Vol 16 (2019) - Issue 5

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A Bona Fide Equity Holder Can Exercise its Preemptive Voting Rights for a Bankruptcy Filing Even if it Also Holds Debt: But not in All Circumstances

Synopsis
A bankruptcy case under the US Bankruptcy Code ('Bankruptcy Code') provides that an 'entity that may be a debtor' may commence a voluntary case by filing a bankruptcy petition. The Bankruptcy Code, however, does not specify who may file a petition on behalf of a corporation – that is determined by state law. If the person filing the petition on behalf of the corporation lacks authorisation under state law to do so at the time of the filing, the bankruptcy court has to dismiss the petition. While contractual provisions prohibiting a bankruptcy filing have been generally found to be unenforceable, certain measures limiting the debtor's authority to commence a bankruptcy case have been enforced under certain circumstances.
In Franchise Services of North America, Inc. v Macquarie Capital (USA), Inc. (In re Franchise Services of North America, Inc.), 891 F.3d 198 (5th Cir. 2018), the Fifth Circuit ('Court') considered the following question: when the certificate of incorporation requires the consent of a majority of the holders of each class of stock, does the preferred shareholder lose its right to vote against (and therefore avert) a voluntary bankruptcy petition if it is also a creditor of the corporation? The Court ruled federal law does not strip a bona fide equity holder of its preemptive voting rights just because it is also a creditor. The Court pointed out, however, that the holding was limited to the facts presented in the case, and that the result may be different if a creditor held the right to prevent a bankruptcy filing and either had no equity stake in the company, or took an equity stake simply as a ruse to guarantee a debt.