Mountain Equipment Co-operative is no more.
In September 2020, Mountain Equipment Co-operative filed for creditor protection. A month later, a judge ordered that the co-ops’ assets be sold to a Los Angeles-based private equity firm, and Mountain Equipment Co-operative became Mountain Equipment Company.
Now, the same federal law that was used to dismantle Mountain Equipment Co-operative is being cited by Paper Excellence in its lawsuit against the province of Nova Scotia related to the creditor protection of Northern Pulp. And Paper Excellence’s lawsuit is being heard by the same judge who ordered Mountain Equipment sold.
If Paper Excellence is successful, it could be awarded $450 million — that is, $450 from every Nova Scotian.
The destruction of a iconic Canadian coop
When Yuill Herbert read that Justice Shelley Fitzpatrick in the British Columbia Supreme Court had ordered Nova Scotia into mediation with Northern Pulp using the broad powers of the Companies’ Creditors Arrangement Act (CCAA), he was immediately and deeply concerned.
Like many in Nova Scotia, Herbert has been keeping an eye on the British Columbia Supreme Court where Northern Pulp, and six related companies have been enjoying creditor protection under the CCAA since June 2020.
So far, Justice Fitzpatrick has granted the Northern Pulp companies and their owners just about everything they’ve asked for.
Herbert finds the court’s mediation order and also the CCAA worrisome. He speaks from first-hand experience.
In September 2020, after Mountain Equipment Co-op (MEC) sought creditor protection under the CCAA in the British Columbia Supreme Court, Herbert was part of a group of MEC members and supporters who mounted a “Save MEC” campaign to try to convince Justice Fitzpatrick to prevent the iconic Canadian co-operative from being sold off to Kingswood Capital Management, a Los Angeles-based private equity company.
It was, says Herbert, “brutal.”
Related: Northern Pulp and its wealthy owners seem intent on taking Nova Scotians to the cleaners
Herbert met recently with the Halifax Examiner to explain why he thinks Nova Scotians should be concerned about what is going on the British Columbia Supreme Court, based on what he learned from the MEC case.
Herbert, originally from British Columbia but a resident of northern Nova Scotia since the early 2000s when he finished his studies at Mount Allison University in New Brunswick, liked the ideals that MEC espoused.
“One percent of their revenue went directly to environmental groups,” Herbert says. “That’s a significant amount of money. There were so many things MEC did, like the gear swap. There are layers and layers of innovation that created a really remarkable enterprise, that made it a symbol of how business can be done differently.”
Mountain Equipment Co-op was founded as a Canadian outdoor outfitter in 1971 by a group of young British Columbia climbers, and its innocuous origins, history, co-operative values — and also its ultimate death as a co-operative — are detailed by David Smart and Brandon Pullan in the 2020 article, “MEC sold, the death of an ideal.”
Herbert became a MEC member when he was just 16. As a teenager he even tried to become a MEC board member. His bid failed, he says, because he was deemed too young.
Today Herbert is a director at the Sustainability Solutions Group, and he’s worked in the co-operative movement for 15 years.
When he learned, in September 2020, that MEC had gone to the British Columbia Supreme Court for creditor protection under CCAA, Herbert’s first question was: “What the hell is happening?”
“Everyone was caught completely off guard,” he says. “We had heard some stories that MEC was not doing well, but we no idea that MEC was in serious financial trouble.”
Not that there weren’t some early warnings about the way MEC was being governed, Herbert says:
There were some pretty significant failures on the governance side well before any of this went down. MEC started having a process of self-selection with the board, where people who were approved by MEC as board candidates had to meet certain criteria, which were determined by the board. And to me, that’s always a red flag that things are not going well.
But, he explains, it was only after MEC became insolvent and filed for creditor protection in the British Columbia court that everyone learned just how badly and how far things had gone.
Unbeknownst to MEC’s members, he says, the board had a deal to sell MEC off to the California-based private equity firm, a deal the court would likely approve to keep MEC’s largest secured creditor, the Royal Bank of Canada, happy.
“We had a two- or three-week window to try to do something,” says Herbert. “That meant finding lawyers, and finding money to match the deal that this private equity company from California had put forward.”
