securities laws considerations in chapter 11 reorganizations...2020/06/23 · prior to commencing...

Securities Laws Considerations in Chapter 11 Reorganizations

Presented by: Alan Bannister and Michael RosenthalJune 23, 2020

● Different voting rules and availability of cramdown to bind dissidents and

holdouts

● Filing for Chapter 11 creates automatic stay of all collection efforts

● Single forum for negotiations

● Debtor can avoid certain prepetition transfers

● Availability of debtor-in-possession financing

● Debtor can reject unfavorable executory contracts and unexpired leases of

nonresidential real property

o Damages for rejection of leases subject to statutory cap

● Claim resolution process/caps/estimation only available in bankruptcy

● More favorable tax treatment regarding COD income

Advantages of Chapter 11 Cases vs. Out-of-Court Restructurings

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● Potentially disruptive to debtor's business operations

● Business relationships can be harmed because debtor may not pay

prepetition debts

● Company operates in a fishbowl

o Company requires court approval for any transaction outside the

ordinary course

● Any party in interest can object

● Added time to complete a Chapter 11 case leads to higher costs, potential

diminution of value of the enterprise

● Company's management may lose control over the reorganization process

o Exclusivity periods

● Examiners and trustees

Disadvantages of Chapter 11 Cases vs. Out-of-Court Restructurings

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● Traditional (including sale/liquidating case)

● Prepackaged Chapter 11 case

● Pre-negotiated Chapter 11 case

Different Types of Chapter 11 Cases

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● "Free fall": Company is forced to file bankruptcy with no precise game plan

and uncertainty as to how the company and capital structure will look upon

exit

● Company's bankruptcy process begins with the filing of the Chapter 11

petition together with the first day pleadings

● After commencing the case, the debtor then negotiates with its creditor

constituencies

● A free fall bankruptcy case can be protracted and expensive

Traditional Chapter 11

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● Negotiate with key group of creditors before filing

o Representatives of different priorities of lenders

o Bond trustees and agent banks

o Ad hoc groups representing a majority position or, sometimes, a

blocking position

● Execute Nondisclosure/Confidentiality Agreement

o See slide below regarding key terms

● Execute Restructuring Support Agreement

o See slide below regarding key terms

Prepackaged Plan: Initial Stages

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● Prior to commencing Chapter 11, solicit votes to accept or reject plan

o Must comply with applicable bankruptcy and non-bankruptcy rules

regarding solicitation (e.g., U.S. securities laws)

Section 1126(b)(1) of the Bankruptcy Code allows prepetition

acceptances and rejections to be used postpetition to seek

confirmation of a plan if the solicitation was in compliance with

applicable nonbankruptcy rules and laws

Prepackaged Plan: Overview (cont'd)

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● File Chapter 11 petition with votes in hand

o Section 1126(b)(2) allows prepetition acceptances or rejections to be

used postpetition to seek confirmation of a plan if the solicitation was

preceded by disclosure of "adequate information"

o Bankruptcy Rule 3018 provides that prepetition acceptances or

rejections cannot be counted if (a) the plan was not transmitted to

substantially all creditors and equity holders of the same class,

(b) an "unreasonably short time" was prescribed for acceptance or

rejection of the plan, or (c) the solicitation was not in compliance with

Section 1126(b)

o Several bankruptcy courts have adopted guidelines for prepackaged

cases not specified in the Code and Rules (e.g., SDNY Prepack

Guidelines)

Prepackaged Plan: Overview (cont'd)

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● Prior to commencing Chapter 11 case:

o Terms of plan negotiated and agreed to with key group of creditors, but

no solicitation of votes

o RSA with key group of creditors is negotiated and executed

● File plan and disclosure statement upon, or shortly after, filing Chapter 11

case

● Company obtains authority to assume RSA (makes RSA enforceable against

the debtor if breached)

