The springtime remodelling of General Motors of Canada Ltd. was remarkable for a number of reasons. The most obvious was its sheer scale. As the largest manufacturer and seller of vehicles in the country, it arguably posed the biggest corporate restructuring challenge in the country’s history.
It was also fast, with most negotiations and agreements concluded in a two-month span culminating with its June 1 announcement that the federal and Ontario governments financially backed the new GM, side-stepping the need for a court-supervised CCAA workout.
Perhaps most notable of all, successfully transforming GM Canada into a viable entity was incredibly complex. As befitting a corporation that was perennially among the country’s top five companies in terms of revenue, the drastic downsizing required the approval not just of government but concessions from its powerful union, creditors, and members of its extensive dealer network. “There were times when we were concerned about having to file [for bankruptcy], no question about it,” says Neil MacDonald, vice president and general counsel at the Oshawa, Ont.-based company. “Certainly our objective was not to file and we would have filed had we not got all our stakeholders who were involved to participate and come to the table.”
GM Canada’s plan B, seeking creditor protection under the Companies’ Creditors Arrangement Act, was a fully developed option. The automaker had a CCAA filing drawn up and ready to present to a court and had retained insolvency and restructuring specialist David Byers, a partner at Stikeman Elliott LLP, to act as counsel to the court-appointed monitor in the event that GM Canada sought creditor protection. In the end, the Canadian unit won the necessary approvals while its Detroit-based parent entered Chapter 11 bankruptcy protection and drove out July 10 with the U.S. and Canadian governments as its largest shareholders, leading the company to be dubbed by many as “Government Motors.”
On the legal side, the largest role in the Canadian restructuring was played by GM Canada’s main outside counsel, Osler Hoskin & Harcourt LLP, which had approximately 90 staffers working on the restructuring at various times, estimates Steven Golick, a partner who headed insolvency and restructuring work at the firm along with Tracy Sandler and Marc Wasserman.
Osler assisted GM in its out-of-court restructuring in parallel with the efforts of the automaker’s U.S. parent as well as taking the necessary steps for a court-ordered restructuring in Canada. Osler had teams working on areas including corporate, finance, labour, pensions, contract reviews, intellectual property, information technology, insolvency, litigation, trusts, tax, real estate, and competition. “This was probably the largest and most complex out-of-court restructuring in Canada,” says Golick, noting it included companies, unions, and governments on both sides of the border.
GM Canada’s legal roster included Terry O’Sullivan of Lax O’Sullivan Scott LLP, who advised the company’s internal board of directors, a group made up of MacDonald, president Arturo Elias, and two other vice presidents responsible for finance and sales and marketing. In addition, Halifax-based McInnes Cooper as well as Osler represented the automaker in negotiations with U.S. bondholders who held debt issued by Nova Scotia-based units of GM’s Detroit-based parent.
Goodmans LLP represented the Government of Ontario. Goodmans' five-lawyer team included Gale Rubenstein, Rob Chadwick, Susan Rowland, Dan Gormley, and Jana Steele. Legal representation of the government of Ontario was led by Mark Warner, legal director of the Ministry of Economic Development and Trade along with James Sinclair, legal director of the Ministry of Finance/Ministry of Revenue. The federal government was represented by McMillan LLP (Export Development Canada). McMillan’s GM team of 13 was led by Andy Kent, partner and chairman of its debt products and restructuring practice and Peter Willis, section leader of its debt products group. Legal representation of the government of Canada was led by Pierre Legault, assistant deputy minister, business and regulatory law at Justice Canada, along with Anne-Marie Lévesque, Anne Boudreau, and Mark Taggart. Legault’s team was advised by Cassels Brock & Blackwell LLP, led by Michael Weinczok. Torys represented General Motors Acceptance Corp. and the federal Canadian Development Investment Corp.
Canadian Auto Workers
General Motors as well as Chrysler — which preceded GM into U.S. bankruptcy protection and quickly exited from it — similarly found themselves insolvent as a result of the worldwide economic downturn. Both companies were unable to regularly make a profit in the relatively healthy economic times leading up to the recession as they lost market share to foreign competitors. Unprofitable when North American sales were running at 17 million annually, their cash reserves quickly dwindled as new vehicle sales plunged by about one half.
Faced with the prospect of the failure of two of three of its major employers, the Canadian Auto Workers union was forced to make a series of concessions to both automakers. With the survival of General Motors at stake, the CAW agreed to an unprecedented four rounds of concessions on issues such as wages, layoffs, and workplace practices. Union givebacks were also demanded as the price for taxpayer support from the Ontario and federal governments which agreed to kick in cash to the company’s underfunded pension liabilities. “You take a look at the CAW, they stepped forward to do what they needed to do to assist us in getting a deal,” says GM’s MacDonald. “It is highly unusual for a union to come back four times in the course of a year to re-bargain. . . . You have to give them credit for that.”
