"Diligently and in good faith": tobacco companies get another 6 month extension on insolvency protection

In a now familiar pattern, Justice MacEwen's court quickly arrived at a decision to give Canada's 3 large tobacco companies a further 6 month extension on insolvency protection. All lawsuits and other claims against them are stayed until March 31, 2022.

Between 10:13 and 10:31, his virtual courtroom was in session. Youtube noted that 28 people watched the proceedings which involved an even larger number participating in the Zoom call that now substitutes for an in-person court hearing. 

During those 18 minutes, 6 lawyers representing each of the companies and each of their accounting-firm monitors gave near-identical presentations.  The companies were working 'diligently and in good faith' on a 'resolution with all stakeholders and in concert with other firms'. They were carrying on business as usual -- and making investments in new packaging equipment and new off-shore suppliers to ensure future operations.

Only 2 of the parties with claims against the companies addressed the judge -- lawyers representing Ontario and Quebec (the 2 largest claims) confirmed that they did not oppose the stay extension. 

Lawyers representing the Quebec class action (the only claim that has been upheld by a court ruling) expressed no concerns about the pace of negotiations or the impact of the delay on the injured smokers they represent, as they had done previously. Nor did the lawyers representing Ontario's tobacco farmers, whose request to be excluded from the proceedings had been twice shot down by Justice McEwen (in March, and then in June). Their new silence may reflect their satisfaction with developments behind the mediator's curtain, or merely a resignation to being in the back-seat of a process in which the provinces, as the largest claimants, will ultimately call the shots.

From a public health perspective, it is noteworthy that the recent business investments cited by the companies to foster future sales -- $20 million here to upgrade shipments to retailers, $29 million there to replace packaging equipment, $4 million in severance for workers displaced by off-shore production, $94 million budgeted for promotions and marketing -- significantly exceed the investments by governments or others to reduce tobacco consumption in the same period.

Business as usual, indeed!

Post script:

The stay extension orders can be found here:

• Imperial Tobacco (endorsement)
• Rothman's, Benson & Hedges (endorsement)
• JTI-Macdonald (endorsement)

Tobacco companies are asking for another 6 months' insolvency protection

In only 9 days (September 30) the current time-out ("stay") on lawsuits against Canada's 3 large tobacco companies will expire. In only 6 days (September 27th) the Ontario court which is charged with setting the terms (if any) of their insolvency protection will convene to hear a request for another 6 month extention.

Court rules require the documents for this hearing to be made public. Those available to date are linked below:

Companies' motions for extension

• JTI Macdonald
• Rothmans, Benson & Hedges
• Imperial Tobacco

Monitor's Reports:

• Rothmans, Benson & Hedges
• Imperial Tobacco
• JTI Macdonald

Creditor's motions

• Ontario Flue-Cured Tobacco Marketing Board

The public will be able to view the hearing through the following Youtube link:

• https://www.youtube.com/watch?v=_ze7onPW__I

The Monitor's reports provide updates on the Canadian tobacco market and their operations during this period. From this we know:

Progress of negotiations:

• Little information on the negotiations is provided in the report, other than statements  that the  discussions are continuing "with a view to facilitating a pan-Canadian global settlement of Tobacco Claims"

Positions of creditors

• The federal government is now among the creditors (as the payments required under a previous settlement have not been paid and as Revenue Canada has assessed an additional $227 million on a previous tax year)

The companies are making long-term investments

• The companies are making long-term investments in new packaging and distribution equipment.
• ITL is expanding the number of VUSE stores in Canada from 4 to 9 by the end of the year. 
• ITL is shifting its source of fine-cut tobacco from Mexico to Germany and Hungary.
• RBH will shift 25% of its production to to Mexico 
• Rothmans plans to launch a vapour-based product in Canada this fall ("Veev, starting in the fall and gradually rolling it out nationally, region by region.") 
• JTI has signed a long-term (6 year) collective agreement with its workers, and is shifting some operations to the Philippines. 

