Their refuge is the Companies' Creditors Arrangement Act (CCAA), a loose federal statutory framework that gives corporate debtors and their creditors the breathing space necessary to avoid bankruptcy by exploring restructuring possibilities that will rescue value. Because the statute offers few precise rules as to what form reorganizations may take, a handful of creative lawyers instructed by frequently ingenious clients (few things focus attention like liquidation), and assisted by a co-operative, business-minded judiciary, have seized on the opportunity to provide greater value for their clients than the economics of insolvency might otherwise normally provide.
These lawyers are the new generation of insolvency practitioners, housed in departments that have shed the gloomy nomenclature of "bankruptcy" for titles that invariably include the words "restructuring", "reorganization", or "workout". Motivated by the bottom line consideration that, for businesses of scale, there is frequently greater value in saving an enterprise (or part of an enterprise) than in liquidating it, these lawyers have become the legal architects behind some of the highest profile stories in the financial pages of the last decade: Cineplex Odeon, Canadian Airlines, Royal Oak, Eatons, Loewen, Livent, Phillips Services and Royal Trust. All insolvency-related restructurings. All big news. All big business.
As the last generation's great insolvency lawyers in Toronto, notably David E. Baird, Q.C., at Torys, R. Gordon Marantz, Q.C., at Osler, Hoskin & Harcourt LLP, and Ronald Robertson, Q.C., at Fasken Martineau DuMoulin LLP, retire or approach retirement, no one at their firms has clearly emerged as the next star of the insolvency bar.
While the major full-service firms continue to field top-notch teams, a changing of the guard is taking place. Two dark horses have emerged. Goodmans LLP and Meighen Demers LLP have arguably positioned themselves as the front-runners in corporate restructuring (CR). Both firms are in the thick of the Loews Cineplex Entertainment Corp. restructuring. Goodmans represents Gerry Schwartz's Onex Corp. and Derrick Tay at Meighen Demers is counsel to Oaktree Capital Management, LLC, the two major investors in the transaction.
With its trio of Geoffrey Morawetz, Jay Carfagnini and Gale Rubenstein, Goodmans appears to have the deepest top-tier bench strength. "Goodmans is in the best position to take advantage of any upswing in insolvency-driven restructuring work," says a senior competitor. Speaking off the record, for obvious reasons, the competitor went on to note: "It's hard to find another shop which has strong players like Morawetz, Carfagnini and Rubenstein in mid-career-and they've built that practice from nothing in the last 10 years." Similarly, the head of a large New York-based vulture fund rates the firm "at the very highest tier of restructuring expertise." On an individual basis, Michael Fitch, Q.C., of Fasken Martineau DuMoulin LLP's Vancouver office, a top-ranked insolvency practitioner in his own right, calls Morawetz "a very hot commodity."
Derrick Tay, whom Fitch calls a "dominating guy in his field," and his group at Meighen Demers are hot on the heels of Goodmans, particularly with the recent recruitment of Tony Reyes from McMillan Binch and Mario Forte, formerly the Associate Managing Partner of Torys' Restructuring and Insolvency Practice. This stepping up to the plate of 40-lawyer-plus Meighen Demers is particularly noteworthy, given the current angst in the profession as to whether mid-sized firms have a future.
But otherwise, the field is surprisingly small. "There are a lot of lawyers who do small bankruptcies, but only a very limited number of lawyers with reputations in high-end restructuring work," says Glenn Sauntry, the Executive Managing Director of BMO Nesbitt Burns Inc. Sauntry is someone who knows a thing or two about corporate restructuring. BMO Nesbitt Burns has been retained in more than three-quarters of the recent major corporate restructurings in Canada.
In Toronto, those with top-flight CR reputations at major firms include Jonathan Levin at Faskens, James Riley at Ogilvy Renault, Andrew Kent at McMillan Binch, Jay Swartz at Davies Ward Phillips & Vineberg LLP, Tony DeMarinis at Torys, Sean Dunphy and David Byers at Stikeman Elliott, Steven Golick, Edward Sellers, Alec Zimmerman and Donald Ross at Osler, Hoskin & Harcourt, Susan Grundy and Kevin McElcheran who are the Co-chairs of the Insolvency Practice Group at Blake, Cassels & Graydon LLP, Terence Dolan and Richard Orzy at McCarthy Tétrault, and Bruce Leonard of Cassels Brock & Blackwell LLP.
