a PDF of this piece

on record
DECEMBER 2014
BANKING
Fenced-in: Don’t be “Buffaloed” When
Registering Caveats and Arguing Land Titles
Fraud – Actions Speak Louder Than Words
Be Careful Structuring Those Cross-Border
Back to Back Loans – The Tax Man May Bite
Perspectives… Syndicated Debt Buy-Backs
Attempted “Shake Downs” with a Bogus
Personal Property Security Act Registration
May Result in Substantial Costs
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On Record Contents:
Banking and other issues of On Record are
available on our web site www.bdplaw.com
1 Fenced-in: Don’t be “Buffaloed” When Registering Caveats and Arguing
Land Titles Fraud – Actions Speak Louder Than Words
BANKING, EDITORS-IN-CHIEF
Cal D. Johnson, q.c.
[email protected] 403-260-0203
4 Be Careful Structuring Cross-Border Back to Back Loans – The Tax Man May Bite
Simina Ionescu-Mocanu
[email protected] 403-260-0231
6 Perspectives… Syndicated Debt Buy-Backs
BANKING, MANAGING EDITOR
Rhonda G. Wishart
[email protected] 403-260-0268
9 Attempted “Shake Downs” with a Bogus Personal Property Security Act Registration
May Result in Substantial Costs
GENERAL NOTICE
On Record is published by BD&P to provide our
clients with timely information as a value-added
service. The articles contained here should not be
considered as legal advice due to their general nature.
Please contact the authors, or other members of our
Banking team directly for more detailed information
or specific professional advice.
Banking Lawyers
Betteridge, Robert D. (Bob)
DeLuca, G. Dino
Fehr, Trish M.
Grout, A. David
Harding, Elizabeth
Ionescu-Mocanu, Simina
Johnson q.c., Cal D.
Kuzma, Andrew
Langdon, Margot D. Pybus, Kathy L.
Smith, Nancy D.
Tremblay, Janie
Wilmot, John A.
[email protected] ................................................................................................................... 403-260-0188
[email protected] .................................................................................................................... 403-260-0211
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BANKING
PAGE 1
FENCED-IN: Don’t be “Buffaloed” When
Registering Caveats and Arguing Land Titles Fraud
Actions Speak Louder Than Words
By Lauren Mills Taylor, Summer Research Student
Introduction
In May 2014, the Alberta Court of Queen’s Bench (the “Court”) dealt a huge blow to the Nature
Conservancy of Canada (the “NCC”) in Nature Conservancy of Canada v. Waterton Land Trust Ltd.1.
NCC sued Thomas Olson, a bison rancher and tax lawyer, for breaching a conservation easement
it had placed on land it sold to Olson in August 2004. While the Court recognized the validity of
NCC’s easement, it held that the new fence that Olson built to contain bison on his property did not
constitute a breach. The Court also put the nail in the coffin by rejecting NCC’s claim of land
titles fraud and finding that NCC owed Olson over $700,000 for failing to issue a tax receipt for
Olson’s purchase of the land at above market value.
Background
Private conservation organizations own and control vast amounts of
land in Canada. When not holding title directly, these organizations
often use conservation easements to control the use of land. In July
2003, NCC filed a conservation easement on the title to an area called
“Penny Ranch”, situated on the eastern edge of the Rocky Mountains
in Southern Alberta. The area has been described as the “North
American Serengeti” because it serves as a migratory corridor for
a number of species.
The conservation easement was originally filed in a standard
form, to be amended after negotiations with the buyer. Thomas
Olson agreed to purchase the land for his bison operation. The
deal closed in August 2004 after more than a year of meetings and
discussions. Olson purchased the land at a price that exceeded
the fair market value of the encumbered property, with the
understanding that the difference in price would qualify as
a tax-deductable charitable donation.
BANKING
PAGE 2
Ironically, Olson was portrayed as more of a conservationist than NCC. The Court noted
that Olson was dedicated to the restoration of wild bison as well as their natural habitat
and the native grasses in the area.
There were problems with the amendment to the conservation
easement from the beginning. First, and due to mistakes by Olson’s
lawyer, the language did not reflect the oral agreement that Olson
and NCC’s representative had reached with regards to fencing.
