Mirant

[Joe Stocks]

Mirant Shareholder Asks Texas Court to Set Precedent That Could Lead to Corporate Bankruptcy Reform
Wednesday April 13, 2:49 pm ET
- Proposal Calls for Valuation Procedures to Protect Shareholder Interests


FORT WORTH, Texas, April 13 /PRNewswire/ -- Michael Sammons, a Mirant shareholder and member of the Shareholder Rights Group, Mirant Bankruptcy, filed a motion yesterday proposing a valuation method that would allow the judge presiding over Mirant Corp.'s (OTC Pink Sheets: MIRKQ - News) Chapter 11 case to provide a "market-based" value for the existing equity holders rather than risking an arbitrary assignment of no value to Mirant and its valuable businesses. This proposal would remove any possibility of a Mirant valuation error comparable to the billions of dollars of junior debt and equity that was wiped out in the National Gypsum and Kmart bankruptcies.
ADVERTISEMENT


Under this plan, stock market performance of Mirant's new stock within a reasonable period of time following confirmation would form the basis for a retroactive valuation of Mirant. Sammons' approach will guarantee the fairest possible value distribution to all of Mirant's creditors and allow the company to exit bankruptcy more quickly than it would otherwise.

Should Mirant be permitted to move forward with its proposed reorganization plan, it would be the third time in recent years shareholders of a bankrupt company were wrongfully denied recovery. In both the National Gypsum and Kmart cases, shareholders received no recovery while more senior creditors benefited from a run up in the price of newly issued shares when the market recognized value not accounted for in the companies' respective bankruptcy plans.

In the National Gypsum case, the error was so apparent that the new stock traded at 300 percent of the judge's valuation virtually overnight -- the cost to lower creditor classes was in excess of $600 million.

In the Kmart case, which involved more difficult to recognize hidden asset values (leaseholds), the stock market took several months to analyze and properly value newly issued Kmart stock. However, within 12 months the value placed on Kmart by the stock market reflected a valuation error by the court dwarfing National Gypsum -- ultimately junior creditors and common shareholders lost a staggering $5 billion.

"Some creditors will be very disappointed they may only receive 110-120 percent of what they are owned, rather than the anticipated windfall comparable to that reaped by the vulture creditors in the National Gypsum and Kmart cases," Sammons said. "We're hoping Judge Lynn will protect Mirant's 200,000 shareholders -- many with stock in retirement accounts and their children's education funds -- from having billions of dollars wrongfully taken from shareholders in order to enrich large banks and hedge funds."

Sammons added, "If Judge Lynn moves forward with this approach, bankruptcy courts will never again risk unfairly destroying the financial lives and futures of thousands of individual investors in Chapter 11 bankruptcies where valuation is contested."

The most difficult area of Mirant's bankruptcy, and most other Chapter 11 bankruptcies with competing classes, is enterprise valuation. In such cases, the presiding judge is typically faced with a debtor that has long since abrogated any fiduciary responsibility to shareholders and is intent instead on lowering asset values and income projections to secure management careers and future performance bonuses.

Such cases also typically involve creditors seeking windfalls of hundreds of millions of dollars that employ their own experts to enthusiastically support the debtor's dismal asset values and income projections. As a result, huge valuation errors by the court, the result of deliberately misleading and biased financial projections by the debtor and creditors with self-serving agendas, are almost unavoidable.

"Despite Judge Lynn's best efforts, it will be virtually impossible to predict how the stock market will value Mirant's new stock following confirmation of a bankruptcy plan," Sammons said. "My plan presents a guarantee that value will be distributed among creditors by the ultimate appraiser, the stock market. Rarely does the price of justice come at such a bargain price."

Though Sammons anticipates that certain creditor groups might object to waiting an average of 3.7 months for full payment in cash or stock following plan confirmation, he argues the debtor's enhanced ability to reach a consensual plan of reorganization will ultimately result in creditors receiving payment more quickly than they would under the current system. His research indicates that Mirant may remain in bankruptcy for at least another 20 months without a consensual POR given the size and complexity of the bankruptcy.

Sammons, an attorney and CPA, owns more than 300,000 shares of Mirant common stock. He retired several years ago from his position as an investment banker after having worked for Merrill Lynch, Stephens Inc., and First Southwest Company.

A copy of Sammons' motion can be obtained at (http://pacer.psc.uscourts.gov/ [case #: 03-46590, docket #: 9203]). The motion illustrates how Sammons' proposal can be applied in Mirant's bankruptcy case.