shareholder rights in ch 11 - global forum on law, … rights in the us • in general, shareholder...
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ShareholderRightsintheUS
• Ingeneral,shareholderrightsaregovernedbystatelaw(e.g.,Delawarelaw,NYlaw,etc)
• ShareholdershavetherighttoselectmembersoftheBoardofDirectors
• Directorsareexpectedtoactinthebestinterestsoftheirshareholders(dutyofloyaltyandinsomestatesdutyofcare)
• Directorsselectofficers,whoalsohavesimilardu@esofloyaltyandcare
ShareholderRightsinBankruptcy• OncetheshareholdershaveauthorizedthefilingofaCh.11,thedebtoren@ty’sdu@esshiStoincludethecreditors(ingeneral)
• Directorsandofficerscon@nuetooperatethedebtor,asdebtor-in-possession,aquasi-fiduciary
• Butcreditorshavepriorityofpaymentovershareholders,crea@ngpoten@alconflictsforofficersanddirectors
• Canshareholdersaffectthedecisionsofofficersanddirectorsinbankruptcy?
§1129(b)(2)(B)
(b)[ifaclasshasvotedtorejecttheplan,theplanmays@llbeconfirmed,butonlyif--](B)Withrespecttoaclassofunsecuredclaims—(i)theplanprovidesthateachholderof[anallowed]claimofsuchclass[isfullysa@sfied];or(ii)theholderofanyclaimorinterestthatisjuniortotheclaimsofsuchclasswillnotreceiveorretainundertheplanonaccountofsuchjuniorclaimorinterestanyproperty…..
§1129(b)(2)(C)
(C)Withrespecttoaclassofinterests—(i)theplanprovidesthateachholderofaninterestofsuchclassreceiveorretainonaccountofsuchinterestpropertyofavalue,asoftheeffec@vedateoftheplan,equalto…thevalueofsuchinterest;or(ii)theholderofanyinterestthatisjuniortotheinterestsofsuchclasswillnotreceiveorretainundertheplanonaccountofsuchjuniorinterestanyproperty.
§1123(a)(4)
Aplanshall(4)providethesametreatmentforeachclaimorinterestofapar@cularclass,unlesstheholderofapar@cularclaimorinterestagreestoalessfavorabletreatmentofsuchpar@cularclaimorinterest
§1123(a)(6)…aplanshall(6)providefortheinclusioninthecharterofthedebtor,ifthedebtorisacorpora@on,orofanycorpora@onreferredtoinparagraph(5)(B)or(5)(C)ofthissubsec@on,ofaprovisionprohibi5ngtheissuanceofnonvo5ngequitysecuri5es,andproviding,astotheseveralclassesofsecuri@espossessingvo@ngpower,anappropriatedistribu@onofsuchpoweramongsuchclasses,including,inthecaseofanyclassofequitysecuri@eshavingapreferenceoveranotherclassofequitysecuri@eswithrespecttodividends,adequateprovisionsfortheelec@onofdirectorsrepresen@ngsuchpreferredclassintheeventofdefaultinthepaymentofsuchdividends
§1145(a)(1)[S]ec@on5oftheSecuri@esActof1933andanyStateorlocallawrequiringregistra@onforofferorsaleofasecurityorregistra@onorlicensingofanissuerof,underwriterof,orbrokerordealerin,asecuritydonotapplyto—(1)theofferorsaleunderaplanofasecurityofthedebtor,ofanaffiliatepar@cipa@nginajointplanwiththedebtor,orofasuccessortothedebtorundertheplan—(A)inexchangeforaclaimagainst,aninterestin,oraclaimforanadministra@veexpenseinthecaseconcerning,thedebtororsuchaffiliate;or(B)principallyinsuchexchangeandpartlyforcashorproperty[similarprovisionforwarrants,op@ons,etc.)