Second, the provisions related to fencing in the amended easement
were located on a page that was missing from the caveat filed to
protect the amending agreement, both the first and second time
it was filed. Third, after Olson became aware in November 2004
that the caveat was defective, he proceeded to transfer the land to
a trust according to his usual practice in his bison operations, thus
precluding NCC from ever being able to correct the caveat.
The Issues
The Court’s lengthy judgment dealt with several issues:
1. What fencing restrictions did the parties agree on, if any?
If the parties’ written agreement (in the form of the amended
conservation easement) did not match their actual agreement,
was rectification an available remedy either because of a mutual
mistake of the parties or a unilateral mistake by one of them?
2. Did the new fence breach the conservation easement?
Was the easement even valid at all?
3. Did the land transfer to the trust constitute land titles fraud
since Olson knew that the caveat was defective?
4. Was NCC liable to Olson for its failure to issue the tax
receipt in a timely manner?
The Rectification and Mistake Issues
This case is at its core a dispute about the fence. NCC filed its
statement of claim in an attempt to enforce the conservation easement,
which it argued limited Olson’s ability to rebuild the fences on the
land in question. The amended conservation easement contained a
provision (which it appears was included as a result of a mistake by
Olson’s own lawyer) which said that the fence could only be rebuilt in
its original size and location. Olson, however, claimed that he never
would have purchased the property in the first place if he was unable
to replace and strengthen the existing fences where necessary in order
to contain his bison. Olson claimed that the parties’ actual agreement
allowed him to rebuild the fences so long as they were not wildlifeproof, and that NCC’s more restrictive version was incorrect.
Clearly, the Court was more persuaded by Olson’s version of events.
First, NCC only raised the fence as an issue after Olson’s neighbours
began to complain about the new fence. Prior to the complaints,
nobody at NCC took issue with the idea that Olson’s intent was to
use the land for bison ranching, or that he may need higher fences to
do so. NCC’s representative involved in the negotiations could not
remember ever discussing fences with Olson during the negotiations.
Second, NCC never focused on fencing before Olson purchased
the land. A baseline report prepared when NCC acquired the
property was silent on wildlife migration. A 2003 lease agreement
signed between NCC and one of Olson’s companies did not have
any restrictive language dealing with fencing.
Third, Olson attempted to resolve the fencing dispute in good faith
using a variety of options. The design of the fence was wildlife friendly
(i.e. Olson raised the bottom of the fence to an average of 18 inches
above ground and the fence’s height could be lowered to between
4 and 4.5 feet when the bison were not present in a particular area).
Olson told NCC that he would ensure that the fences would only be
raised to their full height where there were bison present. Olson also
offered to educate his neighbours about the new fencing and about
bison ranching. He held an open house for the community and offered
to place educational signs along the fence.
Ironically, Olson was portrayed as more of a conservationist
than NCC. The Court noted that Olson was dedicated to the
restoration of wild bison as well as their natural habitat and
the native grasses in the area. He operated his ranches in an
environmentally responsible manner, and thought that his donation
to NCC would help him market his bison meat to the eco — and
health — conscious markets. By contrast, NCC continued to
overgraze the land and did nothing to rehabilitate it while it was
the landlord, despite a baseline report that revealed the rangeland
to be unhealthy. When Olson’s neighbours complained about the
fence, NCC seemed more concerned about community relations
and its reputation than promoting a conservation-oriented solution.
Finally, despite its request of an injunction, NCC failed to
demonstrate that wildlife movement was prevented or additionally
impeded by the new fence.
Rectification
The Court found that the conservation easement could be rectified
as either a mutual mistake or a unilateral mistake. The Court
concluded that the evidence supported a mutual mistake by the
parties with respect to the terms of the easement amendment (i.e.
the parties had a common understanding which mistakenly was not
incorporated in the written amendment) and which allowed the
Court to “rectify” the easement amendment to reflect the parties’
common understanding. Alternately, the Court was prepared to
rectify the agreement on the basis of a “unilateral mistake” (i.e.
Olson made a mistake but NCC was well aware of it and would not
be allowed to take advantage of it). A common intention and prior
oral agreement existed between Olson and NCC’s representative.
Olson never would have agreed to the more restrictive provision on
fencing. Allowing NCC to rely on the incorrect fencing provision
would unjustly enrich NCC at the expense of Olson.
BANKING
Nevertheless, the Court also held that Olson’s fence did not
constitute a breach of the rectified conservation easement.