● Solicit votes to accept or reject plan after filing Chapter 11 case

● Official Committee of Unsecured Creditors could be appointed

● Claims Bar Date generally established

● Schedules of Assets and Liabilities and Statement of Financial Affairs

generally required

Pre-Negotiated Plan: Overview

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● Solicitations of creditors or claimants who are existing security holders may be

subject to applicable tender offer rules (e.g., 13E/14E)

o No SEC definition of “tender offer”

o Wellman vs. Dickinson factors for determining whether a tender offer

Active and widespread solicitation

Solicitation for a substantial percentage of securities

Premium over prevailing market price

Terms of offer firm rather than negotiable

Minimum or maximum amount of purchased securities established

Offer open for limited period

Offeree subject to pressure to sell

Publicity preceding or accompanying rapid accumulation

Securities Law Issues: Out-of-Court Restructurings

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● Timing implications if deemed a tender offer, including:

o 20 business day offer period (although for debt securities in certain

circumstances there can be a 5-day abbreviated “any and all” tender);

o Prompt payment of tender consideration at end of offer;

o In the case of tender offers for a class of equity securities registered

under Section 12 of the Exchange Act, Rule 13e-4 will, among other

things, require the issuer/debtor to prepare and file with the SEC Form

TO meeting the requirements of that Rule, and the dissemination of

specified information to the target shareholders in the manner required

thereunder

Adds substantially to timeline

Securities Law Issues: Out-of-Court Restructurings (cont’d)

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● To the extent the creditors solicited are being offered new securities, the

offer and sale must be registered under the Securities Act or exempt

therefrom

o Registration process timing implications

o Most likely exemptions

Private placements

4(a)(2) or Reg D Rule 506(b)

□ Permits sales to unlimited number of “Accredited Investors” and up to 35 (sophisticated) non-Accredited Investors;

□ No “general solicitation” or “general advertising” permitted;

□ Specified information (including financial statements) must be delivered to non-Accredited Investors


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Or to permit general solicitation:

Reg D Rule 506(c):

□ Steps to confirm Accredited Investor status

□ Note that Regulation D is not available if the issuer, its predecessor, directors or executive officers are “bad actors”


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Section 3(a)(9)

“[e]xcept with respect to a security exchanged in a case under title 11,

any security exchanged by the issuer with its existing security holders

exclusively where no commission or other remuneration is paid or given

directly or indirectly for soliciting such exchange”

No remuneration for soliciting exchange

Identity of Issuer

No considerations other than surrender of existing security

● For debt securities offered in exchange for any claims, the Trust Indenture

Act of 1939 may require the indenture be qualified under that statute

o The TIA contains an exemption for private placements

o If Section 1145 is available, Section 1145(d) provides and exemption for

new debt securities issued under the plan if the new security has a

maturity of not more than one year


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● Generally agreed tender offer rules do not apply to any solicitation (post petition)

in support of a plan pursuant to a disclosure statement approved by the

Bankruptcy Court

● Solicitations of holders of the debtor’s securities that are registered under Section

12 of the Exchange Act for support of a Plan pursuant to a Court-approved

Disclosure Statement would, absent an exemption, constitute a solicitation of

votes or proxies subject to the SEC proxy solicitation rules

o Requiring proxy statement and other process meeting the requirements of

Regulation 14A

o Section 14a-2(a)(4) provides that the Exchange Act proxy solicitation

regulations (Regulation 14A) do not apply to:

“[a]ny solicitation with respect to a plan of reorganization under Chapter 11 of

the Bankruptcy Reform Act of 1978, as amended, if made after the entry of an

order approving the written disclosure statement concerning a plan of

reorganization pursuant to section 1125 of said Act and after, or concurrently

with, the transmittal of such disclosure statement”.

Securities Law Issues: In Court – Traditional (“Free Fall”)

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o Section 1125(e) of the Bankruptcy Code provides:

“A person that solicits acceptance or rejection of a plan, in good faith

and in compliance with the applicable provisions of this title, or that

participates, in good faith and in compliance with the applicable

provisions of this title, in the offer, issuance, sale, or purchase of a

security, offered or sold under the plan, of the debtor, of an affiliate

participating in a joint plan with the debtor, or of a newly organized

successor to the debtor under the plan, is not liable, on account of

such solicitation or participation, for violation of any applicable law,

rule, or regulation governing solicitation of acceptance or rejection

of a plan or the offer, issuance, sale, or purchase of securities.”

