In some cases, a prompt restructuring of the company’s obligations is imperative for its survival. In order to minimise risks, delay and expense, and emerge from chapter 11 as quickly as feasible and in a manner that will facilitate the debtor’s ability to move forward on a viable basis, the use of a support agreement can serve a crucial role. Restructuring support agreements, also known as plan support agreements, have been used with increasing frequency as a tool to advance chapter 11 cases toward the goal of plan confirmation. Such arrangements were sometimes referred to as lock-up agreements, but due to the potential associated negative connotation, the use of that term has fallen out of favour.
Restructuring support agreements provide clear direction and structure to a chapter 11 case and set forth negotiated terms of a chapter 11 reorganisation plan. They can be entered before or after a case is commenced. The core of a restructuring support agreement is the creditors’ pledge to support the plan. Generally, the agreement will be between the debtor and key creditor groups. The agreements invariably include affirmative and negative covenants obligating the creditors to support and vote in favour of the plan so long as it is consistent with the terms of the restructuring support agreement and precluding the creditors from taking any action to delay or undermine confirmation of the plan. Creditors generally receive concessions from the debtor such as more favourable payment terms, deadlines for the debtor to achieve various significant milestones in advancing the case, and greater certainty regarding the timeline and outcome of the restructuring.
When a restructuring support agreement is entered prepetition, the debtor typically files a motion with the court requesting approval of assumption of the agreement as an executory contract under Section 365 of the Bankruptcy Code. Support agreements are considered executory contracts, with all parties to the agreements having significant material, unperformed obligations. Courts approve assumption of executory contracts when the debtor has exercised reasonable business judgement in determining to move forward with assumption. See Agarwal v. Pomona Valley Medical Group, Inc. (In re Pomona Valley Medical Group, Inc.), 476 F.3d 665, 670 (9th Cir. 2007). In such circumstances, assumption benefits the debtor’s estate. Courts are reluctant to second-guess the debtor’s business judgment when evidence is presented supporting that the debtor is acting reasonably. In In re Genco Shipping & Trading Ltd., 509 B.R. 455 (Bankr. S.D.N.Y. 2014), the court approved assumption of a restructuring support agreement pursuant to section 365, stating that “[u]nder the ‘business judgment’ test, a debtor must simply put forth a showing that assumption or rejection of the executory contract or unexpired lease will benefit the Debtor’s estate” and that “[t]he Debtors’ decision to assume the RSA clearly meets the ‘business judgment’ standard.” Id., at 463 (citations omitted).
When seeking court approval of a restructuring support agreement, the debtor will invariably assert that it exercised sound business judgment in negotiating and entering the agreement.
Restructuring support agreements entered after the commencement of chapter 11 cases are subject to court approval pursuant to Bankruptcy Code Sections 363(b) and 105(a) and Bankruptcy Rule 9019. Section 363(b) requires court approval of a debtor’s use of property of the estate outside of the ordinary course of business. Section 105(a) provides that the “court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.” Taken together, these sections provide bankruptcy courts with the power and discretion to approve post-petition restructuring support agreements. When the proposed agreement satisfies the business judgment rule in that it was made on an informed basis, in good faith, and in honest belief, and is in the best interest of the company, it will be approved under section 363. Further, in conjunction with section 105, courts have routinely found that approval of restructuring support agreements is consistent with applicable provisions of the Bankruptcy Code and the goal of confirming a chapter 11 plan.
Under Bankruptcy Rule 9019, the court may approve compromises and settlements. The chapter 11 process is intended, when feasible, to drive parties toward consensual resolution of disputes. Settlements are approved when fair and equitable and in the best interests of the debtor’s estate. This leaves the court with considerable discretion when considering approval of proposed settlements. The primary factors considered by the courts when determining whether to approve a settlement in the form of a restructuring support agreement generally include: (1) the probability of success in the litigation; (2) the complexity, delay, and cost of the litigation; and (3) the best interests of creditors and the bankruptcy estate. Further, courts generally defer to a debtor’s judgment with regard to settlements, unless the settlement falls below the lowest point in the range of reasonableness in terms of benefits to the estate.
When seeking court approval of a restructuring support agreement, the debtor will invariably assert that it exercised sound business judgment in negotiating and entering the agreement. It is important that the agreement is the product of arms-length negotiations. Further, it will frequently be asserted that the support agreement is necessary in order to ensure the support of key creditor constituencies during the chapter 11 case and/or a condition of necessary funding for the reorganisation plan. Additionally, the case for approval also usually includes the assertions that the support agreement will help provide direction and structure for the reorganisation, and allow the debtor to expeditiously advance its chapter 11 case, avoid delay, minimise expense, eliminate potential litigation, and successfully emerge from chapter 11 on a viable, restructured basis. In some cases, approval of the support agreement will also help the debtor avoid the significant risks associated with a “free fall” chapter 11 case (one where no identified exit is in place).
Further, restructuring support agreements routinely recite that the agreement is not a solicitation for consents to the plan.
Before their use became common, there was some uncertainty whether post-petition restructuring support agreements would be found to violate the requirement of the Bankruptcy Code that post-petition solicitation of votes on a chapter 11 plan can only occur after a disclosure statement approved by the court as containing adequate information is approved and circulated. Bankruptcy Code Section 1125(b) provides that “[a]n acceptance or rejection of a plan may not be solicited after the commencement of the case under this title from a holder of a claim or interest with respect to such claim or interest, unless, at the time of or before such solicitation, there is transmitted to such holder the plan or a summary of the plan, and a written disclosure statement approved, after notice and a hearing, by the court as containing adequate information.” Courts, however, have generally determined that “solicitation” must be read narrowly so that the debtor’s post-petition negotiations with creditors are not chilled. Essentially, courts usually find that the way to effectively move cases forward in chapter 11 is to encourage post-petition negotiation, even in the absence of a disclosure statement.
Further, restructuring support agreements routinely recite that the agreement is not a solicitation for consents to the plan. Such typical language provides that the support agreement is not and shall not be deemed to be a solicitation for consents to the plan. Additional typical disclaimer language in support agreements provides that the votes of the holders of claims against and interests in the debtor will not be solicited until such holders who are entitled to vote on the plan have received the plan, the disclosure statement, as approved by the Bankruptcy Court as having adequate information in accordance with section 1125 of the Bankruptcy Code, and related ballots, and other required solicitation materials. While the language may be self-serving, the use of restructuring support agreements has become accepted, common, and generally not subject to serious challenge.
Finally, the obligations of the debtor under a restructuring support agreement should be subject to a “fiduciary out” allowing the debtor to terminate the agreement in the reasonable exercise of its fiduciary duties. When entering the support agreement, it should be the debtor’s belief that the restructuring contemplated by the agreement is the best available alternative in light of the then-existing facts and circumstances. Further, by explicitly allowing the debtor to terminate its obligations under the agreement if a superior alternative presents itself, the support agreement does not conflict with the debtor’s fiduciary duty to maximise the value of the bankruptcy estate.
David S. Kupetz, a partner in SulmeyerKupetz, is an expert in restructuring, business reorganization, bankruptcy, and other insolvency solutions. He can be reached at firstname.lastname@example.org.