By the end of April, GM Canada was able to announce a new agreement with the CAW that reduced its annual hourly labour costs by 50 per cent from US$1 billion to $500 million until 2014. The automaker is also going to get dramatically smaller: shrinking from 10,300 employees in 2008 to just 4,400 in 2014. (GM Canada’s non-unionized workforce agreed to accept cuts of between three and 10 per cent).
Most of the negotiations surrounding union concessions between GM Canada and its union were handled by management and in-house counsel. “It was a tough, very tough set of negotiations,” says Lewis Gottheil, in-house counsel to the CAW, who characterized the discussions as “adversarial and respectful at the same time.” The CAW also geared up for a possible CCAA filing by GM and Chrysler Canada Inc., neither of which happened. Preparing for that eventuality also included retaining an outside “labour law firm that has expertise as well with insolvency work,” says the CAW’s top lawyer.
The union’s seven-lawyer team was very much on the periphery during the rounds of negotiations surrounding union givebacks with both automakers. The main focus for the CAW legal team has surrounded the creation and implementation of independent health-care trusts for workers of the two companies. “The key legal issue is really the development of what we have called the Canadian Health Care Trust,” says Gottheil. “The legal [issues] there pertain to the establishment of the trust, its tax treatment, the legal dimensions connected to basically taking undertakings or promises that were in a collective agreement and now that are going to be administered outside of a collective agreement context.”
The CAW has agreed to set up and administer the trusts, which are being funded by cash and loan payments by the respective auto companies. In the case of GM Canada, the health-care trust covers about 9,000 active members and another 27,000 retirees. Similar to U.S. voluntary employee beneficiary associations established by the Detroit-based automakers and the United Auto Workers union, the new trusts required Ottawa to give more favourable tax treatment to companies that agree to pre-fund retiree benefits.
While putting GM Canada into CCAA protection was widely recognized as a poor second choice that potentially jeopardized the timing of the main U.S. restructuring, the main focus of the parties was on creating a smaller, profitable automaker. “It was getting to an agreement with the CAW that would be considered appropriate and competitive and sufficiently fair given what was being asked of all the stakeholders,” says one lawyer with a firm retained by the province of Ontario.
Governments step up
Money losers even before North American vehicle sales drove off a recessionary cliff, Chrysler and General Motors required more than union givebacks and plant closures to survive. Both needed massive transfusions of government capital, renegotiation, and relief from debtors and, in the case of GM, shrinking its sprawling franchised dealer network.
Getting Chrysler, and to a greater extent, GM back on the right financial track appeared daunting: “I would therefore had expected at the outset that this would have been a very difficult, complex protracted [and] lengthy process with potentially a lot of contentious issues played before the courts,” says Tony DeMarinis, partner and co-chairman of Torys LLP’s restructuring and insolvency practice. “It became pretty clear as we headed toward the finish line that there was an overwhelming determination and will coming out of Washington that [the GM] restructuring happen and that it happen quickly.” DeMarinis headed a Torys’ team that represented former GM finance arm General Motors Acceptance Corp. Torys also represented the Canadian Development Investment Corp. with another team of lawyers headed by Patrice Walch-Watson.
With economies tottering on both sides of the border, governments here and in the U.S. were unwilling to stand by and let the two automakers fail. On this side of the border, besides the tens of thousands of direct jobs at stake, GM purchased $10 billion in goods and services from Canadian firms, the largest outlay of any company in the country.
Chrysler Canada represented an easier fix for the parties involved in its restructuring: its operations were smaller; its dealer network had already been rationalized and it did not have GMC’s bondholder complications. “In some ways Chrysler was a test case for us,” said one Canadian government lawyer involved in both restructurings. Ottawa and Queen’s Park threw their first lifeline to Chrysler Canada late last year in the form of a $1.2-billion bridge loan. Unwilling to lose thousands of Ontario manufacturing jobs in Windsor and Brampton, the two levels of government eventually committed to put up $3.8-billion to fund the bailout while the U.S. Treasury put in billions more. Chrysler Canada was able to skirt creditor protection in the U.S. and underwent a surprisingly swift reorganization and recapitalization under a Chapter 11 filing.
In the Chrysler Canada restructuring, McCarthy Tétrault LLP represented the automaker in Canada while Goodmans LLP represented Ontario’s Ministry of Economic Development and Trade and the ministries of Finance and Revenue. The federal government was represented by McMillan LLP (Export Development Canada), Cassels Brock & Blackwell LLP (Industry Canada) and Torys (the CDIC). In the U.S., Chrysler was represented by a 70-lawyer team at Jones Day.
Having made the decision to save as many auto-related jobs as possible, politicians and bureaucrats in Ottawa and Toronto deserve much of the credit for the success of the Chrysler Canada restructuring, says Richard Higa, who headed McCarthy’s finance team on Chrysler. “I think the Canadian government[s] did a pretty good job of responding quickly to protect the [manufacturing] footprint,” he says. “They were very quick out into the press saying we will commit 20 per cent or whatever the proportionate share is of the Canadian production.”
