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Deregulation or Bust?

Fortnightly Magazine - May 15 1995

construction and development of a troubled facility that is far from being online. Similarly, a utility burdened with an above-market independent power producer supply contract may be able to reject the contract. The third power can provide a company with sufficient cash to maintain its business while negotiating a restructuring. Such new funds are only available because of the protections that Chapter 11 affords lenders.

The ultimate objective of Chapter 11 is to confirm a plan that establishes the structure of the reorganized company and how its obligations to creditors and equity security holders will be treated. The debtor has tremendous control in this all-important task. First, only the debtor may file a plan for at least the first 120 days. (Usually this period is extended by the court, often for years, although it can be shortened in rare cases.) Thus, management generally stays in control. Second, even though a plan is developed through negotiations with creditor and equity constituencies, and voted on by these parties, the debtor, as the plan proponent, establishes the "classes" of claims and equity interests (within reason). This is key because of the unique voting and binding provisions of Chapter 11.

Chapter 11 creditors and equity holders vote on a plan of reorganization by class. For a class of claims to accept a plan, more than one half in number of the holders in a such class must vote to accept the plan, and these holders must represent at least two-thirds of the amount of claims in such class. For equity classes, only two-thirds in amount is required (count only those holders who actually vote in making the calculations). If such percentages accept, the plan is binding on dissenters and abstainers (as long as certain basic tests are made). These voting and binding features are critical advantages for a restructuring company, when compared to a workout/

exchange offer where virtually unanimous individual consent is required. Moreover, in Chapter 11, even if one or more classes reject the plan, it is possible to "cramdown" the plan on such classes if certain other tests are met.

Chapter 11 is not without its serious shortcomings, however:

1) It can be exorbitantly expensive (see Chart 1 for a list of the professional expenses associated with certain well-known Chapter 11 cases).

2) Mere filing can cause business deterioration as customers, suppliers, employees, and others become concerned about the company's long-term prospects.

3) The administrative burdens are enormous and may divert management's attention from the primary goals of running the business and reorganizing the company.

4) Cases can take inordinate amounts of time, often lasting for years.

5) Management might be replaced, or third parties might propose a plan not to management's liking.

Despite these pitfalls, Chapter 11 can provide a mechanism for reorganizing companies when other possibilities are not available.

Prepackaged

Chapter 11 Plans

"Prepackaged" restructurings are a relatively recent innovation that combines the best elements of workout/exchange offers with the best elements of traditional Chapter 11 cases. In "Prepacks," the entire restructuring is negotiated, documented, and voted on by creditors and