By Richard Dusome of Gowling Lafleur Henderson LLP
When structuring a new financing for a corporate borrower, lenders typically obtain postponements from all other creditors and shareholders advancing loans to the proposed borrower. Postponements establish the lender’s priority to receive payment from the borrower vis-à-vis these other known creditors.
However, some shareholders who have not actually advanced loans to the borrower may still hold shares that contain a right of retraction that will require the borrower, at the shareholder’s option, to purchase the retractable shares at a pre-arranged price following the issuance of an exercise notice. The retraction serves to create a new debt obligation out of what was originally an equity holding.