On the boutique side of the equation, Robert Thornton and James Grout at Thornton Grout Finnigan, and Peter Griffin of Lenczner Slaght Royce Smith Griffin, are important players on the circuit. Thornton Grout in particular has built a strong twelve-lawyer practice that focuses on representing financial institutions in debt restructuring situations, with a clientele that some of the majors might well envy.
Calgary, with its historical roller-coaster oil and gas economy and entrepreneurial business climate, has also developed a strong CR bar. Joining Patrick McCarthy, Q.C. of Borden Ladner Gervais LLP at the top tier are Frank Dearlove and Karen Horner at Bennett Jones, Larry Robinson at Miller Thomson, B.A.R. (Quincy) Smith, Q.C. at Fraser Milner Casgrain LLP, and Brian O'Leary of Burnet, Duckworth & Palmer LLP. Peter Pastewka at Gowlings has enjoyed considerable success. Pastewka acted for Hurricane Hydrocarbons Ltd. in a remarkable transaction that saw investors recoup their investment in an insolvent company at least six times over in less than a year.
As demand for their particular skill set surges, CR lawyers and their departments have become big business for law firms. "We don't do straightforward bankruptcy or receivership files in our department," says Morawetz at Goodmans. His partner Gale Rubenstein, a specialist in the financial services end of the insolvency practice, notes that working on the unwinding of Confederation Life Insurance Company, an ongoing matter that includes the sale of several foreign divisions, is the equivalent of having "a thousand files" in her office. "This is a long tail practice," Rubenstein says. "Files can take a long time to develop and a long time to resolve."
With various degrees of involvement, Torys reputedly had 40 to 50 lawyers working on the Royal Trust workout and over 90 Blakes lawyers worked on the Royal Oak insolvency with Kevin McElcheran. "Over the years as well as currently, we've seen that there can be issues and problems in virtually every sector," says Terence Dolan of McCarthys in Toronto. The firm's widespread insolvency practice, active throughout its national network, boasts financial institutions, bondholder groups, claims-trading vulture funds, debtors, receivers and monitors as clients.
With the apparent downturn in the economy, CR is hard on the heels of mergers and acquisitions (M&A), securities and intellectual property (IP) as the "hot" practice areas of the day. "Restructuring is just another word for an M&A practice," says Jonathan Levin at Faskens. Levin, who represents the independent board of directors of Cineplex, acted in the Loewen matter and is currently keeping 15 lawyers busy on a pending, but unannounced, auto parts company restructuring. Driving home his argument that much of the work is M&A masquerading as insolvency workouts, Levin points out that while "some of the American vulture funds, who have become significant players in Canadian insolvencies, buy debt to resell it, most of them buy to acquire the underlying company at a favourable price."
Andrew Kent at McMillan Binch is of like mind. He regards his practice as "a specialized blend of M&A and corporate finance." Kent notes that Joseph Flom, the legendary driving force behind American M&A powerhouse Skadden, Arps, Slate, Meagher & Flom LLP, started out as an insolvency lawyer. "Similarly, our restructuring practice, in tandem with a strong finance practice, has assisted much of our firm's growth," Kent adds.
Terence Dolan sees a growing interrelationship between McCarthys' M&A and insolvency practices, as well as between insolvency and other important practice areas. "Enforceability issues (in the event of insolvency), are becoming commonplace in all types of corporate restructuring. Every securitization deal, for example, requires an opinion that the securitized assets would not form part of the seller's overall assets in the event of an insolvency."
Like M&A, large insolvency-driven restructurings, which contemplate the continuation rather than the demise of an ongoing business operation, cross multiple practice areas. "Insolvency restructurings are huge mandates for law firms because we need advice from every area of the firm we retain," says a major financial advisor in the CR field, who spoke on condition of anonymity. "The deals are bigger than M&A transactions because they take longer and because the dispute resolution process involved is very complicated." Adding to the complexity is the fact that most major restructurings today have cross-border elements, which serve to increase the complexity by adding a host of jurisdictional and conflicts of law considerations.
