Journal Article

Chapter 11 Rights Offerings and Private Placements: How Creditors Can Strike A Windfall

Saxon, Shelby V

2020

Overview

Debtors-in-possession have increasingly turned to rights offerings and/or private placement sales as an exit financing option in chapter 11 bankruptcy. When timed and executed properly, these offerings can provide a windfall of returns to select creditors. This windfall does not appear to exist outside of chapter 11, as rights offerings and private placements are subject to heightened fiduciary duties without the flexibility of the Bankruptcy Code. Notwithstanding objections to many aspects of these sales and their outcomes, courts adjudieating these disputes have found no violations of the Code. The popularity of these offerings within chapter 11 has increased in recent years and courts have consistently confirmed plans that include them. This Article asserts that courts adjudicating rights offerings disputes have correctly applied the plain language of the Code. However, unbridled financing terms combined with intentional complexity, opaque value incurred, and strategic negotiation methods have created the opportunity for favored groups of creditors to strike a windfall that the drafters of the Code never intended to allow, as this treatment undermines the equitable nature of bankruptcy. While some commentators and at least one judge have discussed rights offering components using reasonability terms, there is currently no express reasonability test applied to rights offerings. This Article argues that a market-based reasonability standard applied to rights offering finance terms would mitigate this windfall yet preserve fair returns for investors willing to take financial risks. This result would more properly balance the equitable goals of bankruptcy, while still ab lowing for successful debtor exit financing.

• Publisher: National Conference of Bankruptcy Judges
• Subject: Bankruptcy laws / Bankruptcy reorganization / Bankruptcy reorganizations / Coal industry / Coal mining / Collateral / Committees / Disputes / Equitable remedies / Federal courts / Fiduciary responsibility / Laws, regulations and rules / Mediation / Methods / Mines / Negotiations / Priorities of claims and liens / Private placement / Private placements (Securities) / Remedies / Sales / Securities offerings / Stockholders