The fence was wildlife permeable and may even have reduced
restrictions on wildlife movement. In any case, the restrictive
provisions in NCC’s version of the conservation easement
were too vague to be enforceable. For example, if a fence was
required to be the same size, did this refer to the height alone or
to something else? Absurd interpretations could result — e.g., a
fence constructed with wood planks might impede wildlife more
than a taller, more permeable fence, even though the wood fence
would be the same “size” as the original. This would undermine
the entire purpose of the conservation easement.
The Fraud Issue
In September 2004, shortly after closing the deal for the purchase
of the land, Olson began putting in place the legal structures he
needed to run his bison operation. Olson created a trust with the
idea of transferring ownership of the property to the trust in early
2005 after the end of the personal tax year for which he would
use his charitable donation receipt. He referred to the trust as an
“asset protection trust”, which was used to protect the property
from creditors through future generations. Olson used similar
structures for his other ranch land holdings.
In November 2004, while reviewing the conservation easement
for provisions about fencing, Olson discovered the defect in the
easement amendment and the missing page from the amending
agreement (which contained the fencing restriction) that
was attached to the caveat that NCC had filed to protect the
amendment. NCC learned of the omission in December 2004
during a meeting with Olson. The parties continued to negotiate
on the fencing issue, but could not agree as NCC seemed
determined to enforce the more restrictive fencing provisions.
After a few months, Olson continued with his original plan to
transfer the land to the trust and completed the transfer in March
2005. NCC argued that this transfer transaction was fraudulent
because Olson knew that the caveat was defective.
The Court reviewed the Land Titles Act, which has no definition
of fraud but specifies that mere knowledge of an unregistered
interest is not enough to constitute fraud. “Something more”
is needed. An example of “something more” was discussed in
Alberta Minister of Forestry, Lands and Wildlife v. McCulloch
(“McCulloch”)2. In this case, an error in a Crown caveat was
discovered, and McCulloch transferred the unencumbered
property to a holding company almost immediately. McCulloch
was distinguished from the present case since Olson took over
three months to make a similar transfer. The Court determined
that Olson did not create the trust to defeat NCC’s interest, but
as part of a long-run plan which he had used before. He had no
obligation to suspend his plan because of NCC’s public relations
problems. NCC also might have filed a caveat on title when it
discovered the error, to protect its position. It was also clear that
Olson acquired the property in his personal capacity (rather than
through one of his holding companies) to maximize the charitable
donation.
PAGE 3
The Court found that there was no fraud. The requirement for
“something more” must point to dishonest conduct amounting to
actual fraud, not constructive fraud or something less. As fraud is
a serious accusation, there must be evidence that the parties were
motivated to circumvent an interest or deceive the other party.
The Tax Issue
Olson agreed to buy the land at the market value it would have
had if it were unencumbered by the conservation easement. The
value of the encumbered land would then be deducted from the
purchase price and NCC would provide a charitable donation receipt
equal to the difference in price. The receipt could not be issued
right after the signing because there were issues with the appraisal
methodology and a new appraisal was required to determine the
value of the land. A new appraisal was conducted and the parties
knew the correct amount for the receipt in July 2005. However,
NCC chose not to issue the receipt until December 2009. The Court
found that NCC was not actually concerned about the validity of
the easement, but withheld the receipt because it thought Olson was
in breach. The tax receipt should not have been conditional on or
revocable for any post-gift conduct.
There was an implied term in the agreement between NCC and
Olson to provide the receipt in a reasonable amount of time. The
usual practice for charities is to issue receipts by February or March
of the following year, if not immediately, to allow donors to include
the receipt in their tax return. Delay reduces the value of the receipt
due to the time value of money. The Court found that the last day
that the receipt could have been issued within a reasonable time
was August 31, 2005.
NCC argued that Olson was disentitled to damages because he did
not mitigate his losses by applying for taxpayer relief. The Court
found that Olson did not have to apply for tax relief as the process
is highly uncertain and would have been slow, continuing possibly
through trial and complicating the issues even further.
Moral of the Story
At the end of the day, NCC may have done more damage to its
reputation by its hostile conduct towards Olson than it would have
incurred by allowing the fence to be built in the first place. NCC’s
actions were inconsistent with its stated conservation objectives,
and ironically promoted quite a restrictive view of conservationism
when it refused to consider the alternatives proposed by Olson,
such as the permeable fence or community education.
