MEGA Brands Inc.: The Canada Business Corporations Act Provides an Innovative Approach to Balance Sheet Restructuring and a Landmark Result
On March 22, 2010, the Superior Court of Quebec approved a plan of arrangement under the Canada Business Corporations Act (the “CBCA”) that allowed MEGA Brands Inc. to achieve a worldwide restructuring of its business under a corporate statute, rather than a more typical insolvency and restructuring statute like the Companies’ Creditors Arrangement Act (Canada) (the “CCAA”).
The Arrangement
MEGA Brands is a corporation governed by the CBCA, with its head office and senior management in Montreal. The arrangement involved a transaction between MEGA Brands and a number of related corporations and direct and indirect subsidiaries in Canada, the United States, Luxembourg, and Mexico.
The arrangement affected the claims of secured lenders under a credit agreement and two swap agreements as well as the claims of holders of convertible debentures. The arrangement also effected a significant dilution of shareholders, but preserved an equity stake in the continuing company for these shareholders. The Court granted a temporary stay of proceedings against the applicant corporations as well as impleaded parties in the United States, Europe, and Mexico.
Shareholders and lenders voted overwhelmingly in favour of the arrangement.
The Court allowed the company to have recourse to the CBCA because the restructuring involved solvent entities and would result in a solvent entity.
On March 23, 2010, the United States Bankruptcy Court for the District of Delaware granted an order enforcing the arrangement in the United States.
Unique Restructuring
It is the first time an arrangement of this nature has been implemented in Canada.
These orders confirm that the arrangement provision at CBCA section 192 provides an effective mechanism for a company to restructure its debt securities by exchanging them for cash, equity, new debt, or a combination thereof.
Unlike the CCAA, the CBCA allows the arranged entities to remain in control of the restructuring process and does not call for a trustee or court-appointed monitor to oversee the transaction. Thus, a CBCA arrangement may provide a more efficient and flexible alternative for corporations that choose to restructure debt. In addition, the CBCA process is faster and less costly than the CCAA, and there may be a business benefit to not undertaking insolvency proceedings.
For more detailed information on this restructuring, please see this Osler Update.
