Tag: Bankruptcy


Gold or Fool’s Gold?

Douglas P. Bartner is partner in the Financial Restructuring & Insolvency Group, Shearman & Sterling LLP. This post is based on an article by Mr. Bartner, Fredric Sosnick, and Cynthia Urda Kassis that first appeared in the Mining Journal.

Douglas P. Bartner is partner in the Financial Restructuring & Insolvency Group, Shearman & Sterling LLP. This post is based on an article by Mr. Bartner, Fredric Sosnick, and Cynthia Urda Kassis that first appeared in the Mining Journal.

By mid-2014 the consequences of several years of significant liquidity constraints in the traditional sources of funding for the mining sector, combined with depressed commodity prices, became increasingly evident.

Official corporate announcements and market rumours appeared sporadically at first and then with disturbing regularity as major and mid-tier companies began selling “non-core” assets and juniors tried to sell themselves or entered into insolvency proceedings when that was not an option. This increased level of distressed transaction activity in the mining sector which began in 2014 looks set to continue through 2015.

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Financial Distress, Stock Returns, and the 1978 Bankruptcy Reform Act

Dirk Hackbarth is Associate Professor of Finance at Boston University. This post is based on an article authored by Professor Hackbarth; Rainer Haselmann, Professor of Finance, Accounting, and Taxation at Goethe University, Frankfurt; and David Schoenherr of the Department of Finance at London Business School.

Dirk Hackbarth is Associate Professor of Finance at Boston University. This post is based on an article authored by Professor Hackbarth; Rainer Haselmann, Professor of Finance, Accounting, and Taxation at Goethe University, Frankfurt; and David Schoenherr of the Department of Finance at London Business School.

In our article, Financial Distress, Stock Returns, and the 1978 Bankruptcy Reform Act, forthcoming in The Review of Financial Studies, we examine how bargaining power in distress affects the pricing of corporate securities. The nature of Chapter 11 makes bargaining an important factor in distressed reorganizations. Reorganization outcomes depend on the relative bargaining power of the parties involved. A number of papers document that shareholders receive concessions in distressed reorganization even when creditors are not paid in full despite of their contractual (junior) status as residual claimants (Franks and Torous 1989; Eberhart, Moore and Roenfeldt 1990; Weiss 1990). To this end, our research exploits an exogenous variation in the allocation of bargaining power between shareholders and debtholders due to the 1978 Bankruptcy Reform Act to examine how the ex post allocation of cash flows in distress affects the ex ante pricing (return and risk) of corporate securities, such as risky debt and levered equity.

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ABI Commission to Study the Reform of Chapter 11 Report

The following post comes to us from Donald S. Bernstein, Partner and head of the Insolvency and Restructuring Practice at Davis Polk & Wardwell LLP, and is based on a Davis Polk memorandum authored by Mr. Bernstein, Marshall S. Huebner, Damian S. Schaible, and Kevin J. Coco. The complete publication is available here.

The following post comes to us from Donald S. Bernstein, Partner and head of the Insolvency and Restructuring Practice at Davis Polk & Wardwell LLP, and is based on a Davis Polk memorandum authored by Mr. Bernstein, Marshall S. Huebner, Damian S. Schaible, and Kevin J. Coco. The complete publication is available here.

On December 8, the American Bankruptcy Institute Commission to Study the Reform of Chapter 11 released its Final Report and Recommendations. The American Bankruptcy Institute organized the 23-member Commission in 2011 to study and address how financial markets, products and participants have evolved and, in some respects, outgrown the current chapter 11 framework, enacted in 1978. Since the 19th century, Congress has overhauled the corporate reorganization provisions of the federal bankruptcy law approximately every 40 years, and the 40th anniversary of the enactment of the 1978 Bankruptcy Code is just four years away. The Commission Report, which spans nearly 400 pages, recommends significant changes that seek to reconfigure our corporate insolvency system.

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New ISDA Protocol Limits Buy-Side Remedies in Financial Institution Failure

The following post comes to us from Stephen D. Adams, associate in the investment management and hedge funds practice groups at Ropes & Gray LLP, and is based on a Ropes & Gray publication by Mr. Adams, Leigh R. Fraser, Anna Lawry, and Molly Moore.

