Synergy Shareholders Legal Fight Starts To Pay Off
Jan. 17, 2019 2:15 PM ET|
8 comments
|
About: Synergy Pharmaceuticals, Inc. (SGYP)
Jose Solorio
Long/short equity, special situations, healthcare, options
(1,126 followers)
Summary
A self-funded ad-hoc committee was formed in early December by shareholders to protest one of the most unfounded bankruptcy stories in recent history.
Shareholders have also petitioned the US Trustee to appoint an official equity committee. A letter to that regard was sent on December 26 to the US Trustee.
On January 14, the US Trustee advised that they will solicit interest on the formation of an equity committee.
On top of that, CRG, with their predatory like practices, refused to renegotiate a term loan with Synergy. Instead, they wanted Synergy to file for bankruptcy to accelerate very generous prepayment penalties (which will be challenged by shareholders), entrance and exit fees for a Debtor in Possession finance package, and interest rates.
Finally, Bausch Health put on a stalking horse bid price that barely covered the severance and the senior secured creditors. By doing so, they were hoping to expedite the bankruptcy process by bypassing the possibility of a shareholder committee being formed as I will explain below.
Shareholders are last in line
The reason why many times in bankruptcy shareholders are wiped down is that it's too difficult to organize shareholders in a large, fast and efficient manner. Shareholders are always spread out so thin that they barely ever have a chance to mount a significant defense to protect their interests. As such, management, creditors, unsecured creditors, the DIP lender, etc. will all feast at their expense. Usually, here's how money is distributed in a bankruptcy.
Food Chain of Bankruptcy
DIP Lender
Secured Lenders
Unsecured Lenders
Unsecured Claims
Shareholders
To the extent that there's money leftover, there will be a distribution for the rest of shareholders.
How to protect the interest of shareholders in Bankruptcy Court
The first question that any investor has to ask is whether there's a significant likelihood of recovery. This has to be based on facts and information. If there's a significant chance, then you should fight back. In order to fight back in bankruptcy, there are 3 possible avenues:
A self-funded Ad-Hoc Committee.
A US Trustee appointed Official Equity Committee.
A court-appointed Official Equity Committee.
An Ad-Hoc committee is a self-funded effort where a group of investors or a single large investor hires a law firm to protect their interests on the court. This can be a very expensive endeavor since legal fees in court quickly pile up. Synergy Investors through a GoFundMe campaign raised over $34,000 to hire Cole Schotz and quickly get their defense started. Then they asked Cole Schotz to petition the US Trustee on their behalf to appoint an Official Equity Committee.
The Role of Official Committees in Bankruptcy
When a bankruptcy is filed there are millions of dollars in legal fees involved. When a lender lends money, they don't lend money to spend millions trying to get it back. As such, to protect the interests of the different parties, the court tends to appoint Committees whose legal costs will run as part of the costs of the Debtor in Bankruptcy court.
When 1) there's a significant chance that money can be recovered for shareholders and 2) that if no appointment of an Official Equity Committee will significantly damage the interests of shareholders because no alternative legal defense is available, then the US Trustee is more likely to appoint an Official Equity Committee.
Significant Resources at their Disposal
Once an official Equity Committee of shareholders is formed, shareholders have equal resources to defend their interests against all the other 4 parties previously mentioned in the food chain of bankruptcy.
How to participate
You should receive through your brokerage a letter asking you to fill out a form. Though participating in an Official Equity Committee sounds very interesting, the commitment shouldn't be taken lightly. Being a shareholder shouldn't be the only reason you want to join. You should want to join because you have significant expertise to add to the process. For example, if you have a healthcare background, have significant experience in litigation, deal-making, and finance. Deep understanding of SEC filings and other things are also required. Also the ability to read thousands of pages in a very short period of time. If you can't fulfill the previous requirements it's best to let others take the lead.
Click here to download the form.
Deadline
In order to be able to participate on the Equity Committee, you have to fill out the form and send it by January 25.
Ad-Hoc Committee
There is still time to fill out the form which helped petition the US Trustee and which has compiled the information of over 700 shareholders who are part of the resistance and through which efforts, an Official Equity Committee is likely to be formed. They have launched a NewGoFundMe as well to cover the rest of the legal fight until the Official Equity Committee appointment arrives.
Cole Schotz
If you get to serve on the Official Equity Committee, please don't forget that Cole Schotz has financed close to 65k in legal fees to help protect shareholders against other parties (this is the difference between the retainer and actual legal work performed). Cole Schotz is one of the best bankruptcy law firms in New York. Also, consider that in such a short bankruptcy case, switching law firms from the Ad-Hoc Committee into the Official Equity Committee could significantly slow the progress. A significant amount of time and resources is needed to get up to speed with court filings.
Summary
Things are looking up for Synergy Shareholders. Ten years ago I was part of the Fremont General bankruptcy. Shares traded all the way down to .015 cents. However, we had an Official Equity Committee and we were able to put up a significant defense and reorganize. When we came out of bankruptcy we traded as high as $1.40 two months later. Where there's a will, there's a way and Synergy shareholders have definitely proved to be resilient and their efforts will pay off.
The following are the motions filed by Cole Schotz on behalf of Ad-Hoc Committee of shareholders:
Objection to DIP Financing Motion
Objection to Debtor's Bidding Procedures
Objection to Debtor's Bidding Procedures 2
Objection to Debtor's Dip Financing Motion
Objection to Key Employee Incentive Plan
Synergy Pharmaceuticals (SGYP) shareholders should greatly rejoice on the news that the US Trustee is soliciting interest for the formation of an Official Committee of Equity Holders. This is bullish news for any shareholder who is still holding onto their investment in Synergy. I would explain what steps you need to take in order to apply to be part of it and whether you should even consider applying to it.
Shareholders Getting wiped in Bankruptcy
A common myth in bankruptcy is that shareholders always get wiped out and they lose everything. While sometimes this is true, companies file for bankruptcy for a variety of reasons. For example, in Synergy's case, I believe the company filed for bankruptcy in order to avoid civil liability and release its directors from claims. This can be better understood by looking at the reorganization plan filed with the court on December 21, 2018. In other cases, companies file for bankruptcy to negotiate better terms with a lender and to restructure their operations and pension obligations.
CRG, Bausch Health, Centerview and Synergy covering their backs
What has been evident since the beginning of this bankruptcy case is that all the parties were working against the interest of shareholders. For example, it seems that when management was unable to find an offer that would make their options worth a significant amount of money (most of the senior management team had options valued above $2), they decided instead to file for bankruptcy and in the process negotiate a $15 million severance plan for them that was set aside specifically for them out of the stalking horse bid. They also proposed a KEIP (Key Employment Incentive Plan) that rewarded them for selling the company at a higher price than their artificially created low price. The combined bonuses made up for a good portion of their lost options.
News 
Market Data 
Discover 
