A recent, highly anticipated ruling by a Bankruptcy Court in Delaware has reilluminated the concept of a “golden share”. While an appeal of the ruling seems likely, this latest ruling by Delaware Bankruptcy Judge Mary F. Walrath suggests that as the COVID-19 outbreak continues to disrupt businesses and send shockwaves through the economy, courts may look at the specific circumstances of each case and weigh the interests of all corporate stakeholders in determining whether to enforce a “bankruptcy blocker”.

What is a “Golden Share”?

A “golden share” refers to an equity interest in a company that affords the owner a number of consent rights. A key right is the right to block a company from filing for bankruptcy. Private credit lenders may rely upon a “golden share” structure when making preferred equity investments or in connection with a loan restructuring.

The Checkered History of the Enforceability of the “Golden Share” in Delaware

The first Delaware case to address the enforceability of the “golden share” was In re Intervention Energy Holdings, LLC, 553 B.R. 258 (Bankr. D. Del. 2016). In that case, as a condition to waiving all of the company’s existing events of default, a secured creditor required a borrower to amend its corporate charter to include a “golden share” provision, which required the unanimous consent of the company’s common unitholders to file for bankruptcy. The company was also required to issue one common unit to the secured creditor. In response to a subsequent Chapter 11 filing by the company, the secured creditor filed a motion to dismiss, insisting that the key protection it had contracted for be enforced. Because the company had not obtained the unanimous consent of its unitholders, the secured creditor argued that the bankruptcy filing was unauthorized. Finding that the secured creditor was only a nominal unitholder and was primarily a creditor which, unlike a director, does not owe any fiduciary duties to the company, the court held that allowing the parties to contract around the constitutional right to seek bankruptcy relief would be contrary to federal public policy, and therefore, the “golden share” was unenforceable.

The Fifth Circuit Court of Appeals, however, interpreting Delaware law, came to a different conclusion when the “golden share” was held by a preferred shareholder. In In re Franchise Services of North America, Inc., 891 F.3d 198 (5th Cir. 2018), a preferred shareholder agreed to make a $15 million investment in a company so long as the company reincorporated in Delaware and amended its corporate charter to include a “golden share” provision. When the company filed a Chapter 11 petition, the preferred shareholder sought to dismiss the case, arguing that the petition could not be authorized without a shareholder vote. The company responded by asserting that the shareholder’s argument was a pretense for its true motivation—to secure undue leverage for repayment of its $3 million claim for unpaid consulting fees. In dismissing the bankruptcy case, the Fifth Circuit Court of Appeals agreed with the preferred shareholder and upheld the right of a bona fide preferred shareholder to exercise its “golden share”.

Recently, the efficacy of the “golden share” was tested again in a bankruptcy filing by Pace Industries (In re: Pace Industries, LLC, Case No. 20-10927-MFW (Bankr. D. Del.)). In connection with its $37.15 million preferred equity investment, the preferred shareholder obtained various rights and protections, including an amendment and restatement of the company’s corporate charter to include a “golden share” provision. In the wake of the COVID-19 pandemic, Pace Industries found itself in dire financial straits, unable to pay hundreds of millions of dollars of debt, closing many of its manufacturing facilities, and laying off the majority of its employees. However, the company successfully negotiated a restructuring and filed a Chapter 11 petition to implement the restructuring, which was supported by the company’s secured creditors and which proposed to pay unsecured creditors in full. The preferred shareholder did not consent to the petition and moved to dismiss the case.

In denying the motion to dismiss, Judge Walrath was keenly focused on the harsh reality facing Pace Industries. The court was persuaded by the fact that the COVID-19 outbreak had forced the company to shut down most of its operations and that the proposed debtor-in-possession financing was the company’s only source of liquidity in the midst of the global pandemic. Furthermore, Judge Walrath observed that the preferred shareholder had not offered any viable alternatives. As a result, the court concluded that permitting the bankruptcy filing would likely benefit the greatest number of stakeholders, while dismissing the bankruptcy case would violate federal public policy by taking away a debtor’s constitutional right to bankruptcy relief. In declining to follow the Fifth Circuit’s interpretation of Delaware state law, Judge Walrath went so far as to conclude that a blocking right might create a fiduciary duty on the part of a minority shareholder.

Key Takeaway

Unlike Franchise Services, the bankruptcy court’s ruling in Pace Industries echoes the sentiment expressed in Intervention Energy and at a minimum calls into question the enforceability of the “golden share”. As Judge Walrath noted, “a minority shareholder has [no] more right to block a bankruptcy . . . than a creditor does.” While the Judge Walrath’s comment that the “golden share” may create a fiduciary duty may be a bridge too far, the case is a reminder that in these extraordinary times, bankruptcy courts will look skeptically on the enforceability of so-called bankruptcy blockers.

The Private Credit Group and The Private Credit Restructuring Group at Proskauer are closely monitoring the impact that COVID-19 will have on judicial decisions that may affect private credit lenders.

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Proskauer’s cross-disciplinary, cross-jurisdictional Coronavirus Response Team is focused on supporting and addressing client concerns. We will continue to evaluate the CARES Act, related regulations and any subsequent legislation to provide our clients guidance in real time. Please visit our Coronavirus Resource Center for guidance on risk management measures, practical steps businesses can take, and resources to help manage ongoing operations.

Photo of Peter Antoszyk Peter Antoszyk

Peter J. Antoszyk is a partner in the Corporate Department, a member of The Private Credit Group and co-head of the Private Credit Restructuring Group. Peter is also a member of the Firm’s cross-disciplinary, cross-jurisdictional Coronavirus Response Team.

