Monday, April 13, 2009



It's Easter Monday today.

For some it's a holiday. For others, another working day.

For me... I spent the wee hours of the morning in thankful reflection. Parked across the street from a GM dealership, I wondered how those working for, and connected to, General Motors are feeling today?

To them there is only one thought... Survival.

Sunday's news from the New York Times made Easter somewhat less than happy for the extended car maker family.

The U.S. Treasury Department is directing General Motors to lay the groundwork for a bankruptcy filing by a June 1 deadline. The goal is to prepare for a fast “surgical” bankruptcy according to those initmate with the details of the plan.

In the United States one potential scenario would be to create a new company that would buy the “good” assets of G.M. almost immediately after the carmaker files for bankruptcy. One potential outcome would have the “good G.M.” enter and exit bankruptcy protection in as little as two weeks.

But that is the United States. What about Canada?

Well... that's where things get 'sticky'.

There is a profound difference in Canadian law compared with U.S. law on this issue. In Canada companies can't bust unions through bankruptcy.

In the United States, insolvencies can be used to end high-cost union contracts if certain procedures are followed. In Canada, however, such contracts survive insolvency and extend to successor employers who emerge from the ashes of a defunct company.

Moreover, a union collective bargaining agreement can also apply to any company that simply buys equipment, even if it's moved to a different location and possibly even if it's used for different purposes.

So, in the United States, you can impose a "cram down" and use the threat of bankruptcy to force unions to accept a deal. Here, that's a tactic that doesn't fly and the presence of a collective bargaining agreement makes it more complex when restructuring a company.

And while judges have broad powers under insolvency law in Canada, even they can't set aside union contracts to facilitate a restructuring.

The successor-rights issue is going to be a major stumbling block in Canada and is going to affect the dynamic of negotiations in restructuring. The worst case scenario is that GM can't effectively reorganize in Canada and because of those union obligations, nobody will buy the plants or the equipment.

The end result is that plants in Canada are mothballed and the equipment shipped outside the reach of the union's CBA, such as overseas or to a lower-cost jurisdiction. (Labour laws apply only to the province they cover.)

Rick Orzy, an insolvency lawyer at Bennett Jones in Toronto, often advises lenders in insolvencies. In a recent National Post interview he said the successor rights also affect valuations and financing. He tells lenders that if they lend to a company with a union and the company defaults and they have to collect on the loan by selling the company or its assets, the buyer is then subject to the CBA and the liabilities that go with it. "The price you are going to get as a result of the law is less."

Alison Narod, an employment lawyer at Farris, Vaughan, Wills & Murphy in Vancouver, said a CBA "is always an issue because of the effect it has on costs or running the business and any restrictions there may be on running the business. Typically, parties have to address that in cutting their deal. Some unions are practical and will be more concerned about preserving jobs if they are convinced that the employer is in a tight financial spot," she added.

For the GM factories in Ontario, the parts manufacturers that support them and the dealerships all across the country these are extraordinary, uncertain times where even the best options can only be described as 'bleak'.

So on this Easter Monday my thoughts go out to all the little guys caught in the middle of this power play.

The uncertainty and angst must be gut-wrenching, at best.



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