Chrysler emerged after barely one month under U.S. Chapter 11 protection in June with Italian automaker Fiat taking control of the company, and U.S. and Canadian governments and other parties taking stakes in the company.
GM Canada dealer downsizing
Perhaps the most controversial component of GM Canada’s restructuring was the decision to shutter 240 of its 705 dealers by the end of 2010 and another 50 through attrition. Some of its dealer base was shocked by the move to close more than one third of GM’s outlets and at least one southern Ontario dealer says he has hired legal counsel to contest his store’s closing. It has been reported that GM Canada will pay franchisees of locations slated for closure a payment ranging up to more than $1.5 million and they are also eligible for an allowance for signage removal.
Settling on fair compensation represented “huge, huge amounts” of work with GM Canada and its legal teams, says a lawyer associated with those deliberations who requested anonymity. “There is an art to out-of-court restructuring. One of them is trying to come to a determination to what is fair and reasonable and then trying to convince people that that is correct.” The absence of widespread opposition to the GM franchise closures is a reflection of that successful balance, the lawyer argues. “It allows for an orderly wind down for some of these dealerships and therefore doesn’t impact the communities in which they operate as hard as a sudden slam down, if you would,” says GM’s counsel MacDonald.
Richard Gauthier, president and CEO of the Canadian Automobile Dealers Association, says GM did not consult his association about the closures and it is not a role CADA would take. “If they had asked us our views on that we would have told them not to close any dealers.” CADA’s main role to date has been to inform affected dealers what options they have. “Dealers want to know if a) can GM do this? b) what does my dealer sales and service agreement allow for? Dealers primarily have to make their own individual business decisions in this regard.” He noted that more than 90 per cent of dealers have agreed to accept GM Canada’s closure offer.
The most vocal opponent of the closures, Grimsby, Ont., dealer Bob Slessor of Robert Slessor Pontiac Buick GMC, says he has retained counsel and is working with an unspecified number of fellow dealers to fight the closures. “There is a dealer group that has started to form. I would say that it would be a noticeable-sized group.”
Gauthier say his group’s legal stance is now “business as usual” following GM Canada’s successful restructuring. “Our entire contingency plan and the strategy we had put in place was in expectation or anticipation of GM filing for bankruptcy protection.” The association similarly prepared for a Chrysler CCAA filing which did not materialize. “Up until June 1 . . . we were all bracing for a GM bankruptcy filing and so everything that we were going to do with the retention of legal teams, the contingency plans that we had in place for dealing with that, being the representative of GM dealers . . . was all geared around GM being in bankruptcy protection.”
CADA’s internal examination of GM Canada’s offer to dealers was handled by Gauthier, Tim Ryan, the association’s director of industry relations and general counsel, and a few other staffers.
Nova Scotia bondholders
The final sticking point for a successful out-of-court restructuring of GM Canada was the need to come to terms with bondholders associated with General Motors Nova Scotia Financial Co. and General Motors Nova Scotia Investments Ltd., companies established to make loans and issue debt in Canada.
A group of investment firms led by Aurelius Capital Partners LP of New York sued the Nova Scotia subsidiaries in March, arguing that a transfer of $600-million from Canada to GM’s U.S. parent took cash out of the companies at a time when GM was “either insolvent or on the brink of insolvency.”
With some of the bondholders owed a total of $1.3-billion refusing to accept a deal that would pay them about 33 cents on the dollar, The Globe and Mail reported. Politicians would blame the failure of the restructuring on the bondholders in a press conference followed up by a General Motors Canada CCAA filing with a Superior Court of Ontario judge. A lawyer involved in the Nova Scotia bondholder settlement confirmed the “High Noon” style showdown between government and the bondholders which cleared the way for GM Canada’s out-of-court settlement.
Jeff Galway, Pamela Huff, J.A. Prestage, and Nathan Cheifetz, all Toronto partners at Blake Cassels & Graydon LLP, together with John Keith of Cox & Palmer represented a group of note holders of General Motors Nova Scotia Finance Co.
The new GM Canada
Politics and business were intertwined in GM Canada’s June 1 announcement that it had successfully avoided court protection and had approval to restructure from its various stakeholders. It had the high profile backing of Canada’s Prime Minister Stephen Harper and Ontario’s Premier Dalton McGuinty, who together pledged $10.6-billion in aid in return for a 12-per-cent stake in the automaker and a seat at the directors table.
GM Canada’s MacDonald says, however, there is a lot of credit to be spread around. “It’s a testament to our dealers, it’s a testament to our employees, it’s a testament to the CAW, it’s a testament to the great work done on the part of the law firms and the foresight to the governments of Canada and Ontario.
“It is almost quintessentially Canadian to get it done in this fashion.”