In all these major CR transactions tax expertise is critical, as is a strong securities capability when public companies are in play. Litigation bench strength can often be vital when the corporate negotiators need elbow room. IP expertise is integral to workouts involving knowledge-based New Economy and high-tech companies. Labour and employment issues are commonplace in restructurings. Commercial contracts and leases require renegotiation. Environmental liability issues frequently arise. Industry-specific knowledge, as in the energy business, will likely be required. In short, a major CR transaction can represent a legal cornucopia.
Douglas Knowles, Q.C. at Fraser Milner, one of the top names in the business in Vancouver, agrees with Andrew Kent as to the impact such work has on law firm growth. Indeed, there's even a further factor not always apparent at the outset. According to Knowles: "Restructuring contributes to law firm growth because it is more complicated than a straight sale and takes a lot more imagination. And there's an added benefit in acting for a debtor over and above the fees you earn in the restructuring, because there is a high possibility that you will become corporate counsel even if the debtor wasn't previously your client. Small wonder, then, as Lexpert's off the record financial services source somewhat wryly put it: "It's a big day for law firms when they get these assignments."
A sure sign of the emerging status of CR is the quickening pace of lateral moves among restructuring lawyers in Toronto. In the last two years, Geoffrey Morawetz has moved to Goodmans from Borden Ladner, Jim Riley left Stikeman Elliott to join Ogilvys' Toronto office, Alec Zimmerman and Edward Sellers joined Oslers from Fraser Milner Casgrain, who in turn welcomed Daniel Dowdall from Lang Michener. Tony Reyes joined Meighen Demers after a stint at McMillan Binch and, most recently, Torys partners Robin Walker, Q.C., and Mario Forte left, respectively, for Gowlings and Meighen Demers.
Torys has not been idly standing by. The firm recently scooped four experienced US insolvency lawyers for its New York office, where it hopes to use its on-the-ground presence to take advantage of the growing cross-border nature of major restructurings. "The New York connection is key for us," says Tony DeMarinis, Managing Partner of the firm's Insolvency and Restructuring Practice, "because it gives us a great competitive advantage when American funds invest in and dominate, as they commonly do, many of the larger Canadian restructurings."
The US presence, DeMarinis points out, was an important factor in Torys' representation of the entire creditor group of hedge and vulture funds that were owed $300 million in the Hurricane Hydrocarbons restructuring. Torys also acted for American-owned Sears, which purchased the remains of the Eatons department store chain, as well as representing Safety-Kleen Corp., the subsidiary at the heart of Laidlaw's woes.
It is clear that many of the major Toronto firms have been positioning themselves for an economic downturn for well over a year. CR's evolution into an important stand-alone practice area, however, spans nearly two decades of change in the way major corporations conduct business. The depth of these changes and pervasive nature of the new continental and global economies strongly suggests that insolvency-driven restructuring as a new practice area is here to stay.
What are these changes? What legal skill sets do they require? How have Canadian firms positioned themselves to take advantage of CR's growth? And what are the strategies of the various firms?
Insolvency first emerged as a distinct practice area in the mid-1960s to mid-1970s. At that time, explains Michael Fitch, "The financial climate was much more simplistic, very bank-dominated, and the work tended to be liquidation-oriented." Secured creditors, receivers and the Bankruptcy and Insolvency Act (BIA) drove a reactive insolvency regime. The CCAA, enacted during the 1930s, was seldom utilized.
The recession of the early 1980s hit hard, particularly in Western Canada. At first, large Western-based property developers, such as Daon, Paragon, NuWest, and Parma, experienced financial difficulties. "These were businesses with real, hard assets," recalls Larry Robinson at Miller Thomson, "and some of them started finding ways to restructure, initiating a trend that has gained momentum to this day."
Next the very mainstays of the economy floundered, both in Canada and the United States. Dome Petroleum Ltd., Algoma Steel Inc., International Harvester, Massey Ferguson, and Chrysler are but a few of the companies for whom the prospect of insolvency seemed real. In the case of Massey, a number of institutional lenders agreed to defer to a workout scheme, setting a precedent still remembered in CR circles today.
In 1978, the US enacted the now famous Chapter XI provisions as part of its bankruptcy and insolvency statutory regime. A debtor protection mechanism, Chapter XI was intended to give financially troubled companies an opportunity to reorganize under court protection, thus preventing precipitous action by creditors. Influenced by the liberal approach of US courts to Chapter XI, and "the need to do something constructive" in the words of Andrew Kent, Alberta courts pioneered the modern use of the CCAA in the early 1980s with an activist, business-oriented interpretation "that allowed people to fix their business."
