DJ Shareholders Are Winning a Seat at the Bankruptcy Table
Aug 31, 2016 05:30:00 (ET)
By Lillian Rizzo
Stock investors are lately demanding -- and winning -- the chance to fight for a recovery in bankruptcy.
In chapter 11 bankruptcy reorganizations, shareholders don't get paid unless companies pay off all their debts, which typically means they don't get paid.
Rather than accept defeat, however, shareholders in energy, coal and other commodities-focused companies are fighting for a voice, and possibly a recovery, in some of the biggest bankruptcies that have been filed over the past couple of years.
"Equity is just not as willing to walk away as they once were," said DLA Piper restructuring lawyer Thomas Califano.
In most of these cases, shareholders are wiped out as companies reorganize by giving equity to creditors or selling their assets at prices too low to cover their debts. Companies see no need to include shareholders in restructuring talks because they usually don't end up with anything.
Shareholders who want a say in the process typically argue that the company is worth more than it says it is, meaning they have a shot at a payout. Or, they may point to an unusual situation that warrants their involvement, such as accusations of mismanagement.
If a judge decides shareholders deserve representation, they will get official committee status, giving them a voice in the process and requiring the bankrupt company to foot their legal bills.
Without committee status, individual shareholders may not have the resources or know-how to navigate complex legal proceedings.
"You just feel exploited when your life savings are about to be taken from you," said Kristen Plaisance, who owns stock in bankrupt Texas oil and gas driller Energy XXI Ltd. "All you can do is sit in the back of a courtroom, where no one knows who you are or why you're there, and feel left out of the case."
Ms. Plaisance, who with her husband and sons stand to lose hundreds of thousands of dollars if Energy XXI's restructuring plan is approved, learned it would cost as much as $200,000 in legal fees to fight for their investment after the company's April 14 chapter 11 filing.
Then she learned about equity committees. She connected with fellow investors via online message boards, and soon, 16 investors pooled their resources to hire a lawyer.
Energy XXI's shareholders allege in bankruptcy-court filings that management wrongly marked down the value of the company before planning a restructuring that would hand control of the company to bondholders while letting current management keep their jobs and collect bonuses. An Energy XXI spokesman declined to comment on the allegations.
In June, U.S. Bankruptcy Court Judge Marvin Isgur granted Energy XXI investors an official committee.
"Of course, we felt elated," Ms. Plaisance said. "It was a huge sense of relief and the feeling of powerlessness is gone."
Sometimes, the battle doesn't pay off for anyone except the advisers. Shareholders in Penn Virginia Corp. dropped their bid for a committee in a court-approved settlement that doesn't get them a recovery but pays their lawyers and advisers.
Shareholders in offshore oil-rig operator Hercules Offshore Inc. and zinc producer Horsehead Holding Corp. this year won committees. Hercules shareholders aren't expected to go empty-handed in the case but have raised concerns about the company's return to chapter 11 after exiting a prior bankruptcy last year.
A committee is under consideration in Breitburn Energy Partners' chapter 11 case as shareholders argue that a rise in oil prices give them hopes of a recovery.
Equity recoveries in bankruptcy aren't unheard of. In the recent restructuring of oil and gas driller Swift Energy Co., shareholders hung onto a 4% stake plus got warrants for additional shares. Court papers show the company's valuation wasn't high enough to support a payout to equity, but a restructuring deal struck with bondholders before the bankruptcy promised a shareholder recovery. As a result of that agreement, the company was in and out of chapter 11 in less than four months.
In Mirant Corp.'s 2003 bankruptcy, shareholders set to go unpaid argued that rising natural-gas and electricity prices should be considered. When the company emerged from bankruptcy about two years later, shareholders received partial ownership of the reorganized Mirant.
But such victories -- and chances for them -- are rare, meaning "equity committees still tend to be the exception rather than the rule," according to LeClairRyan lawyer Janice Grubin.
Even in recent cases in which shareholders won committees, judges made it clear they didn't have high hopes for a shareholder recovery.
"I think there is a substantial probability...that you're not going to make a recovery out of value here," Judge Isgur said in the Energy XXI case. Instead, he cited what he said was the "very substantial evidence before me that management was not forthright in its dealings with the company and in its dealings with the shareholders."
Similarly, U.S. Bankruptcy Judge Christopher Sontchi in May granted committee status to Horsehead Holding shareholders not to determine "whether there's a substantial likelihood of a recovery to equity." Instead he cited the "sudden and precipitous decline in value that occurred at the time on or about the filing of bankruptcy in February," which he said shocked the credit and equity markets. A Horsehead spokesman cited "rapidly" falling zinc prices, an idled plant and troubles with its lender as the causes for the company's decline in value.
(END) Dow Jones Newswires
August 31, 2016 05:30 ET (09:30 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
