Insights

Patrick Archambault Assesses the In re Pace decision in the American Bankruptcy Law Journal

As many U.S. companies navigate the most challenging economy since the Great Recession, investors are seeking ways to structure their transactions to both minimize the risk of losing control over the decision to file for bankruptcy and to preserve the value of their investment in distressed scenarios. One way to secure such protections is by obtaining a consent right to approve voluntary bankruptcy filings through “golden shares,” which is an equity interest in a company that affords the owner certain consent rights, including the right to block a company from filing for bankruptcy. 

Yet courts are divided over whether golden shares are enforceable as a matter of federal public policy or under applicable state law. Breaking from precedent established by the Fifth Circuit Court of Appeals, the In re Pace Industries, LLC (“In re Pace”) Delaware bankruptcy court refused to dismiss THE DEBTOR’S BANKRUPTCY CASE on the motion of a preferred equity holder, despite the fact that the movant possessed a bankruptcy-veto right and did not consent to the filing. In stark contrast to In re Franchise Services of North America, Inc., In re Pace held from the bench that an exercise of golden shares violated federal public policy and created a fiduciary duty that the golden shareholder owed to the other shareholders who did not have a bankruptcy consent right. The precedent-setting decision represents the first time that any court has invalidated a bona fide shareholder’s golden share.

In the article, “Coal Instead of Golden Shares: The Enforceability of Bankruptcy Filing Consent Rights, recently published in the American Bankruptcy Law Journal, Choate senior associate Patrick Archambault and his co-author critique the decision in In re Pace in light of other bankruptcy precedent and commercial practice.  Further, because In re Pace is not binding precedent, it leaves unanswered the question of whether golden shares are enforceable, making likely litigation of the issue. As In re Pace illustrates, courts faced with determining the enforceability of golden shares will examine closely the nature of A debtor’s distress, whether there are viable alternatives to the bankruptcy process, and whether a bankruptcy will benefit most stakeholders. Ultimately, the In re Pace decision and the uncertainty resulting from the court’s rejection of the negotiated bankruptcy-consent right may disrupt the renowned incentives to conduct business in Delaware, and businesses might look to other jurisdictions to ensure that they receive the benefits of their bargain.

To read the article, please click here.