Trying to ‘save MEC’
Herbert was one of many MEC members who sprang into action.
Another MEC member, Kevin Harding, started a “Save MEC” petition, which garnered 153,392 signatures.
A “Save Our Co-op” Go Fund Me campaign, which sought $50,000 for legal fees, raised that in just a couple of days, and went on to attract a total of $115,017.
“It was incredibly intense,” Herbert says.
Every single night after work from 6 until 2 I was on the phone, coordinating a lot of co-operative leaders to try and raise the money. I reached out to all the major financial institutions and worked with others.
Herbert says he and others tried to “cajole” credit unions across the country to make a financial commitment they could present to the court to show that there were options other than the fire sale of MEC to Kingswood Capital, an American private investment firm that would hire a new executive with ties to the military and police, which MEC members said clashed with the co-operative’s values.
Lawyers they engaged argued in the British Columbia Supreme Court that the MEC Board had broken the law because they hadn’t consulted with members, Herbert says.[1]
Our argument was that we needed time. We the members were the legitimate owners of the co-op and we had a couple of hundred million dollars worth of equity that was being written off.
Nearly 6 million MEC members’ equity ‘wiped out’
By the time MEC went to court, it had close to 6 million members, all of whom had paid at least $5 for memberships, and Herbert says many had accumulated far more shares over time.
“Some had $500 or more, and that was all wiped, it was considered immaterial,” he says. “This is part of the CCAA nonsense.”
In addition to losing their equity, members also stood to lose a lot of private information to the investment firm Kingswood, as Simon Fraser University professor Michael Parent noted in an article that detailed the “treasure trove of member data” that the US firm got by purchasing MEC.
Herbert says they asked Justice Fitzpatrick for a two-week delay, so they could present a deal to the Court as an alternative to the deal from the private equity company.
This is how Herbert sees what happened:
She argued that if she was to give us time, it would jeopardize the deal with this private equity firm, which would then potentially jeopardize jobs for MEC employees, jeopardize the viability of the business case this private equity company was putting forward. She used that as the rationale to not give us two weeks, which was, I think, just brutal, because MEC had spent six months securing this deal for a $110 million from the private equity firm. And in two weeks we’d raised like $60 or $70 million in pledges.
If she’d given us the go-ahead, we had a whole step-by-step plan as to how we were going to get the rest of that money. There were some brilliant financiers from Toronto who had put this plan together.
So for this judge to not give us two weeks to save a Canadian institution on some bogus grounds that this private equity firm might walk away afterwards, it was just ridiculous.
Going against co-op values
Kevin Harding, a policy analyst in BC, was the national spokesperson for the Save MEC campaign. He describes himself as a “passionate believer in co-ops and social enterprises” as a business form because of the power he believes they have to support communities.
Harding wrote in October 2020 that co-ops are “neither fossils nor anachronisms,” noting:
Profit isn’t their driving force — instead, they’re driven by a connection to their members, knowing what they need, and finding creative, low-cost and collaborative ways to solve their members’ problems. They embody the idea of a democratic economy, while challenging traditional forms of business by their very existence.
In a telephone interview from Vancouver, Harding tells the Examiner, “What really bothered me about what happened with MEC was that people would assign the blame to the co-operative rather than to management and poor business decisions.”
Harding says that in recent years, the MEC Board had pursued a “big box retail growth strategy,” and overextended themselves with commercial loans to build new stores and open up new markets, to the point they found themselves unable to pay their bills when COVID-19 hit and there was a general downturn in the economy.
According to Harding, once MEC found itself in financial trouble, having pursued a retail business model that went against the co-op values, the MEC board went to court with the “pre-pack deal” for the sale already prepared by the large “management consulting” firm Alvarez and Marsal, which became the court monitor for the MEC case.
Says Harding:
There was a deal arranged with the American investment firm. And the terms of the deal, like step one, was you need to go to court and get creditor protection and then apply to have this sale approved under the CCAA. And that is the nub of the legal part, because the sale isn’t permitted under the Co-operative Act, and not permitted in a bunch of different ways. But the federal law, the Companies’ Creditors Arrangement Act, permits these sales to be approved by the court. If the court had said “we’re not going to approve this,” the deal would have been off, and MEC would have paid a penalty, and the whole thing would have fallen apart.
