The Enduring Legality of Exit Consents: A Realist's Guide

Abstract

Almost every proposal for Venezuela’s debt restructuring simply assumes that exit consents are a viable strategy for effectuating an orderly restructuring. Restructurers appear to take this strategy for granted as the “safe option” that has passed the test of time. However, this fundamental assumption is unwarranted. Exit consents have never been put through the crucible of litigation in the sovereign context. Furthermore, the only case law that is available on the issue comes from the corporate setting. But even in that setting, the paramount exit consent case occurred over 30 years ago, and there is a striking dearth of cases to delineate which exit consents are permissible. Moreover, even with the assistance of the available corporate cases to provide sovereigns with guidance as to which exit consents are permissible, the ambiguous litmus test of “wrongful coercion” is an intricately fact-intensive inquiry where courts have tremendous discretion. So, is this seemingly "safe option" more of a gamble than is conventionally assumed? Or are exit consents a risky mechanism that will expose restructuring agreements to costly litigation where billions of dollars are at stake?

This paper addresses this glaring issue. This paper proposes that courts look at how exit consents are used within the overall debt restructuring context. If a court perceives that the issuer is overall seeking to wreak havoc on maverick holdouts, the strategy will be invalidated for bad faith. But if the strategy is used to solve the problems inherent with exchange offers, the strategy is permissible.

Keywords: exit consents, exit amendments, legality, exchange offers, sovereign debt, debt restructuring, Venezuela