Securities Law Issues: In Court – Traditional (“Free Fall”) (cont’d)

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● In addition – sales of new securities under a Chapter 11 Plan and, once the

petition has been filed, offers of those securities may be exempt from registration

under the Securities Act under Section 1145 of the Bankruptcy Code:

● Section 1145 of the Bankruptcy Code provides:

(a) Except with respect to an entity that is an underwriter as defined in subsection (b) of this

section, section 5 of the Securities Act of 1933 and any State or local law requiring registration

for offer or sale of a security or registration or licensing of an issuer of, underwriter of, or

broker or dealer in, a security do not apply to—

(1) the offer or sale under a plan of a security of the debtor, of an affiliate participating in a

joint plan with the debtor, or of a successor to the debtor under the plan—

(A) in exchange for a claim against, an interest in, or a claim for an administrative

expense in the case concerning, the debtor or such affiliate; or

(B) principally in such exchange and partly for cash or property;

(2) the offer of a security through any warrant, option, right to subscribe, or conversion

privilege that was sold in the manner specified in paragraph (1) of this subsection, or the

sale of a security upon the exercise of such a warrant, option, right, or privilege;


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U.S. Code § 1145. Exemption from securities laws (cont’d)

(3) the offer or sale, other than under a plan, of a security of an issuer other than the debtor or an

affiliate, if—

(A) such security was owned by the debtor on the date of the filing of the petition;

(B) the issuer of such security is—

(i) required to file reports under section 13 or 15(d) of the Securities Exchange Act of 1934;

and

(ii) in compliance with the disclosure and reporting provision of such applicable section; and

(C) such offer or sale is of securities that do not exceed—

(i) during the two-year period immediately following the date of the filing of the petition,

four percent of the securities of such class outstanding on such date; and

(ii) during any 180-day period following such two-year period, one percent of the securities

outstanding at the beginning of such 180-day period; or

(4) a transaction by a stockbroker in a security that is executed after a transaction of a kind specified in

paragraph (1) or (2) of this subsection in such security and before the expiration of 40 days after the

first date on which such security was bona fide offered to the public by the issuer or by or through

an underwriter, if such stockbroker provides, at the time of or before such transaction by such

stockbroker, a disclosure statement approved under section 1125 of this title, and, if the court

orders, information supplementing such disclosure statement.


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(b) (1) Except as provided in paragraph (2) of this subsection and except with respect to ordinary

trading transactions of an entity that is not an issuer, an entity is an underwriter under

Section 2(a)(11) of the Securities Act of 1933, if such entity—

(A) purchases a claim against, interest in, or claim for an administrative expense in the case

concerning, the debtor, if such purchase is with a view to distribution of any security

received or to be received in exchange for such a claim or interest;

(B) offers to sell securities offered or sold under the plan for the holders of such securities;

(C) offers to buy securities offered or sold under the plan from the holders of such securities, if

such offer to buy is—

(i) with a view to distribution of such securities; and

(ii) under an agreement made in connection with the plan, with the consummation of the

plan, or with the offer or sale of securities under the plan; or

(D) is an issuer, as used in such section 2(a)(11), with respect to such securities.


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(2) An entity is not an underwriter under section 2(a)(11) of the Securities of 1933 or under

paragraph (1) of this subsection with respect to an agreement that provides only for—

(A) (i) the matching or combining of fractional interests in securities offered or sold under

the plan into whole interests; or

(ii) the purchase or sale of such fractional interests from or to entities receiving such

fractional interests under the plan; or

(B) the purchase or sale for such entities of such fractional or whole interests as are necessary

to adjust for any remaining fractional interests after such matching.

(3) An entity other than an entity of the kind specified in paragraph (1) of this subsection is not an

underwriter under section 2(a)(11) of the Securities Act of 1933 with respect to any securities

offered or sold to such entity in the manner specified in subsection (a)(1) of this section.

(c) An offer or sale of securities of the kind and in the manner specified under subsection (a)(1) of this

section is deemed to be a public offering.

(d) The Trust Indenture Act of 1939 does not apply to a note issued under the plan that matures not

later than one year after the effective date of the plan.


