Special purpose entities or vehicles (commonly referred to as
SPEs or SPVs) are frequently created as part of various types of
financing transactions from real estate loans to more complex
securitization structures. The benefits of utilizing such entities
are widely understood, such as asset isolation and the attendant
lower borrowing costs. However, as corporate entities (or LLCs),
such entities are eligible to file for relief under U.S. bankruptcy
laws. Lenders continue to try to mitigate or eliminate this risk by
having borrowers structure the entities in ways that make it
difficult or impossible for the entity to file for bankruptcy. One
method that has been the subject of recent case law involve the
utilization of an arrangement whereby the lender is given
significant rights to, among other things, block a bankruptcy
proceeding. This right is sometimes referred to as the grant of a
"golden share". The holder of such share is given the
right to consent to a bankruptcy filing.
However in two recent cases out of Delaware and Illinois, two
companies were allowed to file for bankruptcy relief despite the
fact that the debtors failed to obtain the necessary consent of
their members, which held the "golden-shares". In re
Lake Michigan Beach Pottawattamie Resort, LLC, 547 B.R. 899
(Bankr. N.D. Ill. 2016); In re Intervention Energy Holdings,
LLC, No. 16-11247, 2016 WL 3185576 (Bankr. D. Del. June 3,
The courts concluded that these "golden share" or
"blocking share" provisions were not enforceable as
violations of public policy. The Delaware court
explained that "[a] provision in a ... governance document
..., the sole purpose of which is to place into the hands of a
single minority equity holder the ultimate authority to eviscerate
the right of that entity to seek federal bankruptcy relief ... is
tantamount to an absolute waiver of that right, and ... is void as
contrary to federal public policy." In re Intervention
Energy Holdings, LLC, No. 16-11247, 2016 WL 3185576 at 5
(Bankr. D. Del. June 3, 2016).
Two critically important public policies were implicated in
these cases – the fiduciary obligations of corporate leaders
and the constitutionally authorized ability to seek federal
bankruptcy relief. The ability of one member or shareholder to
block the exercise of these duties as well as the right to seek
bankruptcy code protection is what the courts found the most
troubling in each situation. However, where a creditor has an
equity interest separate from the loan, a court might view the
parties' interests as being more aligned and enforce a golden
share. Finally, where the agreement is entered into prior to the
borrower facing financial distress, a court may view the
transaction more favorably as the parties will have more equal
bargaining power. The crucial takeaway from these cases is that the
courts are going to look at the purpose and effect of the
transactions and not simply the form or language of the
In addition, borrowers may now have persuasive authority to
challenge agreements that altogether eliminate the fiduciary
obligations of the directors or members, which exist under state
law. However, it is plausible that where a debtor is insolvent and
the duties of its members or directors under applicable state law
include considerations of creditor interests, a court may view the
enforcement of the "golden share" provision as being
consistent with the reason for the establishment of the special
entity – isolation of an asset for credit and enforcement
purposes. It should be noted that if the corporate separateness of
the entities was not properly established or was not observed, a
court could still find a basis to prevent enforcement of the golden
While these cases may be viewed as another step down the road in
a series of cases frustrating the efforts to make entities
bankruptcy-proof, the benefits of utilizing special purpose
entities in finance still outweigh this additional risk, which can,
and likely will, be priced into the deals. The decisions also raise
the bar for lenders and their counsel to generate more creative
techniques to provide lenders with assurances that their borrowers
will not file bankruptcy.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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