'Golden Shares' In US Bankruptcy Cases: Can The Right To Block A Bankruptcy Filing Be Enforced?1


The COVID-19 pandemic will likely wreak havoc for years to come on US and global businesses and markets. In an effort to stave off the pandemic's effects on business operations, distressed companies have and will continue to require, among other things, liquidity infusions, amendments to existing credit agreements, or some combination thereof. Investors may seek various concessions and protections in return - including, for example, blocking rights with respect to the borrower's bankruptcy filing, or so-called 'Golden Shares'. Such blocking rights, however, are not necessarily enforceable, as recently confirmed by the United States Bankruptcy Court for the District of Delaware (the 'Delaware Bankruptcy Court') in In re Pace Industries, LLC.

Defining 'Golden Share'

Put simply, a 'Golden Share' is an equity interest that gives its holders certain blocking rights, which may include the right to block a company's bankruptcy filing. Typically, a 'Golden Share' comes to existence following two actions taken by the issuing company (the 'Issuer'). First, the Issuer amends its organisational documents (e.g., its Limited Liability Company Agreement, Articles/Certificate of Incorporation) to include either a provision granting one equity holder the power to block a bankruptcy filing or a unanimous consent requirement to commence a bankruptcy case or other type of wind-down.

Several courts have considered whether such blocking rights are enforceable and the answer is not unanimous, as evidenced by the decisions discussed below.

Kingston Square Associates

In In re Kingston Square Associates ('Kingston') the United States Bankruptcy Court for the Southern District of New York analysed blocking rights and one debtor's attempt to circumvent an independent director's enforcement of his blocking right. 2 In Kingston, the efforts of entities owning apartment complexes to file for bankruptcy protection under chapter 11 of tile 11 of the United States Code (the 'Bankruptcy Code') were stymied on the eve of foreclosure by an independent director with the power to block such a bankruptcy filing. 3 To manoeuvre around the independent director's blocking right, the debtors' principal paid a law firm to solicit creditors to file involuntary chapter 11 petitions. 4 The mortgagee for the apartment complexes sought dismissal of the chapter 11 cases arguing the debtors engaged in collusion with the petitioning creditors to avoid the independent director's blocking right and that such collusion warranted dismissal for 'cause'. 5 Despite the obvious orchestration of the involuntary filings on the eve of foreclosure, the Court refused to dismiss the filings for 'cause' and held there was no fraudulent or deceitful purpose in the coordination of efforts primarily because of the possibility of reorganisation. 6 In the context of our analysis below, Kingston eludes to the imposition of fiduciary duties on a party with blocking rights and, more broadly, suggests corporate formalities can be overlooked if there is a legitimate ability or reason to reorganise the debtor.

In re Intervention Energy Holdings, LLC

In In re Intervention Energy Holdings, LLC ('Intervention'), 7 a court considered whether the debtor's bankruptcy filing could be conditioned on the unanimous approval of all common shareholders. Intervention Energy Holdings, LLC ('Holdings') and Intervention Energy, LLC ('Energy') filed bankruptcy petitions for relief under the Bankruptcy Code. 8 EIG Energy Fund ('EIG') held one ownership unit in Holdings and Holdings controlled Energy. 9 Approximately six months prior to the Holdings and Energy chapter 11 filing, the debtors and EIG entered into a forbearance agreement that, among other things, gave EIG one unit of ownership in the debtors and required Holdings to amend its operating agreement to require unanimous consent before the company could file for bankruptcy protection. 10 Following the chapter 11 filings, EIG moved to dismiss the cases asserting unanimous consent had not been obtained because EIG objected to the debtors seeking bankruptcy protection.

In arguing for/against the enforceability of the Golden Share, the parties advanced several arguments under 'state law and contractual treatment of fiduciary obligations.'11 The decision did not address 'the scope of LLC members' freedom to contract under applicable state law provisions', i.e., whether Delaware state law prohibits the Golden Share. 12 Instead, it focused on the public policy considerations of ensuring 'access to the right of a person, including a business entity, to seek federal bankruptcy relief as authorized by the Constitution and enacted by Congress.'13 Relying on a line of cases where courts refused to enforce waivers of federal bankruptcy rights, 14 the Delaware Bankruptcy Court held:

'[a] provision in a limited liability company governance document obtained by contract, the sole purpose and effect 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, and the nature and substance of whose primary relationship with the debtor is that of creditor - not equity holder - and which owes no duty to anyone but itself in connection with an LLC's decision to seek federal bankruptcy relief, is tantamount to an absolute waiver of that right, and, even if arguably permitted by state law, is void as contrary to federal public policy.'15

The Fifth Circuit's differing interpretation in In re Franchise Services of North America, Inc.

