Baffinland: the monitor's case for letting the CRO decide

Subparagraph 6(xiii) of the sale process Baffinland's debtors want approved asks every qualified bid to describe the bidder's intentions for the mine, from the Steensby expansion and the employees to the "contractors, customers, contracts and vendors", per the Fifth Report of the Monitor, Oct. 7, 2026, App. C, Applicants' Proposed SISP, s. 6(xiii), p. 55. FTI Consulting Canada Inc., the monitor, says it asked that the clause name the royalty agreements too. "[T]he Debtors (through the Operating Committee) have refused to do so," its Fifth Report says, and the monitor "does not support the issuance of any SISP that does not contain a specific reference to the bidder's intentions with respect to royalties", because the value of any royalties that must be paid on iron ore "is a crucial component in the assessment of any bid and will necessarily affect stakeholder treatment and recovery under the SISP," per the Fifth Report, para. 60. The lenders' version of the clause adds "(including offtake, fuel, royalty and other commercial agreements)", per the Fifth Report, App. D, Secured Lenders' Proposed SISP, s. 6(xiii), p. 65.

The royalties run through the rest of the report, which takes a position on what it calls the only material outstanding dispute between the proposals: who decides. Leaving that aside, the monitor's view is that both "provide for an open, fair and transparent process with an appropriate level of oversight by the Monitor." On the dispute, it recommends, "on balance", the form put forward by Export Development Canada, the DIP lender, and the senior secured lenders, under which the chief restructuring officer, "with the assistance of the Monitor, is empowered to make the key decisions in the SISP," per the Fifth Report, paras. 15(c)–(e), 74. When this case was last written about here, on October 4, no report of the monitor on the motion was in the record. The motion, adjourned from September 24, is returnable October 9, per the Fifth Report, para. 27.

A customer and two royalty agreements

All decision-making authority over Nunavut Iron Ore, Inc., Baffinland Iron Mines Corporation and Baffinland Iron Mines LP is vested, under a unanimous shareholders agreement, in an operating committee made up entirely of shareholder appointees: five from The Energy & Minerals Group, including two members of the debtors' management, and two from ArcelorMittal Canada Inc., per the Fifth Report, paras. 49–50. In the monitor's words the committee "has significant economic interests in these CCAA Proceedings that may affect the Operating Committee's ability to make decisions in the best interests of the Debtors," and its first example is that ArcelorMittal is the debtors' largest iron ore customer, per the Fifth Report, para. 57.

The report's second example is the royalties. It describes EMG and ArcelorMittal as Nunavut Iron Ore's two largest shareholders, and says that EMG affiliates and ArcelorMittal, with companies belonging to the two management members on the committee, agreed to fund the Baffinland partnership and corporation up to US$300 million in exchange for royalties on iron ore shipped from the Milne port and, once it is complete, the Steensby port. The March 25, 2024 agreement, among an EMG affiliate, ArcelorMittal and the two management members' companies, was for up to US$100 million; the December 23, 2024 agreement, among an EMG affiliate and the two companies, was for up to a further US$200 million. Each carries US$0.50 for every dry metric tonne shipped from each port and a floating royalty on Steensby revenues, per the Fifth Report, paras. 14, 58. On that footing the monitor's view is that the committee's members "have an economic interest in the outcome of the SISP that could prevent the SISP from being viewed as having been conducted in a fair and transparent manner that maximizes value, which must be the bedrock of any SISP approved by the Court," per the Fifth Report, para. 61.

The agreements are also under the monitor's review. It says it "is in the process of reviewing the Royalty Agreements and the value provided for the royalties contained therein to determine whether they are a valid royalty at law and whether the granting of the royalties constitutes a transaction at undervalue or if there are other aspects of the transactions in respect of the Royalty Agreements that would affect their validity." It wrote to the CRO on September 22 for information, has received some of it, and understands that the rest is being collected, per the Fifth Report, para. 59. On the report's account the review is still under way, and the notes to management's cash-flow forecast say royalty payments will be distributed to the monitor "to be held in escrow pending the Monitor's review and any court order, if required," per the Fifth Report, App. E, October Forecast, note 4, p. 74.

Out of fiduciary duties, and back in

The debtors' answer to the conflict concerns has been the independence mandate the committee adopted in September, reported here on September 18. The monitor starts with section 3.1(c) of the shareholders agreement, which, as it describes the clause, lets each committee member act in the best interest of its appointing shareholder "without regard to duties or obligations that would otherwise be applicable", fiduciary duties among them. The mandate provides that the section does not apply to members carrying out their duties while the CCAA proceeding is pending, per the Fifth Report, paras. 54–55. "The Monitor is of the view that the Operating Committee's attempts to first contract out of fiduciary duties and then to contract back into such duties on the eve of this motion ought to be considered by the Court in determining whether the Operating Committee or their Independent Member nominees are the appropriate parties to be entrusted with ultimate decision-making authority in the SISP," per the Fifth Report, para. 55.

The mandate, the monitor says, "may not" rectify the conflicts it describes, for four reasons: an independent member is appointed only where a member has a conflict; a conflict arises only on a matter "currently and directly at issue in the CCAA Proceedings and being considered before the Operating Committee"; a member becomes a conflicted member only by self-reporting or by the committee's determination; and a unanimous resolution of the committee can end the mandate at any time. If the royalty agreements or ArcelorMittal's status as a customer are not currently and directly at issue, "in the discretion of the Operating Committee and its Members," the monitor says, they "may not be considered a Conflict"; and the committee could end the mandate after the SISP is approved while keeping, under the debtors' form, the power to choose the successful bid, per the Fifth Report, paras. 61(a)–(d), 62, 64.

The monitor says it was sent a draft of the mandate on August 7 and did not comment "in light of stakeholder opposition to same." It "was not invited to any meeting and was not provided with any resolution where the Independence Mandate was approved and was only advised that it had been formally approved when the Service List received the Applicants' motion record" on September 17, per the Fifth Report, para. 56. "In the Monitor's view, it should not have been necessary to appoint further independent directors who would have to get up to speed when there is already independence provided by two court officers – the CRO and the Monitor," per the Fifth Report, para. 65.