Rights Offerings and Private Placements in Chapter 11: How Creditors Can Strike a Windfall Within the Boundaries of the Bankruptcy Code
Shelby Saxon, Rights Offerings and Private Placements in Chapter 11: How Creditors Can Strike a Windfall Within the Boundaries of the Bankruptcy Code, 94 Am. Bankr. L. J. (2020 Forthcoming)
27 Pages Posted: 29 Apr 2020
Date Written: 2020
Debtors-in-Possession have increasingly turned to rights offerings and/or private placement sales as an exit financing option in chapter 11 bankruptcy. When timed and executed properly, these offerings can provide a windfall of returns to select creditors. The windfall does not appear to exist outside of chapter 11, as rights offerings and private placements are subject to heightened fiduciary duties without the flexibility of the Bankruptcy Code. Notwithstanding objections to many aspects of these sales and their outcomes, courts adjudicating these disputes have found no violations of the Code. As the popularity of these offerings within chapter 11 has increased in recent years and courts have consistently approved them, the ability for creditors to strike a windfall has become more apparent.
This Article asserts that courts adjudicating rights offerings disputes have correctly applied the text of the Code. However, unbridled financing terms combined with intentional complexity, opaque value incurred, and strategic negotiation methods have created the opportunity for favored groups of creditors to strike a windfall that the drafters of the Code never intended to allow, as it undermines the equitable nature of bankruptcy. While some commentators and at least one judge have discussed rights offering components through a reasonability lens, there is currently no standard reasonability test when assessing rights offerings. This Article argues that a judicially established reasonability standard assessed against rights offering finance terms would mitigate the windfall yet preserve reasonable returns for investors willing to take financial risks. This result would more properly align with the equitable goals of bankruptcy, while still allowing for successful debtor exit financing.
Keywords: bankruptcy, chapter 11, reorganization, rights offering, private placement
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