For many years, Chapter 11 has been nearly-synonymous with sale of a business.
The Old Way
But such Chapter 11 sales typically occur under § 363 as pre-confirmation asset sales.
Rarely is there a post-confirmation sale of the ownership interests in a reorganized Chapter 11 debtor. That’s because, getting an operating plan confirmed in Chapter 11 can be exceedingly difficult.
A New Sale-of-Business Opportunity
But Subchapter V has created a new sale opportunity for owners of a small business in Chapter 11. The new opportunity is for sale of ownership interests in the reorganized debtor, either at plan confirmation or during the term of the plan.
What’s changed is this:
- it is now possible (even likely) that a small business can get an operating plan confirmed in Subchapter V; and
- upon confirmation of a Subchapter V plan, or during its term, the owners can sell their ownership interests in the reorganized Debtor.
This confirmation-related sale possibility should open a new market of opportunity, (i) for those whose trade relates to the purchase or sale of distressed businesses, and (ii) for other interested persons.
Notice / Court Approval Issues and Opportunities
Disclosure and court approval requirements for such a sale opportunity will be an important consideration.
–Pre-confirmation agreements
ISSUES. It is possible for a buyer to enter into a pre-confirmation agreement with a debtor’s owners to purchase ownership interests in the reorganized debtor upon confirmation of the plan. And a disclosure of that agreement is required (under § 1129(a)(5), § 1191(a), and other provisions of the Bankruptcy Code) as a condition for getting the Subchapter V plan confirmed.
Opportunities. An up-front disclosure of such an agreement, its inclusion in the plan and plan approval, should have significant benefits. Consider, for example, the possibility of a corporate or LLC debtor proposing a plan that:
- provides for a stream of plan payments to creditors over time, under the standards provided in § 1191;
- also provides for a new investor stepping in, at confirmation, to make an infusion of substantial funds into the reorganized debtor, for (i) immediate distribution of a portion to creditors (on top of the stream of plan payments over time), and (ii) use of the remaining portion in debtor’s business to assure that plan payments can be made; and
- In exchange, (i) the new investor receives a controlling ownership interest in the reorganized debtor, with old owners retaining a minority interest, and (ii) Debtor’s old owners receive a release from personal guaranties.
Such a plan could have a fighting chance at consensual confirmation, depending on the unique circumstances of each case.
–Post-confirmation agreements
ISSUES. Owners of a debtor that’s reorganized under Subchapter V (i.e., a plan has been confirmed) are probably entitled to sell a portion or all of their ownership interests (without notice to the Court or creditors) for whatever price they can get.
But the no-notice-required rule probably changes (or at least, risks of a no-notice approach increase), once the new owners start changing officers and directors or infusing new money into the reorganized debtor’s business, during the plan’s term.
OPPORTUNITIES. A plan modification to sell ownership interests, similar to the approach identified above, should have possibilities. Consider a plan modification that:
- provides for the existing payments stream to continue;
- also provides that the new investor infuses substantial funds for, (i) immediate distribution of a portion to creditors, and (ii) use of the remaining portion in the business to assure that plan payments can be made; and
- In exchange, (i) the new investor gets a controlling interest, and (ii) old owners get a release from guarantees.
Such a plan modification could also have a fighting chance at a consensual approval.
Other Issues
There are a multitude of issues surrounding a sale of ownership interests, and such issues will vary widely, depending on the unique circumstances of each case.
Such issues might including these.
- Do the debtor and its owners need separate representation in such a sale? The answer is, “Yes.”
- What happens if the reorganized debtor fails to comply with all plan requirements, either before or after the sale of ownership interests? The answer is, “The parties to the sale agreement had better assure that this does not happen, or the purchase effort will be for naught.”
- Might the new owner fund a pre-payment of plan obligations to achieve an early-exodus from the plan? The answer is, (i) “Yes,“ if the plan provides for such a pre-payment and early-exodus, but (ii) “I don’t know,” if the plan is silent on the subject. Presumably, however, the new owner will want to take advantage of the payments stream established in the plan.
Conclusion
Subchapter V provides a new market opportunity for confirmation-related sales of ownership interests in a reorganized debtor.
Whether and how this new opportunity develops, remain to be seen.
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