Some investments are being challenged by creditors

• The Quebec class action lawyers objected to Imperial Tobacco's intention to pay $55 million to BAT operations in Mexico related to the undepreciated cost of manufacturing equipment that will no longer be requird by ITL as a result of new plain packaging requirements

The companies continue to operate with a high profit margin

• Because it raised prices, Imperial Tobacco generated slightly more revenue than it had expected, even though sales volumes were down (by an unspecified amount). It's gross revenues (less tobacco taxes) for the period were 876 million, and its net revenues for the half year were $400 million. 
• Rothmans, Benson and Hedges' sold more cigarettes than it expected, with revenues (less tobacco taxes) were $876 million, from which it retained $466 million.
• JTI-Macdonald's revenues (after tobacco taxes) were $617 million, of which $124 million was retained.

Lawyers and accountant billings continue

• During the 6 month period, ITL spent $3.5 million on professional fees, RBH spent $2.7 million on 'restructuring costs' and JTIM spent $3.5 on legal and accounting services.  

The "kitty" remains far short of the $500+ billion claims

• For the past 30 months, the companies have not been permitted to send their profits to the multinational owners. Each company has to report on the amount of cash that is available to creditors. As of September 2021, RBH has $3.5 billion available,  Imperial Tobacco has $2.2 billion available and JTIM has $694 million set aside. 

Another six month extension efficiently arrived at

Say this for Justice Thomas McEwen's management of the insolvency protection for Canada's Big Three Tobacco Companies: he is efficient.

It took little more than half an hour for his court to extend insolvency protection for the companies -- adding another 6 months to the two years that have already passed since they sought protection after the Quebec Court of Appeal ruled they had to compensate some of the Quebec smoekrs they injured. 

Despite the enormity of the case (Justice McEwen described it as "one of the largest if not the largest restructuring cases in Canada's history") and despite the army of lawyers on the file (150 on the service list), this judge succeeded in minimizing the time the curtain on this case was raised for public view. (Streamed live on Youtube, the hearing really was on public view!)

It would have been even faster had not the tobacco farmers chosen to signal that they want their claim to be hived off from those of the provinces and injured smokers. Although their motion to this effect was not officially up for discussion today, they had signalled their intent in a small submission related to the extension. 

One way Justice McEwen makes his hearings efficient is by letting the lawyers know how he is going to rule on their submissions before they make their arguments. He did this to efficient effect today with Mr. William Sasso, who (virtually) stood to signal where the farmers would be going with their request for separate treatment.

After a couple of moments, Justice McEwen interrupted Mr. Sasso on procedural grounds (the motion was not scheduled for this hearing). He then made clear (to these ears at least) that the farmers' request was a lost cause. 

"I will let you know my views candidly", the judge said, drawing a parallel between the concerns of aging and dying farmers' and those of  the aging and dying Quebec smokers whose request for separate treatment he had rejected earlier in the process.  He even cast doubt on the receivability of the farmers' motions ("if I decide to hear the motion"). Hearing this, Mr. Sasso quickly announced that he had nothing further to say. 

Aside from this hic-cup, the hearing ran quickly and agreeably. Each company briefly identified any major issues in their updates on the file and offered assurance that the mediation was continuing in good faith. Many of the provincial teams voiced their approval to the extension, one mentioning that they were "fully engaged" in mediation. The Monitors gave a collective thumbs up.  No word was said in opposition to the extension.

And there we have it, likely with no more on this case for another six months unless the doors open and a deal is announced.

Developments, if there are any, will be posted on the Monitor's sites. By the end of the afternoon, the extension orders had already been uploaded to those portals.

• Deloitte for JTI-Macdonald
• EY for Rothmans, Benson and Hedges
• FTI for Imperial Tobacco 

The farmers want special standing in the CCAA process

At the time of the last post, it seemed like the sixth extension of the court-ordered insolvency protection for Canada's tobacco companies would go without a hitch. The hearing is scheduled for 2 p.m. on Tuesday, March 30 (viewable on YOUTUBE here!), a mere 24 hours before the current order expires.

Over the weekend  a new motion appeared on one of the Monitors' sites. Ontario's tobacco farmers have now signalled they will ask the court to etablish that their claims against the companies are of a different nature than those of the provinces and injured smokers, and that the settlement of their claims should not be tangled up with these other suits. 

Their 28-page Factum and 277-page Motion Record is a good refresher of the chain of events that lead from the cigarette manufacturers' participation in round-tripping cigarette exports in 1993 to a plea-deal struck with governments some 15 years later. In 2008 the companies agreed to pay $1.15 billion in fines and unpaid taxes. (No Canadian employees went to jail.)

