Golden Share May Not Be A Golden Ticket Out of Bankruptcy
By Michael Enright
A bankruptcy court in Delaware recently weighed in on the ongoing controversy over whether special shareholder approval mechanisms for authorization of a bankruptcy filing actually work to prevent a filing that is not in compliance with the agreed conditions. In the Chapter 11 case of Pace Industries, LLC (In re Pace Industries, LLC, Case No. 20-10927) on May 5, 2020, the court denied the motion of Macquarie Septa (US) I, LLC to dismiss the case, holding that doing so would deprive the debtors of their constitutional right to file for bankruptcy relief. Macquarie held preferred stock, and was not a creditor. The certificate of incorporation of the company was amended at the time of issuance of the preferred stock to require a majority vote of the preferred stock to authorize a bankruptcy filing. Macquarie’s motion to dismiss was based on the debtors’ failure to obtain that majority approval. The court declined to follow a recent decision from the Fifth Circuit Court of Appeals on relatively similar facts, stating from the bench that a minority shareholder had no more right to block the company from exercising its rights to file a bankruptcy petition than a creditor does. The court also noted that applicable corporate law creates duties owed by the preferred shareholder in that position, and those duties needed to be observed. The law in this area remains unsettled, and bears watching.