The moral of this story is that parties should proceed with caution
when filing or enforcing any kind of easement. Defects in filing are
not easily rectified, but require an extensive evaluation of the facts
of the case. Olson faced an uphill battle that was not easily won
and required many years of litigation. Despite a multitude of legal
arguments and the numerous issues in this case, NCC ultimately
found itself fenced-in by its own actions.
Footnotes
1
2014 ABQB 303
2
[1991] A.J. No. 144 (Q.B.) and [1991] A.J. No. 1000 (C.A.).
BANKING
PAGE 4
Be Careful Structuring Those
Cross-Border Back to Back Loans
The Tax Man May Bite
by Brandon Holden of BD&P’s Tax Group
Introduction
Banks may see a decrease in cross-border back-to-back loans as a result of the proposed changes to the thin capitalization and withholding
tax rules contained in the Income Tax Act1 (Canada)(the “Tax Act”). Borrowers like to use back-to-back loan structures to reduce tax payable
on business income generated in Canada and to avoid withholding taxes on amounts paid to non-residents. The Department of Finance
views it quite simply as an erosion of the tax base and a tax motivated avoidance of the withholding tax and thin capitalization rules.
If a Canadian operating company (“Canco”) owned by a foreign parent (“Foreign Parent”) earns taxable income in Canada, those amount
are usually distributed to the Foreign Parent by way of a dividend or an interest payment on an inter-corporate loan. Generally speaking,
interest payments provide an interest deduction against income of Canco, while dividend payments do not. No big surprise that if the
corporate tax rate is higher in Canada, it may reduce the overall tax burden of the corporate group if funds are repatriated as interest rather
than dividends, because the interest is deductible to Canco while dividend payments are not.
On the other hand, international tax law recognizes Canada’s right to tax income earned from business carried on in Canada. The Federal
Government’s position is that the excessive use of debt to finance a Canadian subsidiary and the corresponding interest deduction will
reduce the overall tax payable on income earned in Canada.
BANKING
Thin Capitalization
and Withholding Taxes
In order to assert its right to tax Canadian
source income, the Tax Act contains thin
capitalization and withholding tax rules.
The thin capitalization rules generally
deny an interest deduction to a Canadian
corporation if the interest is payable to a
“specified shareholder” and the Canadian
corporation has a debt to equity ratio in
excess of 1.5 to 1. A “specified shareholder” is
non-resident shareholder that (together with
other non-resident persons with which the
non-resident does not deal at arm’s length)
holds at least 25% of the voting shares or
25% of the fair market value (“FMV”) of
the equity of the Canadian taxpayer.
Similarly, the withholding tax rules impose a
withholding tax at a rate of 25% on interest
paid to non-arm’s length non-resident
persons. This rate is reduced to nil if the
non-resident acts at arm’s length with
Canco, provided that the interest is not
paid on a participating debt obligation.
To avoid these rules, Borrowers have made
use of “back to back” loans.
FOREIGN
COUNTRY
CANADA
Loan/Security
Foreign Parent
Debt
Loan
Canco
Back to Back Loans
In such a structure, rather than the Foreign
Parent making a loan directly to Canco, an
arm’s length third party (the “Bank”) acts as
intermediary, such that the Foreign Parent
makes a loan to the Bank (or provides
security) on the condition that the bank
makes a loan to Canco.
In this situation, the thin capitalization
rules are avoided because the Bank acts
at arm’s length with Canco, such that the
Bank is not a “specified shareholder” in
respect of Canco. As a result, the amount
of the loan is not included in Canco’s debtto-equity calculation for the purposes of the
thin capitalization rules, and the interest
deduction may be available to Canco.
Similarly, there will not be any
withholding tax on the interest payment
made, because the Bank acts at arm’s
length with Canco.
Not so Fast – Amendments
to the Tax Act
2014 Budget Proposals
To combat the use of back-to-back
loans to avoid the thin capitalization and
withholding tax rules, the Department
of Finance proposed amendments in the
2014 federal budget (the “2014 Budget”).
The common view was these proposals
were overly broad and could potentially
encompass several legitimate commercial
transactions that were not necessarily
tax motivated. Needless to say, there
was substantial pushback to these broad
proposals.