As I read it, it was the admission of guilt in those proceedings that emboldened the farmers to claim that they had been underpaid under the terms of their contract with the companies, under which they were paid less for exported cigarettes than for those made for the Canadian market. In 2009 they filed a suit, demanding $50 million to make up for that shortfall.

The companies pushed back, saying that their agreements with government had closed that chapter and that the farmers's demands should be considered a 'released claim'. Besides which, so much time had passed that the issue could no longer be considered by the courts. These issues were swatted away, but they took court time, and the farmers' case had still not gone to trial before the tobacco companies headed to insolvency court in March 2019 immediately after the Quebec Court of Appeal told them to hand over $13.5 billion to Quebec smokers injured by decades of corporate wrongdoing.

As lengthy as the material filed by the farmers is, it does not tell the whole story. Two important details were left out.

The first is that $286 million was paid to farmers by the federal government, and was funded from the federal proceeds of the plea-deal. These payments were announced on August 1, 2008, the day after the agreement with the companies was reached as part of a Tobacco Transition Program. The farmers have arguably already been compensated as a result of their clients' redress for involvement in illicit sales. 

The second missing element is the subversion of the Tobacco Transition Program from one intended to phase out tobacco-growing in Ontario to one which helped sustain it. This happened with the active involvement of farmers who took payments, but continued to participate in tobacco farming, including by transferring property to family members.

The farmers' brief does not identify the receipt of money to get out of tobacco growing, but does not deny the continued participation of the farmers. "Tobacco Manufacturers continue to be supplied with Ontario tobacco grown from some of the very same farms operated by the Producers who sold their tobacco through the Tobacco Board. Many of the licences to grow Ontario tobacco are now owned by the Producers’ offspring (children and grandchildren) and many of the Producers still assist in the production of Ontario tobacco currently supplied to the Tobacco Manufacturers." 

As data from Ontario shows, a lot of tobacco is still being grown in Ontario.  

Having had the $286 million cake of exit payments funded from a tobacco settlement, the farmers are now seeking an additional $50 million (plus interest) slice. If their case settles before the decisions of two Quebec courts are upheld, it will be one more blow to injured Quebec smokers. 

With only one (small) objection, all Canadian lawsuits against tobacco companies will likely be extended for yet another 6 months.

 Next Wednesday (March 31), the Ontario court order which has suspended all legal actions against tobacco companies will expire. On the day before, the dozens of lawyers representing those suing and those being sued will meet (virtually) to argue whether or not the "stay" should be extended for an additional 6 months. The stays have now been in place for 2 years. 

The outcome of the scheduled hearing before Justice McEwen seems to be an inevitable "Yes" to the companies, request. It is now well after the required notice period and only one objection to the extention has been filed, by a relatively small creditor. The big players in the talks (the governments and Quebec class actions) have not signalled any opposition, or any requests to alter the current mediation process. (A backgrounder on these actions is available here)

Follow the action

The COVID-19 pandemic has prevented in-person court hearings, but it has created the opportunity for events to be monitored through phone calls. Those wishing to listen in on proceedings can do so through Youtube at by following this link: 

The hold-out

The objection was filed by the Ontario Flue-Cured Tobacco Growers’ Marketing Board. The farmers are seeking redress for having been underpaid during the 1990s when Canadian tobacco companies arranged for untaxed cigarettes to be re-routed through Indigenous territories and back into Canada. Because these contraband cigarettes were manufactured as "exports", farmers received a lower payment for them than they would have for domestic sales. The farmers filed their suits in 2009, shortly after federal and provincial governments struck a deal with the companies over lost taxes during that period.

In their opposition to the extension, the farmers say their case against the companies is distinct from the others', that it has made no progress during mediation ("has not received any proposal from the Tobacco Manufacturers"), is being left out of discussions ("has no role whatsoever to play in whatever efforts are being made through the Court-Appointed Mediation process"), and feels it is unfair for farmers who were poorly treated in 80s and 90s should have to wait more than 30 years to have their issues addressed.

The financial updates

This is the 6th request for a stay on litigation, and each request has been accompanied by a monitor's report which provides a financial snapshot of the cash-flows of the companies. These are not fulloy reliable financial statements, as they are not adjusted for deferred income and postponed bills, but they do provide more transparency on the tobacco industry market than usual. It has been about 20 years since all of the companies were transferred into fully private ownership and since Canada-specific financial reports and management discussions were available for public view.

