Essar Algoma DIP Lenders to Pursue “Oppression Remedy” Proceedings

Under the terms of the agreement, the port prepaid $154.8 million of rent for the 50 year lease. The rent payments were transferred to Algoma’s parent company, Essar Global, in India. Essar Algoma pays the Port for cargo handling and services as well as providing employees to handle cargo services. The cargo handling agreement is for 20 years, after which time the Port is within its rights to deny Essar Steel Algoma access to the dock for the remaining 30 years of the lease. The DIP argues that the terms of the agreement were “onerous” and “contrary to the best interests of the Company and its stakeholders.”

DIP lenders last week, who have reached agreement on a Recapitalization Proposal, fear that the terms of the lease would allow and the Port of Algoma and its parent Essar Global, to employ “oppressive arrangements to hold the company and its stakeholders hostage” in the restructuring proceedings.

Essar Global, after being dismissed as a bidder for failure to show sufficient funds, made another try to purchase Essar Algoma under the moniker of Ontario Steel. With support by the Port of Algoma and United Steelworkers, they blocked the purchase agreement reached with KPS Capital Partners resulting in KPS withdrawing their bid.

Under the Canada Business Corporations Act, Section 241, complainants have the right to bring a court action against a corporation where conduct has occurred which “is oppressive, unfairly prejudicial or which unfairly disregards the interests of a shareholder, creditor, director or officer.” The right is referred to as an “oppression remedy” and when a standard of fair conduct has been breached the court may make any order it sees fit “including awarding money damages, appointing a receiver, dissolving the corporation, forcing the acquisition of securities and amending charter documents.”

DIP lenders reached an agreement with Essar Algoma last week on a Recapitalization Proposal that would lead to the restructuring or acquisition of Essar Steel Algoma. DIP lenders agreed to an investment of up to US$425 million, a reduction of the Company’s funded debt by approximately US$1.15 billion and a reduction in annual cash interest expense by approximately US$125 million. The stay of proceedings and an extension to the DIP financing under CCAA was extend to January 31, 2017.

Superior Court Justice Frank Newbould ordered that legal actions related to the oppression proceedings be presented to the court no later than October 21. His decision also temporarily lifted the stay of legal proceedings against Essar Steel Algoma, Port of Algoma Inc., and Essar Power Corp. so that the oppression proceedings could go forth.