The relationship between Canada and the United States is one of the closest and most extensive in the world. With the equivalent of $1.6 billion in bilateral trade every day3, it is no surprise that a large number of US companies have subsidiary operations and assets located in Canada. Despite numerous socio-economic similarities between both countries and legal regimes both anchored in the tradition of common law, there are a number of legal differences that have the potential to significantly impact US companies doing business in Canada.

Boards of directors of troubled companies must balance their fiduciary obligations to shareholders and creditors. Insolvent companies owe duties to creditors and not solely to shareholders and, under evolving case law, companies acting in the "zone of insolvency" owe a duty to creditors as well as to shareholders.

The rapid growth in derivatives as hedging instruments, particularly through equity swaps, credit default swaps ("CDS") and loan credit default swaps ("LCDS"), has challenged fundamental assumptions underlying corporate governance law, federal shareholder disclosure requirements and bankruptcy law. Corporate law has long relied on a "one share one vote" model, which presumes that a shareholder's economic interests in a corporation are inextricably linked to their voting power.

We have written in the past about the risks to investors in troubled companies from trustees in bankruptcy seeking recoveries for the estate on theories such as insider trading, breaches of duty and conflicts of interest. While those risks remain real, a recent decision from the Seventh Circuit Court of Appeals should provide some restraint on bankruptcy trustees.

A recent ruling in the Delphi Corporation, et al. ("Delphi") bankruptcy case calls into question the effectiveness of power of attorney provisions found in many claim purchase agreements. Specifically, on February 26, 2008, United States Bankruptcy Judge Robert D. Drain, presiding over the Delphi bankruptcy proceeding, held that claims purchasers could not submit cure notices in reliance on powers of attorney.

Delphi Sent Cure Notices Only to Contract Counterparties

Owners of bank loan participations take on two kinds of credit risk: (i) the borrower’s failure to pay the underlying bank loan, and (ii) the loan participation grantor’s bankruptcy. The first risk is well understood and carefully analyzed in each transaction. This memorandum focuses on the second kind of credit risk assumed by a participant -- grantor insolvency.

Typically, courts will only rarely and sparingly interfere with contractual rights that parties freely negotiate and agree upon.

However, in Protiva Biotherapeutics Inc. v. Inex Pharma­ceuticals Corp., the British Columbia Court of Appeal recently determined that the courts can adjust contractual rights in order to achieve a workable plan of arrangement proposed by a company under the British Columbia Business Corporations Act (the "Act").

Recently, a number of high profile cases have emerged involving the application of material adverse change ("MAC") provisions, primarily in the context of leveraged buyouts.2 This week, the application of MAC clauses to a financing commitment arose in the context of the Solutia Inc. ("Solutia") bankruptcy proceeding. On February 6, 2008, Solutia filed an adversary proceeding against certain lenders (the "Lenders")3 seeking to enforce a commitment to provide $2 billion in exit financing.

Following a recent ruling in the Delphi Corporation bankruptcy case approving cure notices and cure claims procedures, purchasers of unsecured trade claims originating out of executory contracts or unexpired leases should take special precautions to protect their rights or risk impairment or loss of such claims to the extent they become cure claims.

In order to get the information necessary to seize a debtor's assets or garnish his income, Rule 60.18 of the Rules of Court permit a creditor to require a debtor to attend an ex­amination under oath be­fore a court reporter and be questioned in relation to:

(a) the reason for non-payment or non-performance of the judgment;

(b) the debtor's income and property;

(c) the debts owed to and by the debtor;

(d) the disposal the debtor has made of any property either before or after the making of the order;