Many of the current top restructuring lawyers cut their teeth on Amoco's buyout of Dome Petroleum, arguably the forerunner of today's booming CR business. "Dome was the first multi-party restructuring in Canada where people started being creative in the Chapter XI way," says Jay Swartz at Davies Ward, whose list of restructuring mandates includes acting for Cineplex in the Loews workout, and representing clients in the Livent, Phillips Services, Loewen and Playdium matters.
By the time the recession of the early 1990s hit, Dome and similar workouts like Algoma Steel, combined with the general corporate bloodbath of the 1980s, had caused Canadian bankers to rethink their bunker mentality. When giants like Olympia & York (O&Y), Algoma Steel, Royal Trust, Bramalea and Trizec hit the wall, lawyers and financial advisors turned, with considerable success, to the CR model.
They had little choice. The financing regime had changed, becoming layered and often incredibly complex. Many corporate organizations more closely resembled a labyrinth. The O&Y workout, for instance, involved 89 companies sheltered under the corporate umbrella. "Banks turned into more sophisticated consumers of insolvency services," says Quincy Smith at Fraser Milner in Calgary. "They became proactive, developing internal groups that were all over companies in difficulty much earlier, so problems began to emerge at a stage that offered a much better climate for reorganization."
Still, despite the eighties experience, lenders continued to approach the CR model somewhat tentatively. "The people who lived through the nineties will say that, even in the way they managed the Reichmanns' assets, they destroyed value, getting 50 cents on the dollar where they might have got 100," says Jim Riley.
Things have changed in the last decade. Corporate structures, financing arrangements, and financial instruments have assumed even greater complexity. "The crown jewel in a restructuring may be a fourth-tier subsidiary in Germany," Riley notes. In many cases, the banks have been displaced from their dominant role as creditors by domestic and international lenders providing asset-based lending, equity financing, junk bonds and an endless variety of other debt and capitalization vehicles. And even where they continue to play a major role, notes Karen Horner at Bennett Jones, Canada's Schedule 1 chartered banks have developed a broader understanding of CR from their moves into the investment banking and brokerage businesses.
Frequently the money in reorganizations now comes from powerful syndicates, composed of entities like pension funds, whose clout equals or surpasses that of the banks and whose outlook on risk and maximizing value differs considerably from that of traditional lenders. "Companies tend to be better capitalized these days, so when they hit the wall, there isn't a giant bank loan driving an immediate realization," says Patrick McCarthy at Borden Ladner. "People with equity tend to be in there with a long-term view to start with, and it's easier to blow off capital that's gone wrong than debt that's gone wrong." American-based distressed debt funds, popularly known as "vulture funds", have further diminished the influence of the banks, which are frequently content to make a quick exit and sell their debt to the funds.
The new players, particularly the asset-based lenders like GE Capital, Converse Financial and Century Services, as well as the vulture funds, are sophisticated investors. "They understand restructuring and the chances that a restructuring will succeed, and they tend to have a very clear game plan and idea of how the next steps will unfold if the restructuring fails," says McCarthy. "That makes for harder negotiations." Even more so where the debtor is a public company with the vulture funds and arbitrageurs routinely engaging in trading to the very last minute before the restructuring closes. "Insolvency," notes Michael Fitch in classic deadpan fashion, "is no longer a glorified collection practice."
Indeed. Negotiations surrounding a troubled enterprise have moved from one-on-one scenarios between debtor and banker to multi-party, multi-faceted workouts that will maximize value and fix the balance sheet. "The majority of insolvency-related restructuring work is in the high end," says Chris Clark, the Toronto-based President of Price-waterhouseCoopers Inc., and head of the firm's Financial Advisory Services practice. "And that requires a different skill set from lawyers than if they were dealing with a receivership or liquidation. If you're looking at liquidation, knowledge of priorities and a technical knowledge of the BIA is paramount for a lawyer. But clients involved in restructuring look to their professionals for more creative ideas from a business perspective as well as a solid grounding in the law."