The financial pictures provided in the monitors reports (links provided below) are presented somewhat differently than the financial statements typically seen in annual reports, and each company has chosen to provide different levels of details. JTI-Macdonald was the only one to identify its promotional expenditures, for example, only two of the companies revealed how much they paid for the main ingredient in their products (tobacco), and one company combined excise and income taxes in its report. 

What the numbers show:

The only money transfers are from smokers. The CCAA process has prevented smokers from receiving compensation from tobacco companies, but it has not stopped tobacco companies or the governments suing them from receiving money from smokers.

Even in insolvency, tobacco companies are enormously profitable. During this period the annual combined net (after tax) cash retained by the companies is about $1.7 billion dollars. This is about one-half of the $3.3 billion they collectively received through sales and other activities (after excise, sales and income taxes are discounted). If these are final numbers, this will give them net profit margin of about 50%.

These high earnings are still not enough to satisfy claims. At the beginning of the CCAA process, the companies declared that they had $2.5 billion between them as cash available to pay their creditors. Two years later, that amount has grown to $5.8 billion. This is only 1% of the amount that is being claimed against them.

Governments don't need lawsuits to get money from smokers. During this period, Canadian smokers contributed more than $6 billion per year in tax revenues to governments through the companies. (This will include taxes received by the federal government, which is not involved in the lawsuits). Smokers remain the only source of revenue for any compensation paid by the companies in settling these lawsuits.

The cheapest component of cigarettes appears to be tobacco. Two of the companies, RBH and JTIM, provided information on how much they spent on the main ingredient in their products, tobacco: 4% and 2% of their operating costs respectively.

Even in a dark market, promotions are a major cost. Only one of the companies, JTIM, provided expenditures on advertising and promotion. In the two-year period it spent $225 million on promotions, or 35% of its operating costs (8% of its total costs, once its unusually high payments for trademark rights are included). JTI is the only company which does not have a direct contracting system with retailers, so the incentive payments it makes to retailers are not integrated with its billings, as they are for other companies.

Tobacco companies pay well. RBH spent $104 million per year on salaries for its 850 employees and contractors -- an average pay and benefit package worth $120,000. The average for JTI's 500 employees was even higher - $146,500.

Canada's 4.7 million smokers each contributed about $2,000 per year to the tobacco market. About $340 of that was used to manufacture and distribute the cigarettes; governments received about $1,300 in taxes and tobacco companies cleared the remaining $360.

More is being spent to keep tobacco companies alive than is being spent to protect their consumers. During these two years, the companies spent more on "restructuring" costs to keep their companies alive than Health Canada spent on activities aimed at preventing deaths from tobacco. ($74 million vs. $68 million)

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Monitor's reports with financial information:

Imperial Tobacco

Monitor's Ninth Report March 19, 2021
Monitor's Eighth Report September 22, 2020
Monitor's Seventh Report February 13, 2020
Monitor's Fifth Report September 25, 2019
Monitor's Fourth Report June 24, 2019
Monitor's Second Report April 24, 2019
Monitor's First Report April 3, 2019

Rothmans, Benson & Hedges

Seventh Report of the Monitor - 19 Mar 2021
Sixth Report of the Monitor - 21 Sep 2020
Fifth Report of the Monitor - 13 Feb 2020
Third Report of the RBH Monitor - 25 Sep 2019
Second Report of the Monitor - 24 Jun 2019

JTI-Macdonald

Ninth Report of the Monitor - March 22, 2021.pdf
Eighth Report of the Monitor - September 18, 2020.pdf
Seventh Report of the Monitor - February 13, 2020.pdf
Fifth Report of the Monitor - September 25, 2019.pdf
Fourth Report of the Monitor - June 21, 2019.pdf

Agreement to tweak JTI's protective order

 Last week JTI-Macdonald made public its request to the Ontario Superior Court for an amendment to the Order under the Companies' Creditors Arrangement Act that is currently protecting it from claims from injured smokers, third-party government healthcare providers and other litigants. 

In its Notice of Motion it asks the court to lift the stay on litigations enough that the coimpany is able to pursue recovery of the value of a stolen truck of tobacco and also resolve a work-related injury claim. A proposed hearing on February 3rd was mentioned.

This seems to have raised no concerns, and no hearing was held. Yesterday, Justice McEwan agreed with the proposed changes, and issued an amending order.