In In re Franchise Services of North America, Inc. 16 the debtor rental car company ('FSNA') purchased Advantage- Rent-A-Car ('Advantage') from the Hertz Corporation prior to the commencement of the chapter 11 case. 17 Macquarie Capital ('Macquarie') assisted with FSNA's purchase of Advantage by creating a whollyowned subsidiary, Boketo, LLC ('Boketo'), to finance the transaction. 18 Boketo invested USD 15 million in FSNA in exchange for 100% ownership of FSNA's preferred stock and a new certificate of incorporation with a consent provision that required approval from both the preferred stock holders and common stock holders prior to commencing a case under the Bankruptcy Code. 19 In other words, FSNA issued a Golden Share to Boteko. Thereafter, FSNA commenced its chapter 11 case in the United States Bankruptcy Court for the Southern District of Mississippi (the 'Mississippi Bankruptcy Court') 20 'without requesting or securing the consent of a majority of its preferred and common shareholders.'21 Boketo and Macquarie moved to dismiss the chapter 11 case for FSNA's failure to obtain from preferred and common shareholders the required consent. 22 In response, FSNA argued the consent provision violated public policy by restricting its right to file for bankruptcy protection and was thus unenforceable. 23 Following an evidentiary hearing, the Mississippi Bankruptcy Court entered order dismissing FSNA's chapter 11 case and held the consent provision did not violate public policy and was enforceable.24

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1 The views expressed herein are solely those of Mrs. Zerjal and Mr. Imperato, and not necessarily the views of Arnold & Porter Kaye Scholer LLP or any of its attorneys.

2 See 214 B.R. 713 (Bankr. S.D.N.Y. 1997).

3 See id. at 714.

4 See id.

5 See id. at 714-15.

6 See Kingston, 214 B.R. at 714-15. Even though the Court declined to dismiss the chapter 11 cases, the Court did appoint a chapter 11 trustee which had the effect of divesting the debtors from control of their own bankruptcy cases. See id. (holding, 'the debtors plainly orchestrated the filing of the involuntary petitions, they had reason to believe that reorganization was possible and did not circumvent any court-ordered or statutory restrictions on bankruptcy filings such that, absent any evidence of objective futility of the reorganization process, the cases ought not be dismissed now. However, because there is a strong suggestion in the record that the debtors' boards of directors have abdicated their fiduciary responsibilities, I am directing the appointment of chapter 11 trustees, relief for which the mortgagees asked in the alternative and as to which the Debtors have consented.').

7 See In re Intervention Energy Holdings, LLC, 553 B.R. 258, 265-66 (Bankr. D. Del. 2016).

8 See id. at 260.

9 See id.

10 See id. at 260-61 (noting that as a condition to waiving all of the company's existing events of default, secured creditor EIG requested issuance of the Golden Share); see also Theresa J. Pulley Radwan, Who's Got A Golden Ticket?-Limiting Creditor Use of Golden Shares to Prevent A Bankruptcy Filing, 83 Alb. L. Rev. 569, 590-91 (2020) (providing a more fulsome discussion of Intervention's background and the cases that form the basis for Judge Carey's decision).

11 Intervention, 553 B.R. at 262.

12 Id.

13 Id. at 265 (internal citation omitted).

14 See Hayhoe v. Cole (In re Cole), 226 B.R. 647, 651-54 (9th Cir. BAP 1998) (collecting cases and holding, '[i]f any terms in the Consent Agreement ... exist that restrict the right of the debtor parties to file bankruptcy, such terms are not enforceable.'); MBNA Am. Bank, N.A. v. Trans World Airlines, Inc. (In re Trans World Airlines, Inc.), 275 B.R. 712, 723 (Bankr. D. Del. 2002) (holding a 'prepetition agreements purporting to interfere with a debtor's rights under the Bankruptcy Code are not enforceable.'); In re 203 N. LaSalle St. P'ship, 246 B.R. 325, 331 (Bankr. N.D. Ill. 2000) (holding, 'it would defeat the purpose of the Code to allow parties to provide by contract that the provisions of the Code should not apply.'); In re Pease, 195 B.R. 431, 435 (Bankr. D. Neb. 1996) (holding, 'any attempt by a creditor in a private pre-bankruptcy agreement to opt out of the collective consequences of a debtor's future bankruptcy filing is generally unenforceable. The Bankruptcy Code pre-empts the private right to contract around its essential provisions.'). See also In re Citadel Properties, Inc., 86 B.R. 275, 275 (Bankr. M.D. Fla. 1988) ('The Court pauses to suggest that a total prohibition against filing for bankruptcy would be contrary to Constitutional authority as well as public policy.').

15 Intervention, 553 B.R.at 265. No party appealed the decision. See In re Intervention Energy Holdings, LLC, et al., Case No. 16-11247 (KJC) (Bankr. D. Del.) (reflecting a docket devoid of a notice of appeal concerning Intervention).

16 Franchise Servs. of N. Am., Inc. v. U.S. Trs. (In re Franchise Servs. of N. Am.), 891 F.3d 198 (5th Cir. 2018) ('Franchise II').

17 See id. at 203.

18 See id.

19 See id. ('Boketo's stake in FSNA [the debtor] would amount to a 49.76% equity interest if converted, making it the single largest investor in FSNA.').

20 See id. at 204; In re Franchise Servs. of N. Am., Inc., Case No. 01702316EE, 2018 WL 485959, at *1 (Bankr. S.D. Miss. Jan. 17, 2018) ('Franchise I').

21 Franchise II, at 204.

22 See id.

23 See id.

24 See Franchise I, at *2 (noting, '[i]t is clear ... that a blocking provision or a golden share will be upheld if it is held by an equity holder.').

Originally published by Chase Cambria Company (Publishing) Ltd.

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