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(2) An entity is not an underwriter under section 2(a)(11) of the Securities of 1933 or under

paragraph (1) of this subsection with respect to an agreement that provides only for—

(A) (i) the matching or combining of fractional interests in securities offered or sold under

the plan into whole interests; or

(ii) the purchase or sale of such fractional interests from or to entities receiving such

fractional interests under the plan; or

(B) the purchase or sale for such entities of such fractional or whole interests as are necessary

to adjust for any remaining fractional interests after such matching.

(3) An entity other than an entity of the kind specified in paragraph (1) of this subsection is not an

underwriter under section 2(a)(11) of the Securities Act of 1933 with respect to any securities

offered or sold to such entity in the manner specified in subsection (a)(1) of this section.

(c) An offer or sale of securities of the kind and in the manner specified under subsection (a)(1) of this

section is deemed to be a public offering.

(d) The Trust Indenture Act of 1939 does not apply to a note issued under the plan that matures not

later than one year after the effective date of the plan.


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● Where new debt securities are offered under the Plan, if Section 1145 is

unavailable to exempt the offering or if the new debt securities have a

maturity of more than one year form the effective date of the plan, the

indenture under which the debt securities are issued may need to be

qualified under the Trust Indenture Act.

● Recall the difference between “prepackaged” and “pre-negotiated” plans:

o Solicitation of votes in favor of a proposed plan from creditors prior to

filing… “prepackaged” vs. negotiating support from only key creditors

● Solicitations of votes in a prepackaged plan from holders of the debtor’s

securities registered under Section 12 of the Exchange Act subject to the

Exchange Act proxy rules

o Requiring proxy statement and other process meeting the requirements

of Regulation 14A

Securities Law Issues: Prepack / Pre-Negotiated Plans

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● Any offers to security holder claimants – whether or not registered under Section

12 of the Exchange Act and even if a limited subset of the class -- prior to the

filing of the petition may be viewed as tender offer

o See our prior discussion of Wellman factors

● In a pre-negotiated plan in particular, if such negotiation is initiated by reverse

inquiry at the pre-filing stage, may be able to avoid being deemed a tender offer

● To the extent discussions include possible new securities to be offered in

exchange for any existing claim, the offer must be made pursuant to any available

exemption or an effective registration statement

o 1145 is not yet available

o Thus registration or another exemption will be required (typically a private

placement or Section 3(a)(9))

o The RSA should document availability of any Securities Act exemption relied

upon

Securities Law Issues: Prepack / Pre-Negotiated Plans

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● In a pre-negotiated plan scenario, once the Chapter 11 petition is filed,

solicitation of the wider group(s) of all existing security holders, using an

approved Disclosure Statement, may be made in reliance on 1125(e) and

without compliance with the Exchange Act proxy solicitation rules

● Offers to wider group, and sales, may now be eligible for 1145, if available

Securities Law Issues: Prepack / Pre-Negotiated Plans (cont’d)

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● When a company is considering a restructuring, it will generally negotiate an

NDA with holders of substantial indebtedness who wish to engage in

discussions regarding the indebtedness they hold

o Regulation FD concerns for U.S. companies subject to the reporting obligations of

the Exchange Act

o Control over the release of confidential information generally will also drive its

concerns

o For investors who trade securities as to which the confidential information relates,

Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit, among other

things, the purchase or sale of a security while in possession of certain material

nonpublic information (unless disclosed to the counterparty in the trade)

o For investors trading in any assets (including non-securities, such as bank loans) as

to which the confidential information relates, general common law fraud may also

prohibit such transactions

Nondisclosure Agreements

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● For creditors with significant exposure or who may be willing to invest new

money, access to such data and participation in negotiations are worth the

(temporary) restrictions

Nondisclosure Agreements (cont’d)

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● Key provisions:

o Confidentiality restrictions

o Becoming restricted

o MNPI: Receipt of MNPI restricts the ability of the creditor to trade

Use and effectiveness of Big Boy letters

Use of Chinese walls

o "Blow Out" Provisions: For parties to become "unrestricted," MNPI must

either become (i) immaterial/stale or (ii) made public

Parties will require the company to cleanse or "blow out" the MNPI

through a press release or SEC filing by a certain date

Nondisclosure Agreements (cont’d)

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securities laws considerations in chapter 11 reorganizations...2020/06/23 · prior to commencing...

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