The Value of Soft Variables in Corporate Reorganizations
by | posted in: Bankruptcy Administration and Jurisdiction | 0

By Michelle Harner, University of Maryland Francis King Carey School of Law

When a company is worth more as a going concern than on a liquidation basis, what creates that additional value?  Is it the people, management decisions, the simple synergies of the operating business, or some combination of these types of soft variables?  And perhaps more importantly, who owns or has an interest in such soft variables?  These questions are important in all contexts, but hold particular significance in corporate reorganizations where a company’s liabilities frequently exceed the value of its assets.  The value available to satisfy creditors’ claims is limited, and determining the parties’ respective rights to that value is often hotly contested and critical to an effective resolution.  My article, The Value of Soft Variables in Corporate Reorganizations, 2015 Ill. L. Rev. ___ (forthcoming), explores these questions under existing legal doctrine and practice norms.

The basic thesis of the article is that soft variables contribute meaningful value to the operation of a company as a going concern but are often overlooked or undervalued in corporate reorganizations.  Ignoring soft variables not only does a disservice to those working hardest to save the company but also arguably steals value from the company and those constituencies.  If a company’s soft variables do not hold such value, it may indicate that a chapter 7 liquidation is the more appropriate resolution for the company.  But if the company invokes the chapter 11 process and the resolution generates value above liquidation or book value, the court and the parties should identify the relevant soft variables and allocate value accordingly.

A longer summary of the article can be found here, and the full article can be found here.

Activist Investors, Distressed Companies, and Value Uncertainty
by | posted in: Claims Trading | 0

Authors:  Michelle M. Harner, Jamie Marincic Griffin, and Jennifer Ivey-Crickenberger

Hedge funds and other private investment funds often play a key role in chapter 11 cases.  They may hold the debtor’s prepetition secured debt or provide postpetition financing to the debtor.  They also may buy and trade the debtor’s secured and unsecured debt both before and after a chapter 11 filing.  These activities can provide much-needed liquidity to a debtor and foster a robust secondary market for creditors looking to exit the credit.  A fund’s participation in a case, however, sometimes generates litigation and, arguably, both delays the resolution and increases the cost of the case.  Consequently, many commentators and practitioners debate the utility of funds in restructurings.

In our most recent article on funds in chapter 11, we conduct an original empirical study of funds as purchasers of chapter 11 debtors.  Specifically, the study analyzes cases where a fund (individually or as part of a group) acquires control of a debtor through the chapter 11 process by purchasing either substantially all of the debtor’s assets or a majority interest in the reorganized stock.  In the stock acquisition context, we were concerned only with the investment of new capital.

Overall, the data suggest that funds have the potential to provide value in chapter 11.  But neither the participation of funds nor the chapter 11 process itself is a panacea, and more empirical and traditional case studies are needed to understand fully the impact of funds on corporate restructurings.  We hope our study encourages further research.

The full-length article can be found here.

Practitioners, Academics, and a Judge Testify about Safe Harbors before Congress
by | posted in: Financial Firms and Safe Harbors | 0

Author: Stephen D. Adams

The House Judiciary Subcommittee on Regulatory Reform, Commercial, and Antitrust Law has held two sets of hearings in recent months on the bankruptcy safe harbors for repos and derivatives from the automatic stay, from preference and fraudulent conveyance law, and from the limitations on ipso facto clauses.

This past Wednesday, March 26, Judge Christopher Sontchi, Seth Grosshandler, Jane Vris, Thomas Jackson, and Michelle Harner testified. Last December, Jeffrey Lacker, Donald Bernstein, and Mark Roe testified.

Judge Sontchi argued that the 546(e)’s exception for all settlement transactions is too broad and also urged Congress to narrow the safe harbors for repos. Seth Grosshandler, of Cleary Gottlieb, reported on the work of the ABI safe harbors advisory committee (which includes both Judge Sontchi and Prof. Roe) and warned that the safe harbors are complex and potentially costly to alter.  Jane Vris, representing the National Bankruptcy Conference (NBC), and Thomas Jackson, professor at the University of Rochester, testified on bankruptcy of SIFIs as an alternative to Dodd Frank resolution of bail-out.  Michelle Harner, professor at University of Maryland School of Law, testified in her role as the Reporter to the ABI Commission on Bankruptcy Reform about the Commission.

Mark Roe, professor at Harvard Law School, testified that the safe harbors facilitate excessive short-term funding of financial institutions and impede effective resolution of large financial failures, like that of Lehman in 2008.  Donald Bernstein, of Davis Polk, a member of the ABI bankruptcy commission, testified about the bankruptcy adjustments needed to adapt bankruptcy law to the FDIC’s Single Point of Entry resolution mechanisms.  Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, testified about the importance of bankruptcy reform to reduce the problem of too-big-to-fail and reduce reliance on short-term debt.

The written testimonies are linked above, and the video of the oral testimonies for the March 26th hearing will be found here once it has been posted, and is here for the December 3rd hearing.

For more on the bankruptcy safe harbors for derivatives and repurchase agreements, please see the post by Steven L. Schwarcz and Ori Sharon summarizing their recent paper, The Bankruptcy-Law Safe Harbor for Derivatives: A Path-Dependence Analysis, and the post by Kathryn Borgeson, Mark Ellenberg, Lary Stromfeld, and John Thompson, entitled Lehman Bankruptcy Court Issues Safe Harbor Decision, summarizing a recent Lehman case decision on the safe harbors, both published Tuesday.