In Harding’s view, MEC had been in “complete violation” of its co-operative structure. “MEC had done all of this completely secretly,” he says. “There were non-disclosure agreements. The sale advertisement was done under a code name.”
“No one was allowed to talk about it,” Harding says. “So nobody knew it was even going on until the morning the radio story [about MEC being in creditor protection under the CCAA] happened.”
“Then everyone was panicked,” he says. “The co-operative sector was looking around at itself saying, ‘we could have pulled together an alternative financing arrangement.’” Harding explains:
What we were asking for wasn’t that the sale be quashed, because that would have been tossed out of court instantly. We were asking for two weeks so that credit unions could get access to the financial books of Mountain Equipment Co-op, because they weren’t willing to sign on the line and make any financial arrangement until they could verify the financial status of the co-op and really do the risk assessment … So we were asking for two weeks. So that way, the people who were interested in putting up the money to pay MEC could check their credit record. That was all we were asking for.
The death of a co-operative
Justice Fitzpatrick turned down the request and dismissed the arguments Harding made in his sworn affidavit to the Court, allowing the sale to proceed.
In explaining her decision to allow the sale of MEC, she initially seemed sympathetic to MEC’s history and co-operative values, writing:
In 1971, almost 50 years ago, MEC was formed from the passion of many Vancouverites who loved to spend time outdoors and appreciated having the right equipment and gear to do so. Since then, MEC has become an iconic retailer of outdoor activity equipment and clothing, serving the needs of the public who share that passion for the outdoors…
MEC’s ownership is unique. MEC currently has approximately 5.8 million members, each having paid a $5 lifetime membership fee for the right to shop at MEC and participate in its governance as a co-operative member. Counsel advises that the breadth of MEC’s membership in Canada is significant, representing some 22% of the Canadian working population.
MEC has a significant history of community involvement. Since 1987, MEC has contributed approximately $44 million to organizations focused on conservation and outdoor recreation.
However, Justice Fitzpatrick then took a swipe at Kevin Harding and his efforts to “Save MEC” as a co-operative:
It is unfortunate that Mr. Harding appears to be singularly focussed on preserving MEC as a co-operative entity to continue its business. Given the co-operative principle of “concern for community” embraced by MEC as part of its DNA, the “SaveMEC” campaign group and the Co-op Associations might have given some consideration to the fact that the Kingswood sale will benefit many persons in the community. The sale will ensure ongoing employment to most MEC employees, the maintenance of business relationships which support other jobs and repayment of at least some portion of the debt that MEC owes to its many unsecured creditors.
CCAA ‘written by banks’
This is how Harding recalls the court hearing – held over Zoom – at which Justice Fitzpatrick announced her decision:
It felt like to me as an observer, a non-lawyer, that she was just annoyed with us, and our lawyer Colin [Gusikoski] did his absolute best to bring everything that he could to the table and make the case. But she was interested in protecting the banks, making sure the loan got paid and that was about it. So she tossed it. She didn’t seem to have really any compassion in there. There was an acknowledgment in her written decision that, you know, there are elements of cooperatives that are fundamental to things like the Charter of Rights and Freedoms and the Freedom of Association, but that somehow the bank loan takes precedence over all of those things.
Harding believes that co-operatives, like non-profit organizations, should not be treated like corporations by the CCAA.
“They have a different piece of incorporating legislation, a different structure, a different purpose,” he says. “Co-ops aren’t formed for the purposes of generating profit. They’re formed for the purposes of providing services to members. And when it comes to a business decision like this, the law in British Columbia, the law in pretty much every province, even the law for federal cooperatives requires that members actually be consulted first.”
