When a "Golden Share Veto" is Trumped by Federal Public Policy
Last month, the United States Bankruptcy Court for the District of Delaware was faced with a frequently-contested issue: whether a debtor’s bankruptcy petition was filed pursuant to proper corporate authority under state law. In In re Intervention Energy Holdings, LLC1, the issues of state law corporate governance raised by institutional investor EIG Energy Fund XV-A, L.P. (EIG) were those of Delaware limited liability company law. However, the bankruptcy court found it unnecessary to base its ruling on a state law analysis, and instead ruled on the basis of federal preemption.
Intervention Energy Holdings, LLC (IE Holdings) and Intervention Energy, LLC (IE) filed jointly-administered bankruptcy cases in May of 2016. EIG contested the filing of IE Holdings' bankruptcy through a motion to dismiss the bankruptcy case, asserting that IE Holdings' voluntary bankruptcy petition was not duly filed under Delaware law. EIG asserted that IE Holdings' corporate governing documents required the unanimous consent of all holders of common units, in order to authorize a voluntary bankruptcy filing. At the time of IE Holdings' bankruptcy petition, Intervention Energy Investment Holdings, LLC owned about 85 percent of the equity in IE Holdings and held 22 million of its common units, while EIG held one common unit.
EIG is an institutional investor specializing in private investments in global energy projects and companies. In 2012, the Debtors and EIG entered into a Note Purchase Agreement pursuant to which EIG provided up to $200 million in senior secured notes (the NPA). As of the petition date, approximately $140 million of indebtedness remained outstanding under the NPA. In October of 2015, EIG declared an event of default under the NPA for the Debtors’ failure to comply with certain debt covenant(s). In December of 2015, Debtors and EIG negotiated and entered into an amendment to the NPA, which also acted as a forbearance agreement (the Forbearance).
Under the Forbearance, EIG agreed to waive existing defaults under the NPA, subject to Debtors raising $30 million by June 1, 2016, which was to be used to pay down existing debt. As a condition precedent to the effectiveness of the Forbearance, the Debtors were required to: (i) admit EIG or its affiliate as a member of IE Holdings; (ii) amend the limited liability governing documents of IE Holdings, in order to require the consent of each holder of a common unit of IE Holdings to the filing of any voluntary bankruptcy; and (iii) issue one common unit of IE Holdings to EIG.
While EIG argued that IE Holdings’ bankruptcy filing was not authorized under Delaware limited liability company law, since it violated the negotiated limited liability company provision that required unanimous consent of all common unit holders for such action, the Court skirted this issue entirely, holding that:
A provision in a limited liability company governance document obtained by contract, the sole purpose and effect of which is to place into the hands of a single minority equity holder the ultimate authority to eviscerate the right of that entity to seek federal bankruptcy relief, and the nature and substance of whose primary relationship with the debtor is that of creditor – not equity holder – and which owes no duty to anyone but itself in connection with an LLC’s decision to seek federal bankruptcy relief, is tantamount to an absolute waiver of that right, and, even if arguably permitted by state law, is void as contrary to federal public policy.
The court took particular note of EIG’s position of pure self-interest, that is, EIG’s exercise of its "veto" was not tempered by a fiduciary duty. While this case, if followed, could invalidate a provision in a company’s organizational document requiring consent of a creditor to the commencement of a bankruptcy case by the company, it should not jeopardize the typical provisions in the corporate documents of bankruptcy-remote entities commonly used in structured finance transactions. Those provisions often require the consent of an independent director to the filing of a voluntary bankruptcy, but the director, unlike the creditor-shareholder in Intervention Energy, typically has duties to the company and its creditors in determining whether to authorize a bankruptcy filing. For instance, it is often provided in such organizational documents that an independent director shall consider only the interests of the company, including its creditors, in determining whether to authorize a bankruptcy petition. Thus, the holding in Intervention Energy is unlikely to disturb the enforceability of typical bankruptcy remote structures.
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1In re Intervention Energy Holdings, LLC, No. 16-11247 (KJC), 2016 WL 3185576 (Bankr. D. Del. June 3, 2016).