Thursday, 31 October 2024

“The precarious state of this restructuring”

It seemed a foregone conclusion that at today's hearing, Ontario Chief Justice Geoffrey Morawetz would agree to allow a vote on the proposed plan to resolve the lawsuits against Canada's insolvent tobacco companies. After all, December 12th had been set as a day for the vote some weeks ago and the vast majority of the vast number of parties involved wanted this to take plus.

Indeed, by early afternoon, the judge indicated he would be issuing: a) Meeting Orders; (b) claim procedures orders and (c) an extension of the litigation stay to January 31, 2025.

The vote will take place on December 12th. Approval requires the support of half of the creditors and two-thirds of the amount owed. These amounts have been calculated in a way that ensures that representatives of both individuals and provinces will have to support the plan for it to move forward for review by Justice Morawetz at the 'Sanction' hearing. 


Although it was seemingly a relatively simple set of questions (can the proposed plan go to a vote, and what rules will guide that process), it came after a long debate and supported by a ton of paperwork. (The documents filed in connection with this question are listed at the end of this post.) 

It took until the early afternoon before the clear majority got the green light they wanted. The delay came despite the clear enthusiasm of the mediator (Hon. Winkler expressed through a lawyer) for the plan he drafted. It came despite the approval voiced by the provincial governments and injured smokers to whom the companies are indebted. It came despite repeated reminders from the bench and the bar that today's issue was only the procedural issue of whether or not to move to this next step. It came despite assurances that the ingredients of the plan would be reviewed at a future "sanctions" hearing. 

The delay came because two of the companies are unhappy with the amount of money they will have to spend.

"Jointly and severally" hurts Philip Morris's subsidiary 

Rothmans, Benson and Hedges is unhappy because the plan proposes that compensation will be paid as a share of each company's profits. For the first 5 years, each company will pay 85%, dropping by 5% in each subsequent five year periods. A company that is not profitable will pay nothing. A company that is more profitable will pay more. All companies will pay until the total compensation is satisfied.

Rothmans does not sell as many cigarettes today as Imperial Tobacco, and it did not sell as many in the years when the wrongful actions that are the subject of the suit took place. (The proposed embeds an end date for wrong doing - "legal breach" - as March 1996). Moreover, Justice Riordan found that Imperial Tobacco behaved worst of the three companies -- and ordered it to pay two-thirds of the penalty. (Ruling, para 1013)

RBH would appear to want the "allocation issue" to be resolved in a way which reduces the likelihood of it paying more than the others. An allocation agreement among the companies remains one unresolved element of the proposed plan. From today's representation, RBH seems to feel it is on the back foot of the negotiations. The comments today from ITL's representative suggest there is not even agreement on the scope of the disagreement - their counsel suggested that only for $175 million of the $32.5 billion deal was that company prepared to make adjustments.

Japan Tobacco wants royalty payments to get priority 

The decision of Japan Tobacco to organize its ownership of Canadian subsidiaries in ways that avoided taxes and reduced its litigation exposure has been gone over a few times over the past 10 years. (It was first reported here in 2013).

Today two Japan Tobacco subsidiaries tried to convince Justice Morawetz that the failure of the proposed plan to give its inter-company payments the status of secured creditors was reason to not proceed with the vote. 

A particular bug-bear was the drafting of the plan by a third party. JTIM's Responding Factum speaks disparagingly of the process: "unprecedented" "beyond reasonable".  It suggests that assigning the task of drafting to court officials -- creating a "creditor drive-by restructuring" is improper and would not survive appeals.

Given the improbability of putting a spoke in the wheels at this point, the lengthy elaboration of the perceived injustice this will cause sounded like a tactic in a different strategy. With more negotiations to come, as their counsel put it, they hoped to "soften the views of those across the table from us who might think they can do this [impose a plan that the company does not agree with].

The judge gave them the cold eye and asked them to signal where they would take their concerns if they were not satisfied. "What is your endgame?" he asked them. "Everyone knows the decision tree that is going forward in the weeks ahead."

The question was left unanswered. Withdraw from Canada?  Sell out to GRE?  Exhaust appeals? It's not clear how these options would play out or affect the ability of Quebec claimants to finally receive compensation.

The Social Stakeholders

The hearing was book-ended with submissions from two of Canada's largest health charities.

The hearing opened with a request from the Heart and Stroke Foundation to have the hearing postponed by three weeks.  It takes a special kind of moxie to walk into a Zoom meeting with 50 lawyers bedecked in court dress and suggest that they take the rest of the day off, but James Bunting did it seemingly without embarrassment. (To date Heart and Stroke has not issued any comment on the proposed settlement plan). The request was turned down flat. 

At the end of the day, the Canadian Cancer Society proposed a series of amendments they would like to see to the plan. Their five suggestions were: (1) expanding the scope of the foundation to consider different forms of research related to tobacco use; (2) making public the documents exchanged under discovery; (3) including some (unspecified) promotional restrictions; (4) rewording the covenants so that the companies are no longer obliged to continue past practices; and (5) including measures to prevent smoking, given that future smokers will, through their purchases, paying compensation for claims.

Hanging by a thread?

There was much that was said - in words and in silences - that suggests that the participants in this process are far from certain of the outcome. Justice Morawetz acknowledged that the time would come when he would have to assess the fairness and reasonableness of the proposed plan to the parties (although he hinted that a priority was to protect creditors, not companies).

What happens if the wheels fall off this bus?  If, to use the parlance of today's hearings, the 'unsolved' issues do not become 'solved' by the Sanction hearing anticipated for January?

JTI's counsel laid out the three normal options for the provinces and other creditors at the December vote:

  • Vote in favour of a plan
  • Vote against and liquidate the company in bankruptcy
  • Convince a court to appoint a receiver so they can run it themselves
At at the end of a hearing where the plan was described as "precarious" and "unresolved" there was a clear impression that the conclusion of the process is far from certain. Back up plans have certainly been developed, but they are being held close to the chest.

But, as JTI's lawyer pointed out, if the wheels fall off this proposal, two other options remain for the provinces and the other creditors.

Related documents:

JTI Macdonald

RBH

Imperial

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