§510(b)(b)Forthepurposeofdistribu@on…aclaimarisingfromrescissionofapurchaseorsaleofasecurityofthedebtororofanaffiliateofthedebtor,fordamagesarisingfromthepurchaseorsaleofsuchasecurity,orforreimbursementorcontribu5onallowedundersec@on502onaccountofsuchaclaim,shallbesubordinatedtoallclaimsorintereststhatareseniortoorequaltheclaimorinterestrepresentedbysuchsecurity,exceptthatifsuchsecurityiscommonstock,suchclaimhasthesamepriorityascommonstock.
Insummary,then--
• Shareholders,as“claimants”byvirtueoftheirinterests,canreceiveadistribu@ononaccountofthatinterest,butonlyifnounsecuredcreditorclasshasvotedtorejecttheplan
• Ifshareholdersretaintheirinterestundertheplan,however,theirrightscannotbedilutedbynonvo@ngstock
• Claimsarisingfromthepurchaseorsaleofasecurityofthedebtoraretreatedasequity
CorporateGovernanceIssues
Onceadebtorenterschapter11,itisa“debtor-in-possession”or“DIP”forshort.TheDIPactsinthesteadofatrustee,responsibleforgathering
andpreservingassetsforthebenefitofcreditors.Butwhatdoesthismeanfor
corporategovernance?TowhomdoestheBoardofDirectorsanswer?Andcantheybe
removed?Ifso,bywhom?
Johns-Manville“shareholders'desireforleverageisnotabasisfordenyingthemanelec5on,solongasleveragemeansonlytheimprovementoftheirbargainingposi@onortheassuranceoftheirpar@cipa@oninnego@a@ons.…theEquityCommireeispermiredtoelectnewdirectorsinordertoredirectoralterthecourseofareorganiza@on—…thedistrictcourthereexplicitlyrecognizedthatthe[Equity]commireeispermiredtodothat…”InreJohns-ManvilleCorp.,801F.2d60,65-66(1986)(emphasisadded)
Johns-Manville(cont’d)However:“InInrePoBerInstrumentCo.,593F.2d470(2dCir.1979),thiscourtupheldthebankruptcycourt'srefusal,uponafindingofclearabuse,toorderashareholders'mee@[email protected]"suchanelec@onmightresultinunsa@sfactorymanagementandwouldprobablyjeopardizeboth[thedebtor's]rehabilita@onandtherightsofcreditorsandstockholders—soundingthe`deathknell'tothedebtoraswellastoappellanthimself."Id.at475.”Id.,at67(emphasisadded).
Johns-Manville(cont’d)Butthedissentpointsout:“Toseekashareholders'mee@ngatthislatedate,itseemstome,is…aclearabuse.TheEquityCommiree,ifithasitsway,[email protected]@sfiedwiththeBoardofDirectorsforthreeyearsfollowingthefilingofthebankruptcype@@on,thecommireewaitedun@lthedirectorsfinallyproposedaplantoobject,notonlytotheplan,buttothedirectorsthemselves.Inaddi@ontoseekingtoupsettheplan,itisnowtryingtoreplacethedirectors,aresultthatwouldrequirenego@a@onstorecommencefromthebeginning.”
PlanTreatmentofShareholders
Iftheplangivesstocktocreditors,orallowsexis@ngshareholderstoretainstock,[email protected],theCodecontemplatesreturningcorporate
[email protected]@mesneedstobe
altered,foravarietyofreasons.
