Some light reading for you. At least one member said that he got our
first EMail all scrunched up into one big paragraph. If that happens
to you, please let me know.
The Goals of the Equity Committee
The Equity Committee should evaluate courses of action in the case in
light of two fundamental goals. The first of these goals is to
maximize the consideration received by shareholders under a plan of
reorganization. The consideration offered to shareholders is almost
always some form of equity in the reorganized debtor which usually
takes the form of common stock, but can also include more exotic forms
of equity such as warrants or preferred stock. This goal really boils
down to negotiating or otherwise obtaining the largest possible share
of such equity for present shareholders.
The second goal is to maximize the overall value of the equity in the
reorganized debtor, which in turn maximizes the value of the share of
such equity received by present shareholders. This involves monitoring
the case and taking action where necessary to ensure that: (a) the
debtor is doing everything possible to maximize profitability; (b) the
debtor is obtaining maximum value for assets (including causes of
action); (c) creditor claims are being minimized; and (d) the least
possible amount of assets is being allocated to satisfy creditor
claims.
Strategies for Achieving these Goals
Negotiations
As previously discussed, the paramount goal of the Equity Committee
should be to maximize the share of equity received by shareholders
under the plan. Although a legal framework exists for determining
entitlement of shareholders to a share of the reorganized debtor’s
equity, determination of this share typically does not boil down to a
legal battle. More often, the issue is resolved consensually through a
series of negotiations. The success of the Equity Committee in these
negotiations depends upon its effective utilization of “pressure
points” on the debtor and creditors.
Pressure Points
These pressure points can take many forms. Some examples include:
The need for a consensual and quickly confirmed plan. The presence of
an Equity Committee can be a dangerous obstacle that can lead to
concessions for shareholders.
The avoidance of the cost and risk of litigating the entitlement of
shareholders to receive a share of the equity.
Worries of the debtor’s directors and management about fiduciary
obligations to shareholders. The Equity Committee can increase this
pressure by requesting (or threatening to request) the court to compel
the calling of a shareholders’ meeting for the purpose of voting on
the continued service of the directors (and by implication the
continued service of management). See Manville Corp. v. Equity Sec.
Holders Comm. (In re Johns-Manville Corp.) (1986) 801 F2d 60 (denying
motion for summary judgment in action by debtor to enjoin Equity
Committee’s state court action to compel shareholders’ meeting);
Official Comm. of Equity Sec. Holders of Lone Star Industries v.
Lonestar Indust., Inc. (In re New York Trap Rock Corp.) 138 BR 420
(Equity Committee has standing to seek to compel debtor to hold
shareholders ‘ meeting); In re First Capital Holdings Corp. (Bankr CD
Cal. 1992) 146 BR 7 (authorizing Creditors’ Committee to prosecute
claims on behalf of debtor against debtor’s officers and directors).
The Equity Committee can also attack the management based upon past
activities (e.g., an ill-advised leveraged buy-out).
The desire of creditors to avoid an investigation into and possible
litigation over matters such as lender liability, improper claims
trading, or other improper activities.
In high profile cases, the desire by management and major creditor
groups to appear to be publicly magnanimous.
The need of the debtor’s management to enlist the support of the
Equity Committee for their executive compensation, stock options, and
like plans, and to avoid Equity Committee criticism of management
“perks.”
The Threat to File a Competing Plan of Reorganization
If the debtor and creditors cannot be dissuaded from attempting to
confirm a plan highly unfavorable to equity, the Equity Committee may
have no choice but to urge shareholders to vote against it, and to
object to confirmation of the plan.
The most likely target for objection is the requirement of
§1129(a)(8) that each impaired class of claims or interests vote to
accept the plan. If, under the plan, shareholders are not retaining
their 100% ownership of the debtor, the class of shareholders is
impaired. See 11 USC §1124. All that is needed for that class to fail
to accept the plan is for over one-third of voting shareholders in
that class to vote to reject it. See 11 USC §1126(d). This result
usually can be achieved by mailing letters to all shareholders urging
them to vote against the plan. Because shareholders also will receive
a court-approved disclosure statement from the plan proponent, the
Equity Committee probably does not need court approval to send such a
letter. See Century Glove, Inc. v First Am. Bank of New York (3d Cir
1988) 860 F2d 94 . However, to avoid administrative burden and cost
and for greater effectiveness, the Equity Committee may want to ask
the court to require that such a letter be included in the plan and
that a disclosure statement package is sent by the plan proponent.
The failure of §1129(a)(8) voting requirement does not by itself
defeat plan confirmation. Section 1129(b) allows the court to “cram
down” a plan otherwise meeting the requirements of §1129(a) on a
dissenting class of shareholders if the plan does not discriminate and
is “fair and equitable” to such class. See 11 USC 1129(b).
§
Reorganization Value
Where the property to be distributed to creditors is a share of the
equity in the reorganized debtor, a valuation of such equity must be
performed to determine if its value exceeds the allowed amounts of
creditor claims. Such equity is valued according to its
“reorganization value.” This is the future value of the equity once
the reorganization plan has been implemented. If the reorganization
value of the equity to be distributed to creditors exceeds the allowed
amounts of their claims, the plan violates the prohibition on more
than 100% payment and cannot be confirmed. To be confirmed, the plan
must be modified to give shareholders this excess equity value. See
Consolidated Rock Prods. Co. v Du Bois (1941) 312 US 510; Fortgang &
Mayer, Valuation in Bankruptcy, 32 UCLA L Rev 1061, 1126-30 (1985).
Conclusion
Appointment of an Equity Committee, and its full and meaningful
participation in the reorganization process, provides shareholders
with at least a fighting chance to salvage their interest in a
corporation. Further, allowing shareholders to be represented by an
Equity Committee promotes the Chapter 11 policy in favor of consensual
reorganization through negotiations among major constituencies. |
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