Peter represents direct lenders, private…

Peter J. Antoszyk is a partner in the Corporate Department, a member of The Private Credit Group and co-head of the Private Credit Restructuring Group. Peter is also a member of the Firm’s cross-disciplinary, cross-jurisdictional Coronavirus Response Team.

Peter represents direct lenders, private credit funds, asset managers, alternative lenders, sovereign wealth funds, BDCs, insurance companies, hedge funds, finance companies, and other direct credit funds on arranged, syndicated and “club” direct lending transactions ranging from $15 million to $1 billion. Peter has extensive experience with acquisition financing, dividend recapitalizations, growth capital loans, and cross-border finance transactions for sponsor and non-sponsor backed financings in North America and Europe across a wide array of industries including consumer, and retail; manufacturing; science and technology; health care; medical and medical device; and energy and energy related industries. Structures include uni-tranche, one-stops, first-in/last out financings, second lien loans, subordinated term loans, mezzanine, holdco structures, synthetic mezzanine, “silent firsts”, preferred equity and other innovative private credit structures.

Peter has been at the forefront of developing the unitranche and agreement among lender structures.

Peter also has over 25 years of experience in special situations, bankruptcies and insolvencies, including in out-of-court debt-for-equity exchanges, section 363 acquisitions, Debtor-in-possesion (DIP) financings, exit financings, chapter 11 plan acquisitions and restructuring (including restructuring support arguments), and other creditor rights strategies in both domestic and foreign jurisdictions. Peter combines his extensive insolvency and finance experiences to counsel clients not only on structuring financing transactions (including intercreditor issues) but also throughout any workout, exercise of remedies restructuring or insolvency proceedings.

Chambers USA notes that Peter is “not only great at documenting deals, but he’s also a tremendous restructuring attorney”; he “understands the legal issues and the commercial dynamics too; he is “incredibly effective and practiced”.

Peter lectures and writes articles for industry publications and has been quoted in Private Debt Investor, Financier Worldwide, The New York Times, The Washington Post, The Wall Street Journal, The Daily Deal, The Secured Lender and other publications and appeared on CNN Street Sweep.

Photo of Charles Dale Charles Dale

Chad Dale is a partner in Proskauer’s Corporate Department and a member of both the Business Solutions, Governance, Restructuring & Bankruptcy and Private Credit Restructuring Groups.

Chad has nearly 30 years of experience in corporate reorganizations and debt restructurings. As a member of…

Chad Dale is a partner in Proskauer’s Corporate Department and a member of both the Business Solutions, Governance, Restructuring & Bankruptcy and Private Credit Restructuring Groups.

Chad has nearly 30 years of experience in corporate reorganizations and debt restructurings. As a member of the Private Credit Restructuring Group, Chad’s practice focuses on direct lenders and ad hoc groups of direct lenders, hedge funds and BDC’s. He also represents troubled companies, equity sponsors, creditors’ committees, trustees and receivers in complex out-of-court debt restructurings and formal insolvency proceedings. Chad has also served as a court appointed chapter 11 trustee and frequently represents purchasers of financially distressed businesses. Chad offers extensive experience handling debt restructurings, reorganizations and distressed asset transactions.

Recognized by Chambers USA in Band 1 of its rankings, market sources have noted that Chad is “an incredibly accomplished attorney with great presence.” He is a fellow of the prestigious American College of Bankruptcy and has been recognized as one of the top 100 lawyers in New England since 2008.

Chad has written and presented articles on a wide range of matters including debtor-in-possession financings, the reorganization of professional sports franchises, intellectual property licensing in bankruptcy, executory contracts, director and officer liability insurance and income and property taxation in bankruptcy.

Kyle Junik

Kyle R. Junik is a senior counsel in the Corporate Department and a member of the Private Equity and Mergers & Acquisitions Groups. He has a general corporate practice with a particular emphasis on representing private equity sponsors in merger and acquisition transactions…

Kyle R. Junik is a senior counsel in the Corporate Department and a member of the Private Equity and Mergers & Acquisitions Groups. He has a general corporate practice with a particular emphasis on representing private equity sponsors in merger and acquisition transactions, primary and secondary co-investments, restructurings and debt-for-equity recapitalizations. In addition, he regularly counsels clients on a variety of commercial and operational matters, as well as on general corporate governance.

Prior to joining Proskauer, Kyle was an associate at Weil, Gotshal & Manges LLP in Boston.

Photo of Szeman F. Lam Szeman F. Lam

Szeman Lam is a corporate associate at Proskauer and a member of The Private Credit Group. She earned her law degree from the University of Virginia School of Law and graduated magna cum laude from Duke University.

Szeman has a broad transactional practice…

Szeman Lam is a corporate associate at Proskauer and a member of The Private Credit Group. She earned her law degree from the University of Virginia School of Law and graduated magna cum laude from Duke University.

Szeman has a broad transactional practice with an emphasis on finance transactions, including senior secured, second lien, mezzanine and split collateral, particularly those involving private sources of capital. Szeman has represented lenders in acquisition financings, refinancings and recapitalizations, among other deal types.

During law school, Szeman was an editor of the Virginia Law Review. She also participated in the Entrepreneurial Law Clinic, through which she counseled startup companies on general corporate and financing matters.

Szeman serves on the board of Boston Explorers, a nonprofit organization dedicated to providing a unique summer camp experience for urban youth that combines hands-on activities with spontaneous adventures and explorations across the city.