Sales Canada Saddles Up
In circumstances where the assets of a multi-jurisdictional business are to be sold during the reorganization proceedings, it may be important to implement a harmonious cross-border sales process. An orderly sale designed to maximize stakeholder value for the entire enterprise could be jeopardized if fragmented sales procedures are adopted in each country in which different courts have jurisdiction over segments of the debtor's business.
In In Re Archibald Candy (Canada) Corp.,3 a Canadian court approved an auction sale pursuant to a stalking-horse procedure jointly administered under the insolvency laws of Canada and the United States. Unlike in the United States, a stalking-horse sale is relatively novel in Canada. Archibald is the first time in Canadian insolvency jurisprudence that an asset sale was consummated following the holding of an auction between qualified bidders as part of a court-supervised stalking-horse auction procedure.4
The Archibald Case
Archibald Candy Corp. (Archibald U.S.) commenced proceedings under chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of Illinois, Eastern Division. Its Canadian subsidiary, Archibald Candy (Canada) Corp. (Archibald Canada), operated retail candy stores in Canada under the name Laura Secord—a Canadian icon.
Archibald U.S. and its advisors undertook a sales process, culminating in the execution of an agreement with a stalking-horse purchaser for the acquisition of the assets of Archibald Canada and certain assets of Archibald U.S. The asset-purchase agreement was made subject to a break-up fee and bidding procedures, including an auction in accordance with §363 of the U.S. Bankruptcy Code and approval by both the U.S. Court and the Ontario Superior Court of Justice. The Canadian court implemented the stalking-horse sales process in the asset-purchase agreement through a series of orders, which are briefly described below:
- Interim Receivership Order.5 This refers to the Canadian court-appointed interim receiver6 (IR) of Archibald Canada, with the power to review and report to the court as to fairness and reasonableness of the marketing and sales process, bidding procedures and break-up fee as set out in the asset-purchase agreement.
- Bidding Procedures Approval Order.7 Following a favorable report by the IR, the Canadian court approved the bidding procedures, including an auction, break-up fee and the publication of the notice of auction.
- U.S. Recognition Order.8 The Canadian court recognized and gave effect to the parallel order of the U.S. court approving the bidding procedures and break-up fee with respect to the sale of certain of the assets of Archibald U.S. pursuant to the asset-purchase agreement.
- Sale Approval Order.9 The bidding procedures as approved by the U.S. court and the Canadian court resulted in the submission of a qualified bid from another bidder requiring the conduct of an auction with the original stalking horse. The new bidder was ultimately successful in acquiring the assets at the auction. Following a report on the auction sale by the IR, the Canadian court approved the sale to the successful bidder and vested title in the acquired assets free of encumbrances.10
Implications of Archibald for Canadian Cross-border Insolvency Law
Archibald represented a cooperative approach by both the U.S. court and the Canadian court to a cross-border insolvency sale, which efficiently disposed of the debtor's assets while satisfying material considerations of sovereignty and comity. However, as has been noted, the court-supervised auction of assets between a stalking-horse purchaser and other bidders has been atypical of Canadian insolvency proceedings. By contrast, the traditional method of asset sales by an insolvent Canadian debtor is a process where all potential purchasers are encouraged to submit their highest and best offers before a fixed deadline. Generally, the practice is to administer the process to ensure that bidders are not provided with particulars of competing offers before the bid deadline. After the successful bidder is selected and subject generally to court approval, the sales process is concluded. Overbidding or re-bidding among the participating bidders has generally not been condoned by the Canadian courts, and after the conclusion of the bidding process, the successful bid is rarely replaced by another, even if the later bid is higher.11
In Canadian insolvency law, provided that the court is satisfied with evidence as to the sufficiency, integrity and fairness of the process, it will almost always approve the consequent sale.12 An unsuccessful bidder will have no legal standing to appeal from an order approving a transaction that meets the basic criteria for sale approval.13 Therefore, a courtroom auction has historically not been a feature of Canadian insolvency practice.
Archibald and earlier Canadian cases in which a stalking-horse sales process has been implemented14 represent a flexible approach to the importation of this concept from American bankruptcy practice, where the goal is to facilitate a sale of multi-jurisdictional business. Therefore, in appropriate circumstances, Canadian courts will recognize that some care must be taken to ensure that a bilateral sales process is harmonious when business operations straddle both sides of the border. For example, where a strong business case can be made for the acquisition of both American and Canadian operations, prospective purchasers may wish to bid for both. A bid to acquire assets in one jurisdiction may be contingent upon the successful acquisition of the assets in the other. In those circumstances, it could be problematic for there to be two territorial sales processes operating under radically different procedures. Duplication of effort, increased costs and delay could result unless the sales process operates in a relatively seamless manner within the cross-border proceedings. A purchaser who stands to be awarded a break-up fee in the American sales process may not be interested if it is not afforded the same protections with respect to its participation in the Canadian sale.