As an example, under these proposals, if
a foreign subsidiary of Canco provided a
pledge of property to the Bank in order to
a secure a loan that the Bank entered into
with Canco, and Canco had a specified
non-resident shareholder, it could cause
such a legitimate commercial loan to fall
within the definition of a back-to-back
loan arrangement.
I Need a Fix – Draft Legislative Proposals
(August 29, 2014 & October 10, 2014)
On August 29, 2014, the Minister of
Finance released draft legislative proposals
to implement certain measures from the
2014 Budget, and invited comments from
interested parties by September 28, 2014
(the “August Proposals”). These proposals
were intended to refine and narrow the
back-to-back loan proposals contained
in the 2014 Budget. After receiving
comments on the August Proposals, the
Minister of Finance released a second draft
of legislative proposals on October 10,
2014 (the “October Proposals”), which
helped narrow the back-to-back loan
rules further.
PAGE 5
The proposals narrowed the application
of the back-to-back loan rules by:
(i) applying only where the Bank has a
“specified right” in respect of property
that was granted by a specified nonresident shareholder, as opposed to
applying to any pledge of property or
security interest granted by a specified
non-resident shareholder. A specified
right for these purposes would include
a security interest provided to a Bank
“unless it is established by the taxpayer
that all of the proceeds (net of costs, if any)
received, or that would be received, from
exercising the right must first be applied
to reduce [the particular debt].” Thus the
definition is intended to ensure that a
Bank will not have a specified right in
respect of property solely because it has
a security interest in the property.; and
(ii) incorporating a de minimum test
intended to provide possible relief
where multiple parties within a
related borrowing group owe debts
to the lender, such as the crosscollateralization structuring preferred
by Banks in such situations.
Similarly, the de minimus test states that the
back-to-back loan rules will not apply, if the
outstanding amount of the loans, plus the
value of property subject to a specified right,
from the specified non-resident shareholder
to the Bank are less than 25% of the amount
of the Canadian borrower debt with the
intermediary, plus the total of all amounts
that the Canadian borrower or persons acting
at non-arm’s length with the Canadian
borrower, have outstanding under the loan
agreement or a loan agreement connected
with the loan agreement. Accordingly the
de minimus test is also intended to provide
possible relief where there are multiple crosscollateralization debts that are owing to the
Bank by multiple group entities.
Conclusion
The proposed amendments to the Tax Act
should reduce the number of back-to-back
loan structures aimed at circumventing the
thin capitalization and withholding tax rules,
while at the same time, should be sufficiently
narrow to avoid capturing legitimate
commercial banking transactions — but only
time will tell.
Footnotes
1
RSC 1985, c 1 (5th Supp)
BANKING
PAGE 6
PERSPECTIVES…
Syndicated Debt Buy-Backs
by Janie Tremblay *
Introduction
“Perspectives….” is a new feature in our BD&P Banking & Finance Newsletter, which
will explore some of the structures used or topics discussed elsewhere in the world.
We hope that the column may peak your curiosity, whether as a mere intellectual pursuit
or as an additional financial tool.
This first article in the Perspective series will discuss syndicated debt buy-backs, drawing
on European and U.S. perspectives.
Buy-Backs: the Economics
Some Structuring Issues
• sponsors had come to keep the entire leveraged finance segment
of the financial industry afloat: their ability to raise funds
seemed unstoppable; deal sizes and leverage multiples were
on a seemingly never-ending upward curve while, conversely,
minimum equity multiples and average life to an exit were
on a downward curve; and
• whether debt was automatically extinguished when a borrower
bought back its own, or whether that debt only became a nullity
at the point at which it became due and payable; and
Syndicated debt buy-backs take us to the world of leveraged finance
and private equity groups (“sponsors”) — the likes of Apax Partners
and Kohlberg Kravis Roberts. Rewinding to the “pre-2008liquidity-flush-world”:
• secondary trading markets were healthy, with leveraged debt
trading generally at or above par.
Yet, as liquidity receded (culminating with a financial crisis
in full swing), the secondary markets, particularly for leveraged
debt, traded at significant discounts to par. These discounts
(at times, 40%) were often more a reflection of what had become
of the loan markets rather than of the credit quality of the
sponsors’ investments.
