March 16, 2017

Testing Management Valuation When Something Doesn’t Smell Right

Curtis S. Miller and Jose F. Bibiloni – March 16, 2017

This article explores equity committee formation and methods used by bankruptcy courts to limit the costs of appointing an additional statutory committee, and it questions whether the appointment of equity committees resulted in increased returns for equity holders in two recent bankruptcy cases: In re Horsehead Holding Corp. and In re Energy XXI.

In 2016, equity security holders frequently sought the appointment of equity committees in Chapter 11 bankruptcy cases, especially in cases involving energy companies. Equity committees represent the interests of equity holders, or the stockholders, of a debtor in a Chapter 11 case. However, the Bankruptcy Code does not mandate the appointment of an equity committee, unlike the appointment of official committees of unsecured creditors. See 11 U.S.C. §§ 1102(a)(1)–(2). Congress provided for the appointment of equity committees

to counteract the natural tendency of a debtor in distress to pacify large creditors, with whom the debtor would expect to do business, at the expense of small, scattered public investors. A fair and equitable reorganization was viewed as the last clear chance to conserve for [equity security holders] values that corporate financial stress or insolvency have placed in jeopardy.

Heather Lennox et al., American College of Bankruptcy, Best Practices Report, Formation, Function & Obligations of Equity Committees in Chapter 11, at 2 (2011) (internal citations omitted).

This article examines equity committee formation and methods used by bankruptcy courts to limit the costs of appointing an additional statutory committee, and it queries whether the appointment of equity committees in these cases resulted in increased returns for equity holders. It explores this question through an examination of two bankruptcies in which equity committees were appointed: In re Horsehead Holding Corp. in the District of Delaware and In re Energy XXI in the Southern District of Texas.

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