A "business perspective" means that practicality, personality, relationships, experience, and history are important considerations in the makeup of a successful CR lawyer. "New players have a very hard time breaking in, because they won't understand how the wide variety of players all have different approaches," says Patrick McCarthy. "And because the CR bar is small, it's a bit like practising in a small town, where you function much better if you work with your colleagues regularly, applying common sense and fair compromise."
Still, CR lawyers come from disparate backgrounds. Douglas Knowles in Vancouver believes in the importance of a pure insolvency grounding. "The M&A lawyers are pushing into the realm of insolvency restructuring. But you can't run that kind of restructuring unless you have a background in insolvency. The difference between dealing with solvent corporations and insolvent corporations is like night and day."
Geoff Morawetz, Jay Carfagnini and Gale Rubenstein at Goodmans share a "traditionalist" background, coming to the table from the insolvency side of the equation. At Meighen Demers, Derrick Tay's background is similar, as is that of Susan Grundy at Blakes. These "classicists" are masters of the statutory and case law maze that corporate debtors face. All of them, however, have risen to the top ranks of the CR bar because they have kept pace with the changing nature of insolvency practice.
A second group, with roots in banking or corporate practices, has a different perspective. Its members include Jonathan Levin, Andrew Kent, Jay Swartz, James Riley, Tony DeMarinis, Donald Ross, and Michael Fitch. "To me," says Fitch, "the insolvency restructuring practice is an exercise in corporate finance with a slightly different set of rules." Tony DeMarinis, who is currently heading up the restructuring of the Saskatchewan Wheat Pool, says Swartz, Riley, and Levin in particular would not have considered themselves insolvency lawyers before CR came to the foreground. "But now these people have found a home in the practice," he says, "and they do excellent work." Riley accepts the analysis wholeheartedly. "If you told Jay Swartz or myself that we were insolvency lawyers back in 1988, we would have said 'not in a million years.' But the way the insolvency practice has developed, our background and experience enables us to step in to those kinds of situations with creative solutions."
The third group is composed of litigators who are equally comfortable in the restructuring boardroom. Kevin McElcheran calls himself an "insolvency lawyer with a litigation bent." To be sure, insolvency lawyers of varying ilk show up before the judges on Toronto's Superior Court Commercial List and similar courts throughout the country. For the most part, however, they are there in a support role, usually to explain the more arcane business considerations involved in a proposal. But most do not examine witnesses, make arguments or otherwise engage in what is generally regarded as advocacy.
In Toronto, that expanded role is personified by trial lawyers like Robert Thornton and James Grout. "At Thornton Grout, eight of our twelve lawyers are the full solicitor and barristers' package," says Thornton. Sean Dunphy and David Byers at Stikes, Charles Scott at Ogilvy Renault, Lyndon Barnes at Oslers, and Peter Griffin at Lenczner Slaght are other litigators to whom insolvency teams turn when the total solution cannot be delivered in the boardroom. Byers, who numbers the Phillips Services and Cadillac Fairview workouts among his briefs, says he "always looks to an out-of-court solution first." His attitude is typical of this special type of barrister whose litigation experience has become increasingly valuable in situations where restructuring has become the only lifeline for corporations ravaged by the onslaught of class action proceedings.
Still, the lines of demarcation are not clear, particularly outside Toronto. "The person who quarterbacks the file, the insolvency person, is always at the centre of the boardroom," says Douglas Knowles. "The pure corporate or securities guys sit in the boardroom drawing the necessary documents, the litigators sit in the other corner. Some of the insolvency people move from corner to corner, some stay in the centre, some move only to one corner or the other, but there is always some overlap. And even in the courtroom, it is mostly a chambers type practice. Somebody with my background might go further and run with the case and do the appeals if it got dirty. Others wouldn't go that far."
Common to all types of CR lawyers is the ability to practise in real time. "Insolvency is like the emergency ward of the business world," says Andrew Kent. The dynamics of a restructuring, for instance, can change dramatically in short order. "The senior lenders in Cadillac Fairview all went out and sold their positions to distress dealers," recalls Donald Ross at Oslers, who represented Cadillac. "So instead of the company dealing with a banking mentality, it was dealing with distress dealers who had quite different goals. That changes the restructuring plan."