The following post comes to us from Stephen D. Adams, associate in the investment management and hedge funds practice groups at Ropes & Gray LLP, and is based on a Ropes & Gray publication by Mr. Adams, Leigh R. Fraser, Anna Lawry, and Molly Moore.

The ISDA 2014 Resolution Stay Protocol, published on November 12, 2014, by the International Swaps and Derivatives Association, Inc. (ISDA), [1] represents a significant shift in the terms of the over-the-counter derivatives market. It will require adhering parties to relinquish termination rights that have long been part of bankruptcy “safe harbors” for derivatives contracts under bankruptcy and insolvency regimes in many jurisdictions. While buy-side market participants are not required to adhere to the Protocol at this time, future regulations will likely have the effect of compelling market participants to agree to its terms. This change will impact institutional investors, hedge funds, mutual funds, sovereign wealth funds, and other buy-side market participants who enter into over-the-counter derivatives transactions with financial institutions.

Among the key features of the Protocol are the following:

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Cross-Border Recognition of Resolution Actions

The following post comes to us from Sullivan & Cromwell LLP, and is based on a Sullivan & Cromwell publication authored by Mitchell S. Eitel, Andrew R. Gladin, Rebecca J. Simmons, and Jennifer L. Sutton. The complete publication, including footnotes, is available here.

The following post comes to us from Sullivan & Cromwell LLP, and is based on a Sullivan & Cromwell publication authored by Mitchell S. Eitel, Andrew R. Gladin, Rebecca J. Simmons, and Jennifer L. Sutton. The complete publication, including footnotes, is available here.

On September 29, 2014, the Financial Stability Board (the “FSB”) published a consultative document concerning cross-border recognition of resolution actions and the removal of impediments to the resolution of globally active, systemically important financial institutions (the “Consultative Document”). The Consultative Document encourages jurisdictions to include in their statutory frameworks seven elements that would enable prompt effect to be given to foreign resolution actions. In addition, due to a recognized gap between the various national legal resolution regimes that are currently in place and those recommended by the FSB, the Consultative Document sets forth two “contractual solutions”—that is, resolution-related arrangements to be implemented as a matter of contract among the private parties involved—to address two underlying substantive issues that the FSB considers critical for orderly cross-border resolution, namely:

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The Duty to Maximize Value of an Insolvent Enterprise

The following post comes to us from Brad Eric Scheler, senior partner and chairman of the Bankruptcy and Restructuring Practice at Fried, Frank, Harris, Shriver & Jacobson LLP, and is based on a Fried Frank M&A Briefing authored by Mr. Scheler, Steven Epstein, Robert C. Schwenkel, and Gail Weinstein. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

The following post comes to us from Brad Eric Scheler, senior partner and chairman of the Bankruptcy and Restructuring Practice at Fried, Frank, Harris, Shriver & Jacobson LLP, and is based on a Fried Frank M&A Briefing authored by Mr. Scheler, Steven Epstein, Robert C. Schwenkel, and Gail Weinstein. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In Quadrant Structured Products Company, Ltd. v. Vertin (October 1, 2014), Vice Chancellor Laster clarified the Delaware Chancery Court’s approach to breach of fiduciary duty derivative actions brought by creditors against the directors of an insolvent corporation. Importantly, the Vice Chancellor applied business judgment rule deference to the non-independent directors’ decision to try to increase the value of the insolvent corporation by adopting a highly risky investment strategy—even though the creditors bore the full risk of the strategy’s failing, while the corporation’s sole stockholder would benefit if the strategy succeeded. By contrast, the court viewed the directors’ decisions not to exercise their right to defer interest on the notes held by the controller and to pay above-market fees to an affiliate of the controller as having been “transfers of value” from the insolvent corporation to the controller, which were subject to entire fairness review.

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Update on Directors’ and Officers’ Insurance in Bankruptcy

The following post comes to us from Douglas K. Mayer, Of Counsel in the Restructuring and Finance Department at Wachtell, Lipton, Rosen & Katz, and is based on a Wachtell Lipton memorandum by Mr. Mayer, Martin J.E. Arms, and Emil A. Kleinhaus.

The following post comes to us from Douglas K. Mayer, Of Counsel in the Restructuring and Finance Department at Wachtell, Lipton, Rosen & Katz, and is based on a Wachtell Lipton memorandum by Mr. Mayer, Martin J.E. Arms, and Emil A. Kleinhaus.