In “normal” market conditions, a borrower might have concluded
that it made economic sense to prepay some of its debt in
accordance with its loan documentation. In the afore-mentioned
market conditions, purchasing one’s own debt in the open markets
(either to hold for yield or to forgive) had the potential to achieve
much more advantageous economic results.
Syndicated debt buy-backs were, however, highly controversial.
From the lenders’ perspective, they offended the fundamental
principles of seniority, priority, risk sharing and pro rata repayment.
From the sponsors’ perspective, if the documentation did not
preclude buy-backs, then, in a free market, there should be
no reason to prevent a willing buyer and a willing seller from
transacting in a way that made good business sense.
While the economic rationale for debt buy-backs is straightforward,
the same could not be said of the issues surrounding their
implementation. Underpinning such issues were the facts that
(a) loan documentation was typically silent as to the ability of
a borrower to buy-back its debt, and (b) the legal effect of a
buy-back was not without doubt. For instance, under English law,
it was uncertain:
• whether the extinguishment of debt by a group company would
be re-characterized as a prepayment, though it was generally
thought that it would not be so.
The resolution of the issues required a case-by-case analysis
of the applicable loan documentation, having regard to the
identity of the intended purchaser, as the issues differed if the
debt was purchased by a sponsor or an affiliate (each, a “sponsor
company”) or bought back by a borrower or a member of the
borrower group (each, a “group company”). To highlight only
a few:
• Transfer Restrictions. When debt is bought back, it is effectively
assigned by an existing lender to a sponsor or group company,
as purchaser, bringing into focus the extent to which the loan
documentation permits a lender to do so. Most European
loan agreements would have stated that a lender may transfer
its rights and/or obligations to “another bank or financial
institution or to a trust or other entity which is regularly
engaged in or established for the purpose of making, purchasing
or investing in loans, securities or other financial assets”.
It would be a question of fact whether a sponsor or group
company would fall within that language.
BANKING
PAGE 7
• Prepayment and Pro Rata Sharing Provisions. If a buy-back
transaction was re-characterized as a prepayment, it would
need to comply with the provisions which typically applied to
prepayments, such as notice periods, minimum amounts and
pro rata application of the proceeds, which are designed to ensure
that lenders share equally in recoveries in respect of debt.
• Voting and Information Sharing. Until the debt was extinguished,
the sponsor or group company which purchased the debt would
be holding it as lender, which, from the remaining lenders’
perspective, could lead to problematic results on issues such as
voting, information sharing and participation in lenders’ calls
and/or meetings.
• Covenants. Buy-backs could breach covenants or have unintended
effects on financial calculations.
For instance:
(a) the buy-back or holding of the debt could run afoul of
negative covenants on acquisitions, investments or financial
assistance or positive covenants on the conduct of business;
(b) the extinguishment of the debt could run afoul of negative
covenants on asset disposals;
(c) “EBITDA” could be reduced by the consideration paid
and/or increased by any profit resulting from the
extinguishment (or re-sale) of the debt;
(d) “Debt Service” could be inflated, where voluntary
prepayments were added to it, by a re-characterization
(as a prepayment); and
(e) the funds ear-marked for a buy-back could, where the
borrower is subject to an excess cashflow sweep, be included
in the “Excess Cashflow” calculation.
• Intercreditor Agreement. Buy-backs could also breach covenants in
an intercreditor agreement. For instance, the holding of the debt
could run afoul of negative covenants on granting guarantees and
security for, or on making payments in respect of, intra-group debt.
• Other Issues. Regardless of the loan documentation, buy-backs
could trigger adverse tax consequences, and have regulatory and
insider dealing implications.
Yet, buy-backs were concluded without the need for lenders’ consent,
with the first of such buy-backs in Europe being the purchase, in
February 2008, by Danish telecom operator TDC (owned by Apax
Partners, Kohlberg Kravis Roberts, Permira and Providence Equity
Partners) of €200 million of its senior debt. This sent the syndicated
debt markets into a state of frenzy.
The European Solution
The Loan Market Association (“LMA”), which is a Europeanbased trade association representing the interests of the loan market
participants, revised its primary facility agreements in early 2009 to
reflect the terms upon which buy-backs might be acceptable. As a
result, the LMA now provides the option of a complete or partial
prohibition on “Debt Purchase Transactions”, which provisions,
to this day, continue to be standard and rarely negotiated in the
European syndicated loan markets.
