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Software vendors complicate Algoma's exit from insolvency protection

Soon-to-be sold steel mill critically dependent on accounting and human resources applications
Customer lock-in has long been an effective sales strategy for many vendors of enterprise software. Switching to alternative products is often complicated and prohibitively expensive. (File photo)

As Essar Steel Algoma Inc. races to tie up myriad loose ends prior to its planned sale to new owners on Nov. 30, two vendors of business enterprise software emerged as roadblocks this month, last-minute holdouts seeking significantly better deals than they had before the steelmaker entered insolvency protection 47 months ago.

Their audacity didn't get them far.

The two companies are SAP Canada Inc. and Infor (US), Inc., formerly known as Lawson Software.

Since 2005, SAP has supplied Algoma with software licences that run the company's accounting department.

Infor (U.S.) has provided a significant part of the steel mill's human resources software for the past six years, allowing Algoma to keep employees informed about their pay, benefits and pensions.

"SAP and Infor have not provided any legitimate basis why their agreements may not be assigned to the buyer," say Algoma's lawyers, Montreal-based Stikeman Elliott LLP. "These two counterparties either demand significant incremental charges for the same service currently provided by the company, or have requested an assignment fee."

Secret files

The granular details of Algoma's dealings with these two multinational suppliers are, for the most part, shrouded in court-imposed secrecy.

Two weeks ago, Superior Court Justice Glenn Hainey slapped a seal on court documents related to the software vendors, on grounds they contain commercially sensitive information.

The court files that remain publicly accessible reflect Algoma's exasperation with a sector in which customer lock-in has long been employed as a sales strategy, rendering moves to alternative software complicated and prohibitively expensive.

"SAP and Infor are merely seeking to manoeuver and use the sale transaction for their individual benefit without providing a legitimate basis for why their contracts should not be assigned to the buyer," Stikeman Elliott say.

The law firm considers the vendors' last-hour tactics "improper."

Suppliers should never be allowed to improve their own fortunes when a customer voluntarily seeks insolvency protection and aren't entitled to terms they didn't enjoy under their original contract, the lawyers argue.

Just two refusals

In every case in which a critical supplier's consent is needed to transfer a contract to the new owners, Algoma is required to "make commercially reasonable efforts" to persuade them.

So far, transfer consents have been received from 31 vendors.

When court records were most recently updated two weeks ago, two other companies had not yet responded.

One was another software vendor, Oracle Canada ULC, which has since been working with Algoma on an arrangement for transferring its contract to the new company. 

The other nonresponder was RBC Investor & Treasury Services, which had only been contacted the previous week due to an oversight. 

SAP and Infor were the only vendors who outright refused to assign their existing contracts.

"These contracts are primarily with respect to IT and general management services that are important to day-to-day operations," said Brian Denega of Ernst & Young Inc., the court-appointed monitor overseeing Algoma's emergence from insolvency protection. "The monitor understands that the outstanding agreements are a necessary part of the business operations being acquired by the buyer."

Court order

The new owners, including Essar's existing term lenders and consenting senior secured noteholders, intend to operate under the old name, Algoma Steel Inc.

The plan is to run the steel mill without material changes or interruption, preserving 3,000 jobs including all of Algoma's unionized employees and all non-unionized employees who were employed as of Aug. 1, 2018.

But the much-anticipated sale can't close without the critical software contracts.

Algoma served notice to SAP and Infor that it intended to force the issue, seeking a court order requiring them to honour their existing contract with the new company.

The software companies didn't oppose Algoma's subsequent court motion and on Oct. 17, Justice Hainey assigned their contracts to the new owners.

Retirees to meet

Meanwhile, certain Algoma retirees have been invited to meetings next week regarding proposed changes to their pensions. 

The meetings are scheduled for Nov. 6 at the Marconi Hall at 11 a.m., 2 p.m and 4:30 p.m. 

The meetings are being facilitated by court-appointed counsel for the retired and former members (and surviving spouses) of the salaried and WRAP pension plans and those hourly retirees who opted-out of representation by USW Local 2251.