Acequia“Sec@on1123(a)(6)requiresan‘appropriatedistribu@onofvo@ngpower’asto‘theseveralclassesofsecuri@espossessingvo@ngpower....’Sec@on1123(a)(7)(1982)providesthataplanmustcontainprovisions‘thatareconsistentwiththeinterestsof...equitysecurityholdersandwithpublicpolicywithrespecttothemannerofselec@onofanyofficer,director,ortrustee....’Seealso11U.S.C.§1129(a)(5)(A)(ii)(1982).Sec@ons1123(a)(6)and1123(a)(7)mustbereadtogether.Theseprovisionsrequirethatthecourtscru@nizeanyplanwhichaltersvo@ngrightsorestablishesmanagementinconnec@onwithaplanofreorganiza@on,whetherornottheplanprovidesfortheissuanceofnewsecuri@es.”787F2d1352,1362(9thCir.1986)
Acequia(cont’d)
“Werecognizethatashareholder'spar@cipa@oninacorpora@on‘cannotbelightlycastaside....’InreLifeguardIndustries,Inc.,37B.R.3,17(Bankr.S.D.Ohio1983).Clinton,however,presentedJudgeYoungwithnoreasonablealterna@vebuttoextendHaley'sexclusivecontrolbeyondthetwoandone-halfyearperiodthattheproxywasineffect.”Id.,at1362
Acequia(cont’d)
TheplanclassifiedClinton(Hshareholder)andHaley(Wshareholder)inthesameclass,butpermiredonlyHaleytoserveasanofficerwithouttheapprovalofthedirectors.§1123(a)(4)saysthat“interests”havetobetreatedthesame.Courtsaidthatthisprovisionwasnotviolated:“herposi@onasdirectorandofficeroftheDebtorisseparatefromherposi@onasanequitysecurityholder.Haley'ssharesareplacedinthesameclassandsubjecttothesamevo@ngrestric@onsasClinton's.”
AheadCommunica@ons
Purposeof§1126(a)(6)istoallocatevo@ngpowerrecognizesrespec@verightsofclaimantsandshareholders,pertheirrankandrightstheysurrender.Creditorswhoreceivesharesshouldalsoreceivevo@ngrights.Inaddi@on,shareholderswhoretaintheirrightsshouldalsoretaintheirrighttoselectthefuturemanagementofthecompany.395BR512(D.Conn.2008)
LimitsonFilingRights
Thedecisiontofileforch11reliefcanoSenbemadeattheBoardofDirectorslevel,buttheby-lawsmightrequirethatshareholdersauthorizethefiling.Whenthathappens,thecourtmaybe
calledupontoexaminethebonafidesorlegi@macyofthefilingdecision,andtoperhaps
dismissthecase.
SGLCarbonCorp.
Solventcompanyfiledforchapter11.Creditorssoughttodismissthecaseasfiledinbadfaith.Thecourtgrantedthemo@ontodismiss,butonlybecausetherewasintenttogainali@[email protected],andthatpreservingvalueforshareholdersisalegi@matebasisforfiling,[email protected](3rdCir.1999)
IntegrateTelecomExpress,Inc.
Solvententerprisemayfile,includingtopreserveshareholdervalue,butmaynotfiletoobtainali@[email protected]
BankruptcyRemoteness
Some@mes,lendersdesiretomakeaborrower“bankruptcyremote”[email protected]@onof
abankruptcyremoteen@tywhoseby-lawsincludearequirementofunanimitybythe
Board,oneofwhosedirectorsisdesignatedas“independent.”Doesthisstrategywork?
KingstonSqAssoc.Subsidiarycorpora@onswerecreatedtohold@[email protected],provisionswereplacedintheby-lawstomakethesubsidiaries“bankruptcyremote”–thatis,unanimousconsentofallboardmemberswasrequiredtoauthorizethefilingofape@@on,oneboardmemberwas“independent”butinfact“…serve[d]asanindependentdirectorforthreeotheren@@esattherequestofDLJ[thenoteholder],receiving$10,[email protected],Richardsonreceive[d]theaggregateamountof$55,000annuallyforservingonthevariousboardsofdirectorscreatedpursuanttoDLJ-structureddeals.”214B.R.713(Bankr.SDNY1997)
KingstonSq.Assoc.(cont’d)“[C]orporateac@ontakenbyaninsiderwithoutboardorshareholderauthoritymaylaterbefoundtohavebeenappropriateincircumstanceswheretheexistenceofthecorpora@onisverymuchatrisk.Here,withforeclosuresbeingins@tutedbytheMovantsagainsteachDebtors'propertyandtheDebtors'boardstymiedinfilingforbankruptcyinlightoftheblockingvoteheldbyRichardson,Ginsberg'sactstogarnersupportfromwillingcreditorstofileinvoluntarycasesinordertothwartfinancialruinwouldappeartoberightinlinewith[caselaw].”