BANKING
In the event of a “complete prohibition”, all group companies are
prevented from participating, directly or indirectly, in any Debt
Purchase Transaction.
In the event of a “partial prohibition”, a borrower is allowed to
purchase its own term debt, provided that: (a) the purchase is made
for a consideration of less than par; (b) the purchase is made through
an open process (either through a solicitation or an offer process)
whereby, if more than one lender is willing to sell at the same price,
their debt is purchased pro rata; and (c) the purchase is funded from
additional equity injections or excess cashflow not required to be
applied in repayment of the facilities. Further, the provisions:
• deem the borrower to qualify as a lender (addressing “transfer
restrictions” issues);
• confirm the extinguishment of the debt so bought back, and
deem such extinguishment not to amount to a prepayment of the
facilities, such that the pro rata sharing provisions are not applicable
(addressing “prepayment and pro rata sharing provisions”, “voting
and information sharing” and “intercreditor agreement” issues); and
• deem any breach of covenants which may result from a permitted
debt purchase transaction not to have occurred (addressing
“covenants” issues).
In either situation, as sponsor companies are not precluded from
making open market purchases, if such a company holds debt in its
own borrower groups, the LMA provisions (a) nullify the voting rights
that it would otherwise have had, and (b) prevent it from participating
in any lenders’ meetings or calls or from receiving any documentation
prepared at the request of any finance party. It is worth noting that
affiliated, but independently managed, debt funds of sponsors are
specifically excluded from the ambit of such provisions.
Meanwhile, in the U.S.
The economic and structural issues were not dramatically different
in the U.S., though it proved much harder (without lenders’ consent)
to structure around the transfer restrictions, which, unlike their
European counterparts, routinely excluded sponsor and group
companies from the list of “eligible assignees”.
The Loan Syndications and Trading Association (the “LSTA”), which
is a U.S.-based trade association, also representing the interests of
the loan market participants, revised its model provisions to deal with
syndicated debt buy-backs. However, unlike the LMA in Europe, the
LSTA provisions are not as persuasive in the U.S. market. As such,
and with few buy-backs being effected without lenders’ consent, the
contractual regime governing them developed in a more ad hoc fashion
PAGE 8
in the U.S. Initially, it reached broadly the same conclusions as the
LMA regime, with the added quirks that the buyers were required to
represent that they were not in possession of any non-material nonpublic information, and that open market purchases were subject to
a cap (which extended to independently managed debt funds). It has
however evolved in the following ways:
• inclusion of some flexibility for borrowers to make open market
purchases;
• inclusion of a feature where buy-backs have a corresponding
dollar-for-dollar reduction in the excess cash flow sweep;
• successful pushback on the inclusion of the non-material non-public
information representation; and
• successful pushback on the open market purchase cap for
independently managed funds.
And, the Canadian Experience
In Canada, the structuring issues were not dissimilar to those in
Europe and the U.S. (other than as regards transfer restrictions,
which, at times, provided virtually no restrictions at all), but the
economics were different. The Canadian loan markets:
• are much more corporate-focused, with relatively few private
equity-backed and leveraged transactions;
• do not have the same depth in secondary trading; and
• did not experience liquidity issues to the same degree,
all colluding to keep debt buy-backs at bay.
Conclusion
Though the financial crisis has abated and secondary trading no longer
carries such deep discounts, the markets have been far from smooth
sailing, seeing sponsor and group companies still requesting the
flexibility to effect, and lenders still requiring protection in respect
of, buy-backs in loan documentation.
Whether the elements which created the perfect storm at the
height of the crisis might re-occur, whether the Canadian markets
might react differently then and whether buy-backs might be used
to influence debt restructurings are matters which we will leave
open for debate.
If you have enjoyed this first article of “perspectives….” And wish
to read about specific international topics, please do let us know.
* The author of this article, Janie Tremblay, joined BD&P in 2013, returning to a canadianbased practice after seven years in London, England, and one in São Paulo, Brazil.
In Canada, the structuring issues were not dissimilar to those in Europe and the U.S.
(other than as regards transfer restrictions, which, at times, provided virtually no
restrictions at all), but the economics were different.
