Sino-Forest’s restructuring deal leaves shareholders cut out

Peter Koven and Barbara Shecter, Financial Post Staff | Oct 2, 2012 8:28 PM ET
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Bloomberg/Norm Betts In August, the Sino-Forest restructuring plan was quietly amended so that shareholders would receive nothing at all. 

Shareholders have been quietly shoved aside in the court-ordered restructuring of Sino-Forest Corp. — and they feel a lack of legal counsel is partly to blame. Last week, veteran Bay Street lawyer Joe Groia agreed to take up the case of disgruntled Sino shareholders, who are furious about their treatment during the CCAA process.

But he may be too late.

When the scandal-plagued company entered creditor protection in March, the debtholders hatched a restructuring plan in which shareholders would receive up to 15% of the new company that emerged from the insolvency process. In addition, shareholders were told they would get as much as 100% of proceeds from a litigation trust established to sue Muddy Waters LLC, the short seller that first identified problems at Sino-Forest.

But apparently the noteholders have changed their minds. In August, the restructuring plan was quietly amended so that shareholders would receive nothing at all.
When reached by the Financial Post, multiple sources close to the CCAA did not even realize it happened.

This was just rubber-stamped and forgotten by the courts and the monitor. Our rights were completely extinguished

“This was just rubber-stamped and forgotten by the courts and the monitor. Our rights were completely extinguished to the benefit of the noteholders, by the board of directors,” said Jason Evdoxiadis, a minority shareholder who met with Mr. Groia.
He believes the board agreed to the arrangement because it also serves to indemnify them (though no one can be released from serious claims of fraud or criminal misconduct).
Experts say that the noteholders’ change of plan should not come as a surprise, because their first act was to try to sell the company. Once that failed, there was no reason for them to keep shareholders in the picture as they try to recover value.
“Nobody hit their threshold in the sale process, so, you know, the bondholders are completely underwater. When you’re completely underwater, you may not feel so generous,” said one lawyer involved in the restructuring.

Bloomberg/David Paul MorrisCarson Block, research director and founder of Muddy Waters LLC, published a report last summer accusing Sino-Forest of exaggerating its assets.

But some shareholders argue that if they had more legal representation in the court, they might not have lost out on all opportunities to salvage something from Sino’s collapse.
Legal experts said that no two CCAA situations are the same, and shareholders only occasionally get representation. They are last in the pecking order, and the usual assumption is that they will get nothing.

One restructuring lawyer suggested that the Sino process unfolded this way because of a separate class action lawsuit that targets the company and its financial enablers. The class action lawyers are deeply involved in the insolvency process, which is unusual in these cases. For the court, this is evidence that the shareholders have proper representation.
“The class action counsel are effectively representing the shareholders,” the lawyer said, speaking on condition that his name would not be used because he is not working on the case.
Dimitri Lascaris, a partner at Siskinds LLP, one of the two firms leading the class action, said he is certain that the lawsuit is the best hope for shareholders to recover money. However, the suit does not cover investors who bought Sino shares after the Muddy Waters report came out in June of last year.
Mr. Groia, who is not yet acting in an official capacity but is studying possible legal avenues to help out shareholders, called it a “very complicated situation” and said he would look at all the possible sources of recovery.
“You could turn this into a very good law school examination question,” said Mr. Groia, best known for his successful defence of Bre-X geologist John Felderhof. “It’s not going to have a quick and easy solution, if there is one at all.”
http://business.financialpost.com/2012/10/02/sino-forests-restructuring-deal-leaves-shareholders-cut-out/