KingstonSq.Assoc(cont’d)
“[theboardmembers’]inten@onwastocircumventtheinabilityoftheDebtorstoactinthefaceofthependingforeclosureproceedingsbytakingsomeac@ontopreservevaluefortheDebtors'estatesandcreditors.…TheMovantsmayfeelbruisedbecausetheRespondentsoutmaneuveredwhattheMovantsthoughtwasaniron-cladprovisioninthecorporateby-lawspreven@ngabankruptcyfiling,butthisdoesnotmeanthat,withoutmore,thepe@@onsmustbedismissed.”Id.,at737.
Taximplica@onsofdebtforequity
Onereorganiza@ontoolavailableunderch11isdebtforequityswaps.ButtheUSTaxCode
requiresthat“stockfordebt”plansnotresultina“changeofcontrol.”Otherwise,valuabletaxbenefits,suchasnetopera@nglosscarrybacksandcarryforwards,canbelost.See26USC§
382.Thepresenceofsuchvaluablebenefitscanbegoodforexis@ngshareholders.
CharterCommunicaOons
Planprovidedthatasignificantshareholderwouldretainhis35%vo@ngpower,despitethefactthat,asaresultoftherestructuring,hisshareswouldbedilutedtothepointofbeingworthless.Theprovisionwasnecessarytoavoidtriggering“changeofcontrol”–whichwouldhavehadsignificantadversetaxconsequencesundertheInternalRevenueCode.419B.R221(Bankr.SDNY2009)
GezngaroundAbsolutePriority
Equityinterestscannot,underaplan,retain
theirinterestsorreceiveanythingonaccountofthoseinterestsifaclassofunsecuredclaims
seniortothemvotes“no”onanysuchplan.Aretherewaysaroundthisruleinthefaceofsuchopposi@on?Therearetwothathavebeentried
–“newvalue”and“giSplans.”
CasevLosAngelesLumberProducts
Whilejuniorinterestsshouldnormallyreceivenothingifseniorinterestsarenotpaidinfull,thecourtsrecognizeanexcep@onfor“newvalue,”provided–• thecontribu@onis“new”• thecontribu@onis“necessary”• thecontribu@onis“substan@al”• theresul@nginterestgrantedisreasonablyequivalenttotheamountcontributed
308U.S.106(1939)
Lightsquared
Acontribu@onof“newvalue”byexis@ngshareholdersdoesnotneedtomeetthe“newvalue”testiftheexis@ngshareholdersarealreadyoutofthemoney.“ThePlanisnota"new"valueplan—insuchaplan,juniorcreditors"leapover"moreseniorcreditorswhoseclaimsarenotpaidinfull.Here,thestandalonevalua@onfoundbytheCourtisthatthereisnoequitycushion.Thatfindingisno"leap"aheadofAhuja.”534BR522(SDNY2015)
ArmstrongWorldIndustries
Whileitispossibleforasecuredcreditorto“giS”itsownintereststolowerclasseswithoutpassing“newvalue”standards,thekeyques@oniswhetherthegiSconsistsofthecreditor’sproperty,asopposedtogiSingwhatwouldotherwisebethedebtor’sproperty.432F.3d507(3rdCir.2005)
Conclusion
• Despitebeinglastinorderofdistribu@on,shareholderss@llhavepowertoaffectreorganiza@on
• Theirrightscanbewipedoutordilutedinaplan
• Buttheymaybeabletopreservetheirrights• Courtscan,insomecircumstances,enjoinshareholdersfromcontrollingtheboard
