Next Thursday, December 12th, is the day the proposed settlement agreement between the three large tobacco companies and those suing them will be put to its first survival test.
On that day, a secret vote will be held among the companies' creditors to decide whether or not the proposal drafted by the Hon. Warren Winkler is an acceptable resolution to their claims.
In insolvency proceedings, it is usually the companies which draft the proposal to their creditors. In this case, the task was assigned to Mr. Winkler after the negotiations he had mediated between the companies and their creditors had dragged on for more than four years with no obvious result.
Just over a year ago he and the participating accounting firms (monitors) were assigned the task of putting pen to paper. Their suggested text was made public on October 17 this year, and on Halloween it was decided that it should be put to a vote.
The settlement proposal will only survive the vote if it receives a double majority of votes in favour. It must be approved by more than 50% of the eligible voters AND ALSO be supported by those holding at least two-thirds of the companies' debts.
As shown in the settlement plan (below), the effect of this requirement is that some creditors have more voting power than others.
To succeed, those representing some injured Canadian smokers must vote in favour, because they hold 64% of the eligible votes (186,003 of 289,906). A second class of injured smokers in Quebec hold just over one-third of the votes (186,003). Tobacco producers have just over 1% of the votes, but the provinces and other parties have only one vote each.
No other party has enough power to block the vote on their own. The two claimants with the largest claims (Quebec and Ontario) each hold about one-fifth of the value of the proposed compensation: it would take both of these provinces rejecting the settlement before it would collapse. Most of the provinces, including Ontario, have indicated that they will vote in favour.
The results of the vote will be provided to the court on Friday the 13th of December. In the likely case that the vote is in favour, details of the court review of the settlement will be made clear the following week, with a flurry of other preparations for the hearing now scheduled to take place at the end of January.
It would be a whole different ball game if the vote went against: the parties would be back to where they have been since March 2019.
Survival test #2
The next survival test for the settlement agreement will take place at the Sanction hearing, which is scheduled for January 29 to 31. During this 3 day hearing, Justice Morawetz will consider whether the agreement/plan of arrangement is fair and reasonable, how much the class action lawyers should be paid and other issues.
If he decides against the deal, then the parties are back to where they have been since March 2019.
Survival tests #3 and ... ?
A thumbs up or thumbs down from Justice Morawetz may not be the end of the road because his decisions are subject to appeal. The companies and other parties could try to contest any rulings and/or take other actions to block its implementation.
Already we know that two of the companies object to some portions of the plan. The decision to assign the drafting of the plan of arrangement to the mediator is legal novelty - and legal novelties involving rich and unhappy litigants often end up before the Supreme Court.
Other actions may also be available to the companies, should they wish to pull the rug out from under the plan if it makes it past the first hurdles:
* The proposal is drafted in ways which require Japan Tobacco to stop using fancy corporate footwork to make it look like it loses money in Canada. With a small market share and the prospect of only operating at 15% of net revenues, its headquarters may prefer to pull up stakes and abandon the Canadian market.
* The plan contains nothing to resolve the tension between Philip Morris and British American Tobacco on how to apportion payments between them. Subsequent lawsuits between them on this dispute could cause further delays.
