US and UK Tender Offers, Exchange Offers, and Other Out-of-Court Restructurings

This chapter examines several options available to financially troubled companies in connection with out-of-court restructurings in the US and the UK, and provides practical guidance for each option. Specifically, we discuss tender offers, exchange offers and amendments of outstanding debt securities, including the use of exit consents, and their use in conjunction with prepackaged or prearranged bankruptcies in the US. We also discuss the principal legal framework surrounding bond repurchases, issues relating to such repurchases, and the liability management strategy of combining the consensual nature of the tender offer with an exit consent in the UK.

Introduction

As we said in the introduction to the first edition, and as continues to be the case, two systems of law dominate the world debt markets—English law and New York law. Any company of any size, from pretty well anywhere in the world that is looking to raise finance, will find itself heading either to London or New York capital markets and the debt instruments that it then enters into will be governed by the laws of one or other of these jurisdictions.

Restructuring Issues in Energy, Shipping, and Insurance Companies

During the last few years, restructuring professionals have been faced with new and unique situations in industries that do not fit into well-established restructuring frameworks. As this book goes to press, companies in the energy, shipping, and insurance sectors are experiencing unprecedented levels of distress and charting new territory in the restructuring world. In the chapter that follows, we review some of the salient issues that restructuring professionals should study when wading into these new areas of the law, with the caveat that these topics are evolving in real-time as we write these words.

Private Equity and Distressed Debt Funds Emerging Role in Preventing and Participating in Restructurings

Private equity (‘PE’) investment and distressed debt investment covers a wide range of investment activity by pooled investment vehicles (ie, funds) in privately or publicly (through ‘take-private’ transactions or IPO’s) owned companies, using capital raised from institutional investors that are limited partners of the funds. Such investment activity can be broadly categorized according to the point at which the investment is made within the typical development cycle of a company: (i) initial venture capital provides seed capital for start-up businesses; (ii) growth capital assists early-stage companies with the growth of their operations; (iii) mezzanine financing, comprising the contribution of subordinated debt or preferred equity, provides further capital to more established businesses; (iv) leveraged buyouts (‘LBOs’) are pursued to acquire portfolio businesses with a proven track record of sales and financial performance; and (v) distressed debt investing (the focus of this chapter) which provides support to companies that are in financially precarious positions.

Emergency Sales in the US and the UK

Any business that relies on confidence in its financial position, its brand name or goodwill, talented (but mobile) employees, or short-term contracts with customers or counterparties will be particularly hard hit by suggestions that it is or may soon be experiencing financial distress. Businesses of this type have been likened to ‘melting ice cubes’—once exposed to the heat of potential insolvency, value in the business melts away rapidly as customers and counterparties look to terminate relationships, key employees look to exit, and the goodwill and brand name of the business become tarnished. The catastrophic and rapid collapse during 2008 of famous Wall Street and the City of London names illustrated this in dramatic fashion, but businesses of almost every type will suffer negative effects once financial difficulties become more widely known.

Employees and Trade Unions

At first blush, the UK and US case law and statutory regimes that are applicable in insolvency to employees and the unions that represent them appear to be quite different. However, a more thorough review reveals that the goal in both jurisdictions is the same: to reduce the harsh impact of insolvency on those who are usually the least at fault for the subject company’s predicament’its employees. Indeed, among other similarities, both systems provide for priority in right of payment for a portion of the compensation due employees, have stringent notice requirements in the event of termination or rejection of collective bargaining agreements, and require information sharing and good faith negotiations. The underlying objective of each system is to level the playing field and to incentivize the employer and the employees to reach a consensual solution to avoid the risks and burdens mandated by each regime. Whether the legislators, administrators, and jurists in either jurisdiction have gone too far or not far enough in developing tools for one side or the other will depend on the reader’s perspective.

Giving Effect to Debt Compromise Arrangements–Binding The Minority or out of The Money Classes of Creditors

When it comes to remedies at a pre-insolvency proceeding stage, it can be said that England and the US are two countries separated by a common law. In particular, the hardening of common law and equitable rules into clear statements that could be set out in a text book in the nineteenth century in England does not appear to have been replicated to the same extent in the US. England has a strict system of precedent and very clear notions of equitable doctrines and statutory interpretation, whereas the US has a looser approach.

Tax Issues in Restructuring

A company engaged in the modification or restructuring of its debt, or simply the buying back of its debt, should carefully consider the tax implications. In some cases, even what seems like an innocuous action (as in the case of the US tax rules relating to modifications of debt) may have significant tax implications. In other cases, advance planning may yield more efficient structures, or otherwise ensure that taxes are properly factored into the decision-making process. Depending on the situation, the tax cost can take the form of current or deferred tax payments, the reduction or elimination of the company’s valuable tax benefits (such as net operating losses or tax basis), or other limitations on the company’s use of such tax benefits.

Arriving at a Compromise with, and identifying Key Stakeholders: Waivers, Amendments and Standstills, Participations, Debt Buy-backs, Intercreditor Agreements, and Make-Whole Provisions

In the context of a book on the law and practice of restructuring, waivers, amendments, and standstills are generally the paths of least resistance and, if no further procedures need to be pursued to reach the desired resolution, should be the preferred route to a successful consensual restructuring. They are the keyhole surgery alternatives to the more radical procedures discussed elsewhere in this work. For some companies they will be all that is required to enable a return to full health. For others, amendments, waivers, and standstills will be just a triage technique; a method of putting off or stabilizing the patient before the deep cuts needed can be made.

Duties of Directors and Management of Distressed Companies

When slightly modified, the oft-quoted statement from Hamlet, ‘This above all: to thine own [Corporation] be true …’ made by Polonius to his son, Laertes, before his departure to Paris states succinctly the principle underlying the laws of the UK and the US as to the fiduciary duties of company directors. That is to say, the interests of the company come first, ‘above all’ else, in business transactions.