The problem, as he sees it, is the Companies’ Creditors Arrangement Act itself, which he says can “bypass” all of that. According to Harding:
The CCAA was written literally by banks … so the legislation’s written with the sole premise that the creditors, the people who offer loans are the ones who take priority in a situation like this. Everybody else — members, stakeholders, shareholders, employees, everybody else, even creditors who don’t have security — they’re all third-class citizens. The law was written by the banks to protect the banks, and then what you get is compounded years of jurisprudence from courts who see that their primary role in enforcing that piece of legislation is to make sure that the banks are paid.
Wrong decision?
Anna Lund, an associate professor in the Faculty of Law at the University of Alberta, says that opinions differ on the 2020 decision by British Columbia Supreme Court Justice Shelley Fitzpatrick to allow the sale of the Canadian co-op to an American private equity firm.
But Lund thinks the “wrong decision was reached in that case.”
In a telephone interview, Lund tells the Examiner that the court “didn’t seem to accept or appreciate how co-operatives differ from corporations.”
In her view, that was a problem. Lund explains that when the court applied Section 36 of the Companies’ Creditors Arrangement Act, which sets out the discretionary factors that should be looked at when a decision is to be made about the sale of a company, it missed an important point.
“They treated [co-op] members like they were shareholders, and members are differently situated in a co-operative than are shareholders in a corporation,” says Lund. “I think there wasn’t good enough understanding of how co-operatives differ from standard corporations.”
The problem, Lund says, may lie with the broad scope of the CCAA itself.
“Both the CCAA and corporate law could be improved in a lot of different ways,” she says.
Lund thinks there is room for “at least a change in practice” of the law, if not a change in legislation.
‘C’ is now for ‘company’
Whatever one thinks of the law and how it was applied, the fact remains that because of the CCAA, Mountain Equipment Co-op is no more.
Today, MEC stands for Mountain Equipment Company, and it is a chain of 21 retail stores across Canada that – to the average person – may look a lot like the MEC outlets of old.
But today it is a privately held company, owned by California-based Kingswood Capital Management.
As Harley Rustad wrote in The Walrus about how the Mountain Equipment Co-op was rebranded as MEC, and ultimately lost its way, “First it lost the mountain from its brand. Now it has lost the co-op from its spirit. All that’s left is equipment.”
Yuill Herbert says that since the sale, he has never shopped at MEC because the only reason he ever did – because it was a co-operative – is gone.
Based on what happened in the MEC case under the CCAA, Yuill Herbert thinks Nova Scotians should be watching the Northern Pulp creditor protection case in the British Columbia Supreme Court very carefully.
“I think the CCAA is a very powerful tool and it’s not going to represent the public interest,” he says. “It has no intention of representing the public interest, and so Paper Excellence will use that to further whatever ends they have. And Nova Scotia may be surprised at how powerful and destructive that law can be.”
End of Part 1.
Endnotes
[1] The Halifax Examiner contacted the lawyers who represented the BC Co-op Association and Cooperatives, and Mutuals Canada and co-op members to request interviews, but none was granted. One of the lawyers who assisted the co-op members is now representing Paper Excellence Canada Holdings Corporation in the Northern Pulp CCAA creditor protection case in the British Columbia Supreme Court.
What gets a BC Court jurisdiction here. Is it
The arrangement of paper debt between related companies? If NS gov had been to collect money owed on a more timely manner would NS courts have jurisdiction? I know it’s federal law so perhaps jurisdiction doesn’t matter
If you make a poor business investment, you lose your money. If a bank makes a poor business investment, they get their money. It’s codified. We don’t live in a country that represents the interests of its citizens. Speaking of Northern Pulp, companies should be jailed for environmental and criminal conduct. Their assets stripped and banned from operating, just like a person put in jail. If they are treated as people under the law, they should expect nothing less. If an individual broke the law in the ways that they have, they would be in prison. Why do we expect nothing less of a company?
Such a sad saga with MEC. Co-ops have so much to offer society and the board at the time of sale just bailed at the first opportunity their duty to look out for the members.
No surprise Northern Pulp is doing what they are doing.
$5 for a lifetime membership !!! It is pocket change. If you join a co-op make sure you invest money for the long term sustainability of the enterprise and that means spending more than the cost of a cup of coffee. If you value a social enterprise treat it as a long term business,watch every nickel and make sure every member is as dedicated as you.