Directors’ and officers’ (“D&O”) insurance coverage continues to represent a key element of corporate risk management. See memo of July 28 2009. A decision in the bankruptcy of commodities brokerage MF Global, In re MF Global Holdings Ltd., No. 11-15059 (S.D.N.Y. Sept. 4, 2014), provides a recent illustration of how D&O insurance may be treated upon the bankruptcy of the insured company, depending on the specific structure and terms of the insurance at issue.

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Rolling Back the Repo Safe Harbors

Mark Roe is the David Berg Professor of Law at Harvard Law School, where he teaches bankruptcy and corporate law. This post is based on an article co-authored by Professor Roe, Ed Morrison, Professor of Law at Columbia Law School, and Bankruptcy Judge Christopher Sontchi for the District of Delaware. All three are members of the Advisory Committee on Derivatives, Financial Contracts and Safe Harbors, which is working with the ABI Commission to Study the Reform of Chapter 11. The article was presented at the Federal Reserve’s recent conference on Wholesale Funding Markets.

Mark Roe is the David Berg Professor of Law at Harvard Law School, where he teaches bankruptcy and corporate law. This post is based on an article co-authored by Professor Roe, Ed Morrison, Professor of Law at Columbia Law School, and Bankruptcy Judge Christopher Sontchi for the District of Delaware. All three are members of the Advisory Committee on Derivatives, Financial Contracts and Safe Harbors, which is working with the ABI Commission to Study the Reform of Chapter 11. The article was presented at the Federal Reserve’s recent conference on Wholesale Funding Markets.

Ed Morrison, Judge Christopher Sontchi and I recently posted to SSRN our article recommending a major narrowing of the repo safe harbors, after presenting it at the Federal Reserve’s recent conference on Wholesale Funding Markets in which the Boston Fed president warned of the dangers in the repo market. Overall, we conclude that the Bankruptcy Code has aggressively and unwisely sought to regulate market liquidity and systemic risk, with the Code’s “safe harbors” from the normal bankruptcy machinery largely backfiring during the financial crisis. The sounder policy would be to limit the repo safe harbors to U.S. Treasury repos and repos of similarly liquid government securities.

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Bankruptcy Court Holds Secured Creditors Can Be “Crammed Down” With Below-Market Replacement Notes

The following post comes to us from Mark I. Bane, Partner focusing on corporate restructurings at Ropes & Gray LLP, and is based on a Ropes & Gray Alert.

The following post comes to us from Mark I. Bane, Partner focusing on corporate restructurings at Ropes & Gray LLP, and is based on a Ropes & Gray Alert.

On August 26, 2014, in the case In re MPM Silicones, LLC, Case No. 14-22503 (Bankr. S.D.N.Y.) (“Momentive”), the United States Bankruptcy Court for the Southern District of New York held that secured creditors could be “crammed down” in a chapter 11 plan with replacement notes bearing interest at substantially below market rates. Unless overturned on appeal, this decision will introduce a new level of risk to leveraged lending—secured lenders will face the specter of losing in a bankruptcy restructuring not only their negotiated rates, but any semblance of market treatment. This risk could result in a tightening of availability and increased costs to borrowers in levered transactions.

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Nationalize the Clearinghouses!

The following post comes to us from Stephen J. Lubben, Harvey Washington Wiley Chair in Corporate Governance & Business Ethic at Seton Hall University School of Law.

The following post comes to us from Stephen J. Lubben, Harvey Washington Wiley Chair in Corporate Governance & Business Ethic at Seton Hall University School of Law.

A clearinghouse reduces counterparty risks by acting as the hub for trades amongst the largest financial institutions. For this reason, Dodd-Frank’s seventh title, the heart of the law’s regulation of OTC derivatives, requires that most derivatives trade through clearinghouses.

The concentration of trades into a very small number of clearinghouses or CCPs has obvious risks. To maintain the vitality of clearinghouses, Congress thus enacted the eighth title of Dodd-Frank, which allows for the regulation of key “financial system utilities.” In plain English, a financial system utility is either a payment system—like FedWire or CHIPS—or a clearinghouse.

But given the vital place of clearinghouses in Dodd-Frank, it is perhaps surprising that Dodd-Frank makes no provision for the failure of a clearinghouse. Indeed, it is arguable that the United States is not in compliance with its commitment to the G-20 on this point.

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