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BusinessRestructuringReview

Legislative and Regulatory Update

Proposed U.S. Treasury and IRS Regulations Limiting Use of NOLs

On September 9, 2019, the U.S. Treasury Department and the Internal Revenue Service issued proposed regulations addressing the application of certain rules regarding the ability of many companies to utilize net operating losses ("NOLs") and other tax attributes following an "ownership change" under section 382 of the Internal Revenue Code. If adopted in their current form, the proposed regulations would have a potentially severe impact on financially-troubled companies, the pre-ownership change tax attributes of which are frequently a valuable asset facilitating a company's ability to restructure in or outside of chapter 11.

Coupled with additional limits on NOL usage adopted in the 2017 Tax Cuts and Jobs Act, the proposed regulations, which are discussed in more detail here, would reverse long-standing taxpayer-favorable guidance and dramatically reduce the value of NOLs in many cases.

The deadline for comment on the proposed regulations was November 12, 2019. Proposed regulations are generally not effective until finalized.

U.S. Bankruptcy Venue Bill Introduced

On September 19, 2019, a bipartisan group of lawmakers in the U.S. House of Representatives introduced a bill designed to end the dominance of the Southern District of New York and the District of Delaware as the chosen venues for large business restructuring cases. If passed, the Bankruptcy Venue Reform Act of 2019, H.R. 4421, would force companies to file for bankruptcy in either: (i) the district where their principal assets or principal place of business has been located for the 180 days immediately preceding the filing (with certain exceptions); or (ii) the district where a properly venued case is pending of an affiliate holding 50 percent or more of the later-filed debtor's outstanding voting securities.

Under the proposed bill, in many cases, bankruptcy courts in the company's state of incorporation would not be a proper venue. Changes in a corporation's ownership or its location of principal assets or place of business within one year of a bankruptcy filing would not affect the company's venue choices. For public companies, principal place of business would be defined to be "the address of the principal executive office of the person or entity as stated in the last annual report filed . . . prior to the commencement of a case . . . , unless another address is shown to be the principal place of business by clear and convincing evidence." Principal assets would not include cash or cash equivalents. A nearly identical measure died in the Senate in 2018 (S. 2282), and substantially similar bills have been regularly introduced for many years, but never became law.

Canadian Bankruptcy Law Amendments Effective

Amendments to Canada's Bankruptcy and Insolvency Act (the "BIA") and Canada's Companies' Creditors Arrangement Act (the "CCAA") became effective on November 1, 2019. The general policy objective of the changes is to make the insolvency process fairer, more transparent and more accessible.

Notable features of the amendments include:

Disclosure of Economic Interest—The CCAA now provides that, upon application by an interested party, the court may order another interested party to disclose its "economic interest" in an insolvent company. "Economic interest" is defined broadly to include, among other things, claims, certain financial contracts, options, mortgages, pledges, charges, liens and other security interests, as well as the consideration paid for any of the forgoing or any other right or interest. In determining whether to order disclosure, the court must consider whether disclosure would enhance the prospects for a viable compromise or arrangement and whether the party from whom disclosure is sought would be materially prejudiced.

Duty of Good Faith—Both the CCAA and the BIA now contain a statutory duty to act in "good faith" applicable to any party-in-interest in an insolvency proceeding. If any party fails to act in good faith, the court may issue any order that it deems appropriate under the circumstances. "Good faith" is not defined in either the CCAA or the BIA, but the strictures of the concept have been well developed in court rulings.

Duration of Stay on Initial Applications—The maximum duration of the period during which certain actions against a debtor or its assets are stayed pursuant to an "initial order" issued by the court at the inception of a CCAA proceeding has been reduced from 30 days to 10 days. Furthermore, initial orders must be "limited to relief that is reasonably necessary for the continued operations of the debtor company in the ordinary course of business during that period." The same requirement applies to debtor-in-possession financing. The customary "comeback hearing" with respect to an initial order will be convened after the 10-day period expires.

Expanded Director Liability—The BIA previously authorized the court to impose liability on the directors of a corporation equal to the amount of any non-stock dividends or share redemptions or repurchases made during the year preceding the corporation's "initial bankruptcy event." As amended, the BIA authorizes the court to examine any termination pay, severance or incentive or other benefits paid during that same period to a director, an officer or any other person who manages or supervises the corporation's business. The court may impose liability upon such parties if: (i) the payments were made while the corporation was insolvent, or the payments rendered the corporation insolvent; (ii) the payments were "conspicuously" in excess of the fair market value of the consideration received by the corporation; (iii) the payments were made outside the ordinary course of business; and (iv) the directors did not have reasonable grounds to believe that any of the forgoing elements were not satisfied.

Preservation of Intellectual Property Rights—Amendments designed to ensure the preservation of intellectual property rights during insolvency proceedings also became effective on November 1, 2019, pursuant to the Budget Implementation Act of 2018. Intellectual property licensees may now retain their rights to use licensed "intellectual property" (which is not defined), even though such rights are either disclaimed or transferred in an insolvency proceeding under the BIA or the CCAA.

The amendments apply to proceedings filed after November 1, 2019.

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