However, it should be noted that the Canadian court will maintain a high degree of discretion in considering whether to approve a cross-border stalking-horse process and, notwithstanding Archibald, the making of similar orders should not be assumed in future cases. Concerns as to the effectiveness and propriety of the sale process will always be carefully balanced by the Canadian court against the goal of international comity.
For example, in Archibald, the appointment of an interim receiver to provide the court with an independent appraisal of the reasonableness of the marketing process and bidding procedures is an example of one method designed by counsel to assure the Canadian court that the process, when fairly scrutinized, meets a judicially recognized standard. While the appointment of an interim receiver is not a mandatory prerequisite to the approval of a stalking-horse sale in Canada, in fact, Archibald and most Canadian cases in which such sales were approved have been subject to conditional orders, in which the validity of the sale of the assets, including the procedures, is scrutinized by the court on a subsequent motion.15
In the conflict of laws, this approach may be seen as consistent with the support of the Canadian courts to principles of at least limited universalism in international insolvency proceedings. For example, in Re Babcock & Wilcox Canada Ltd., the court recognized the UNCITRAL Model Law on Cross-border Insolvencies as an appropriate model for guidance16 in addressing the issues that arise in an international bankruptcy. One principal of the Model Law relevant to the cross-border recognition of insolvency sales is that:
The enterprise is to be permitted to implement a plan so as to reorganize as a global unit, especially where there is an established interdependence on a transnational basis of the enterprise and to the extent reasonably practicable, one jurisdiction should take charge of the principal administration of the enterprise's reorganization, where such principal type approach will facilitate a potential reorganization and which respects the claims of the stakeholders and does not inappropriately detract from the net benefits which may be available from alternative approaches.17As applied specifically to the cross-border insolvency sale, Canadian adherence to the Model Law would indicate that a sales process administered by an American bankruptcy court can be recognized and adopted for the purpose of selling the Canadian operations as long as the substantive consequences are not inimical to Canadian principles for sale approval. This qualified recognition may be most appropriate where the primary location of the global operations and assets is in the United States with subsidiary operations in Canada and where the assertion by an American bankruptcy court of plenary jurisdiction over the reorganization of the debtor's business has not been contested in Canada.
The Canadian courts have demonstrated a flexibility to the adoption in appropriate circumstances of a stalking-horse process to a cross-border asset sale. This may be practical and efficient where the primary operations of the corporate group of which the Canadian debtor is a member are located in the United States and subject to the administration of an American bankruptcy court. Where the key assets and operations of the international enterprise are situated in Canada, a stalking-horse sale may still be worthy of consideration, but as in all cases, counsel in a cross-border matter will have to be conscious of adopting procedures that promote jurisdictional cooperation. Where asset sales are contemplated, the greater use of protocols and joint hearings between Canadian and American bankruptcy courts may facilitate this.
2 In 2003, 28 percent of filings under the (Canada) Companies' Creditors Arrangement Act were filed jointly with a bankruptcy filing in the United States. See Gauthier, Pritchard and Blanchard, "The CCAA and International Insolvencies: Issues and Initiatives," 3rd Annual Advanced Insolvency Law and Practice, Canada Institute Publications. Return to article
4 The claim of Archibald to be the first Canadian bankruptcy auction is anecdotal but based on the perspectives of various senior bankruptcy practitioners involved. The recent history of stalking-horse sales in Canadian insolvency proceedings is thoroughly canvassed in Cohen, Kolesar, "Canadian Perspective on the Chapter 11 Stalking Horse Bid Process," 21 Nat. Insol. Rev. 25 (2004). The Archibald case was instituted in the Ontario Superior Court of Justice shortly after publication of that article. Return to article
6 The (Canada) Bankruptcy and Insolvency Act provides for the appointment by the court of an interim receiver as a court officer having conservatory and other powers over the assets of a debtor. Return to article
10 In Canadian insolvency jurisprudence, the court may make a "vesting order" in which assets are transferred free and clear of liens with the liens and adverse claims ultimately being asserted against the sale proceeds. Return to article