Filing for bankruptcy, golden shares and the business judgment rule

Filing for bankruptcy, golden shares and the business judgment rule

Is a provision that gives a creditor/shareholder the ability to prevent a corporation from filing for bankruptcy valid?

Franchise Services of North America, Inc. was incorporated and registered in Canada in 1998. Through its subsidiary companies, FSNA was in the business of renting automobiles at over 650 locations, including 25 airports. In 2012, a subsidiary company of Macquarie Capital (USA), Inc., Boketo LLC, became a 49.76% shareholder of FSNA. The shares that Boketo held in FSNA were so-called (series A) preferred stock; by its 49.76% shareholding, Boketo became the largest single shareholder of FSNA. The purpose of this investment by Boketo in FSNA was to make it possible for FSNA to acquire in 2013, via a merger Adreca Holdings Corporation, an affiliate of Macquarie. FSNA, having acquired Andreca, was then re-domiciled as a Delaware corporation. In the meantime, FSNA owed a large amount of money to Macquarie in terms of a ‘Financial Advisory Fee’ and an ‘Arrangement Fee’.

In 2017, FSNA filed for bankruptcy under the U.S. Bankruptcy Code. In appeal, the case was decided by the United States Bankruptcy Court for the Southern District of Mississippi on 18 December 2017. Macquarie, supported by Boketo, filed a motion to the extent that FSNA’s request for bankruptcy should be dismissed. FSNA and Boketo argued that the board of directors of FSNA did not have proper authority to file for bankruptcy, because the board had ignored the so-called ‘golden shares’ or ‘blocking provisions’ that were contained in FSNA’s certificate of incorporation. Under article 4(j) of FSNA’s certificate of incorporation, the corporation was not allowed, ‘without first obtaining the written consent or affirmative vote of (i) the holders of a majority of the shares of Series A Preferred Stock then outstanding, voting separately as a class’ to ‘effect any Liquidation Event’. This provision, as the court noted, implied that ‘if § 4(j) is valid and enforceable, Boketo would have to approve the filing of a bankruptcy petition’. This was an issue that had to be resolved under Delaware law, as FSNA was now registered in the State of Delaware.

On this matter, the court concluded as follows:

‘A review of the case law shows that a golden share/blocking provision will be invalid and contrary to federal public policy if it is in the hands of a creditor. If a substantial equity owner holds such a provision, however, the golden share/blocking provision will be enforced. At the time the petition was filed, the Macquarie Parties clearly were creditors of the Debtor. Consequently, to the extent they claim a golden share/blocking provision under § 4(j), that provision is contrary to federal public policy and is not enforceable. Boketo, however, is a substantial equity owner and not a creditor. Therefore, § 4(j) is valid and enforceable unless contrary to Delaware law.’

This decision can be understood against the backdrop that, as the court noted (referring to existing case law) that as regards ‘golden shares or blocking provisions, either provision will be upheld as valid if it is held by an equity holder. If either provision is held by a creditor, however, the provision will be void as a matter of public policy’.

To this, the court added that, at the time article 4(j) of FSNA’s certificate of incorporation was introduced and accepted by the board of directors of FSNA, under Delaware law in accordance with the so-called business judgment rule, ‘the Court will presume that when the FSNA Board agreed to add § 4(j) to its Certificate of Incorporation, the FSNA Board “acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.”’

This decision can be understood against the backdrop that, as the court noted (referring to existing case law) ‘“The business judgment rule, […], combines a judicial acknowledgment of the managerial prerogatives that are vested in the directors of a Delaware corporation by statute with a judicial recognition that the directors are acting as fiduciaries in discharging their statutory responsibilities to the corporation and its shareholders.”’

However, in a further decision of 17 January 2018, the Bankruptcy Court granted a request by FSNA for an appeal to the United States Court of Appeal for the Fifth Circuit.

The decisions of the Bankruptcy Court can be found at: www.mssb.uscourts.gov, judges/opinions, opinions, judge Ellington, 12/18/2017 and 01/17/2018.


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