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Houlden & Morawetz Insolvency Newsletter | Compensation information

Court’s power to approve a key employee retention plan and seal compensation information in a CCAA proceeding

Houlden & Morawetz Insolvency Newsletter

By: L.W. Houlden and Geoffrey B. Morawetz

Re Essar Steel Algoma Inc.

Re Essar Steel Algoma Inc. (2015), 2015 ONSC 7656, 2015 CarswellOnt 18694, 31 C.B.R. (6th) 116 (Ont. S.C.J. [Commercial List]) Essar Steel Algoma Inc. and related entities (”Algoma” or the “Applicants”) were granted protection under the Companies’ Creditors Arrangement Act (”CCAA”) in an initial order on November 9, 2015. On November 16, 2015, a DIP loan was approved, with the order settled on November 19, 2015, which provided tight timelines for the entire process, including strict timelines for a sale process.

In a motion heard on December 3, 2015, Algoma moved for the approval of a key employee retention plan (”KERP”) offered to certain management employees said to be deemed critical to a successful restructuring and a charge on the current and future assets, undertakings and properties of the Algoma to secure the obligations under the KERP. The KERP was supported by all who had appeared at the hearing, save for the unions who had opposed it.

The KERP covered 23 management personnel. The maximum aggregate amount which could have become payable under the KERP was approximately $3.5 million.

The list of KERP participants and the amounts of the cash retention payments offered to them were formulated by Algoma’s management with the assistance of the Applicants’ legal counsel and other professional advisors, and with the assistance of a report prepared by a third party human resources firm, and in consultation with the Monitor. The KERP had been recommended by the special committee of the board of directors and approved by the board of directors of Algoma.

At the outset, the unions requested an adjournment, which was declined. Newbould J. observed that the motion had been served on November 26, 2015 and the confidential information regarding the persons and the amounts promised to them under the KERP were provided to counsel for the unions on November 30th, after a confidentiality agreement was signed. The information was straightforward and easily understood.

Justice Newbould indicated that it would have been preferable to have the luxury of considering all of the many issues in this CCAA proceeding in a relaxed atmosphere without time pressures. However, that was not possible. He noted that the difficulty in this case was that the timelines were tight and the risk of senior management leaving the Applicants required a quick decision on the KERP. To delay this matter further would increase the risks that the KERP was intended to address.

Justice Newbould noted that there was no express statutory jurisdiction in the CCAA for a court to approve a KERP. However, courts have routinely held that the general power under section 11 of the CCAA gives jurisdiction to authorize a KERP and grant a charge to secure the Applicants’ obligations under the KERP.

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