So long as a CR lawyer's operational mode suits this model, his or her precise background is not likely to be an issue. "I look for a lawyer with common sense, good judgement and experience in the type of transaction in which we are involved," ONEX Chief Gerry Schwartz told Lexpert. Adds Michael Fitch: "The best insolvency lawyers are change agents because most firms in financial straits need change, and they need it quickly. So the restructuring bar are all focused on closure and have a low attention span prompting them to find efficient solutions to problems based on their experience and judgement. There simply isn't the time to stop and analyze problems at length."
Clearly, the top CR lawyers share these qualities and capabilities. What are the marketing strategies, then, by which they hope to outdistance their competitors?
As the current market darlings, Goodmans and Meighen Demers are a good starting point in answering the question. Their core strategies have been similar: identify the market early, create a distinct corporate restructuring department, get support from the firm's leaders, recruit well, acquire depth, give the department a high, independent profile within the firm structure, and target top-tier transactional work. At these firms, the CR lawyers bring in the files and quarterback the work.
"Using this approach," says Jay Carfagnini, who has headed up the department since 1988, "we have slowly and quietly built a very solid practice since we identified the changes in the traditional insolvency market in the eighties." Unlike other firms, where the emphasis on CR and the bodies assigned to the department tend to "go with the economic flow," using Geoffrey Morawetz's words, Goodmans' commitment to the practice has been unwavering. "Other firms will put a higher emphasis on securities and M&A when those areas are booming," Morawetz says, "and consequently, as the corporate restructuring area becomes more complex and requires full-time attention, the number of firms you see on these files is shrinking."
Derrick Tay's approach at Meighen Demers, where the restructuring practice now boasts twelve lawyers, has been similar to that of Goodmans. "Derrick and I are from the same mould in our approaches to building a practice," says Carfagnini. Both departments have excellent depth, backed up by sufficient critical mass to provide the varied expertise required in support, and both Carfagnini and Tay maintain that the lack of a national firm network has not hurt their practices.
The twelve CR lawyers at Goodmans, except for Morawetz, are homegrown. On the other hand, Tay's group at Meighen Demers is a blend of lateral moves and internal growth. Mario Forte, the latest recruit, brings with him experience on Dome, Royal Oak Mines, Magna, Singer Sewing Company and Phillips. His reason for the move? "The practice at Meighen Demers is very important and very high-end, just as it is at Torys. But there are fewer conflicts at Meighen Demers, so it's a place where I can obtain a great profile instead of watching from the sidelines so often."
At other firms the work is more spread around, making it harder for the insolvency department to establish a free-standing reputation. At most major firms other departments may quarterback restructuring files, particularly when they involve existing clients. Donald Ross at Oslers, a corporate and M&A specialist, acquired an instant reputation in CR when he ran the Cadillac Fairview workout. Ross is quick to acknowledge, however, the critical role of the firm's insolvency specialists. "I ended up being the coordinator because I was the one dealing with the board on both general strategy and on their duties."
To be sure, the strength of the CR departments at the major full-service firms enables them to continue to represent their corporate clients when financial problems arise. But this may change. Andrew Kent at McMillan Binch points to developments in the US where corporate clients now frequently abandon their historical law firms to seek out firms with high-profile restructuring specialists and stand-alone departments. If that trend intensifies, Goodmans and Meighen Demers, with the emphasis they place on their CR departments, may be in the best position to improve their market position.
Another factor plays a role. Many of the major full service firms have important historical relationships with Schedule 1 banks which can, of course, preclude the firm from representing particular corporate debtors. Other firms are not faced with such considerations and can be more freewheeling in a transactional sense. This can be important. Again, according to Mario Forte at Meighen Demers, the most lucrative and the most interesting work comes with acting for debtors. "You want to act for the company," he says. "It is the most challenging and pays best because the company's lawyers frequently end up putting in the most time, and if the restructuring plan works, they have really provided a value-added service."
In the end, it is difficult to predict who the leading firms and individual stars will be. In Toronto there is, as noted at the outset of this article, a changing of the guard taking place. But, if the current situation has any predictive value, the firms with a long-term commitment to insolvency will likely emerge as the market leaders. And according to Derrick Tay, part of the commitment is remembering the core mandate of the corporate restructuring bar: "Insolvency must remain your principal title because you are trying to attract corporates in financial difficulty."
Julius Melnitzer is a Toronto legal affairs writer.