BANKING
PAGE 9
The Bogus OPPSA Registration
There was no legitimate basis for the
OPPSA registration as there was no
signed security agreement between any of
the parties meaning that there was no valid
security interest. Without any legal right
to register the financing statement under
the OPPSA, PHM and Myers sought an
order from the Superior Court under the
OPPSA, directing its discharge, seeking a
statutory award of $500 and damages for
injurious falsehood, punitive damages and
costs on a full indemnity basis.
Attempted “Shake
Downs” with a
Bogus Personal
Property Security
Act Registration
May Result in
Substantial Costs
Ms. Blackman’s corporation responded
to Myers informing him that the OPPSA
registration would only be discharged
upon payment of $10.25 million.
By Amy Yeung, Student-at-Law
What to Do with an Unauthorized
PPSA Registration: The General
Rule
As a general rule, when an unauthorized
Personal Property Security Act1, (“the
APPSA”) registration is made in Alberta,
the response should be to approach
the alleged secured party and ask
that party to provide evidence of the
alleged indebtedness or to discharge the
registration immediately. If neither of
those responses is effective, another option
is to make a court application for an order
requiring the registering party to discharge
the registration. A recent decision of the
Ontario Superior Court of Justice (“the
Superior Court”) deals specifically with
this matter of an unauthorized registration
in the context of the Ontario Personal
Property Security Act2 (“the OPPSA”).
Background
In Myers v Blackman3, the Superior Court
dealt with an application to discharge
an illegitimately registered financing
statement under the OPPSA. The
applicants, the law firm Papazian, Heisey,
Myers (“PHM”) and one of its senior
partners, Michael Myers (“Myers”) became
alleged debtors of a security agreement
after PHM tried to recover amounts owing
by the Blackmans under a line of credit
extended by PHM’s client, the National
Bank of Canada (the “Bank”).
The Finding of the Superior Court
When PHM and Myers sent a demand
letter to the Blackmans for payment of
$21,076.60 with interest, Ms. Blackman
responded with a series of letters attempting
to “shake down” PHM and Myers. The
letters from Ms. Blackman unilaterally
imposed obligations on PHM and Myers
and required them to pay Ms. Blackman fees
for failing to comply with her demands. Mrs.
Blackman’s imposed obligations included
$1 million per use for any unauthorized use
of her name and $1 million per instance
for threats and/or attempted intimidation.
PHM rejected these meritless demands in
Ms. Blackman’s letters and proceeded with
a Small Claims Court proceeding to recover
the Bank’s funds.
Default Judgment Granted
but the Demands Continue…
Instead of defending the action in Small
Claims Court, Ms. Blackman decided to
send PHM and Myers a notice imposing
more aggressive obligations with an invoice
of $2.75 million for fraud, unsolicited
correspondence and threats. In a further
attempt to “shake down” PHM, Ms.
Blackman incorporated a company and used
that corporation as a shield to foist more
forceful demands. This corporation registered
an OPPSA financing statement against
Myers and PHM. Since the Blackmans did
not defend the Small Claims Court action,
PHM obtained a default judgment against
the Blackmans for $20,536.99.
Without colour of right, the OPPSA
registration against PHM and Myers was
discharged. In addition, in the absence of
any legitimate basis upon which to assert the
OPPSA registration, Ms. Blackman and her
corporation were ordered to pay the $500
statutory award under the OPPSA. Without
any evidence of actual injury, the Superior
Court did not award damages for injurious
falsehood, even though the Superior Court
found the OPPSA registration was actuated
by malice. The Court, surprisingly perhaps
in the circumstances of Ms. Blackman’s
behaviour, also refused to award any punitive
damages, taking the position that punitive
damages are the exception and not the rule.
Instead, substantial costs were awarded
against Ms. Blackman and her corporation,
denunciating Ms. Blackman’s reprehensible
misconduct and deterring other parties
from emulating that conduct.
Although this decision was issued by the
Superior Court of Ontario in the context
of the OPPSA, its principles are likely to
be applied to any illegitimate registrations
filed under the APPSA here in Alberta.
The lesson learned — unless one has a signed
security agreement between the purported
parties and a legitimate basis for registering
a financing statement under the relevant
personal property security legislation, it
will be discharged. And one can be held
liable to pay substantial costs.
Footnotes
1
2
3
RSO 1990, c P 10.
RSA 2000, c.P-7.
2014 ONSC 5226.
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