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August 19, 2019 – An ad hoc committee of the Debtors' equity security holders (the “Equity Committee”) objected [Docket No. 561] to the adequacy of the Debtors' Disclosure Statement, citing the lack of any credible valuation efforts on the part of the of the Debtors and arguing that the intentional shortcoming is a "sleight of hand" being used to over-protect creditors and cheat equity holders. The Equity Committee points to recent 10-Qs as indicative of value that should be leftover for equity; indeed even the Debtors' May 11, 2019 Petition notes estimated assets of $2.9bn and and estimated liabilities of $1.9bn. Why then, the Equity Committee asks, do the Debtors offer up nothing better than a "$1.25 billion Settlement Purposes Only Valuation" a number with "no basis in fact"?
The objection states, “From the standpoint of whether the Disclosure Statement provides ‘adequate information’ to all interested parties, including shareholders, the most fundamental defect concerning the Disclosure Statement and the Plan, is the sleight of hand which is being used to under-value the Debtors’ business. Valuation is the pretext behind the elimination of all equity interests in the Debtors.
Chapter 11 was not conceived as a device to enable a debtor to evade its fiduciary duties and wipe out the interests of its shareholders in violation of applicable law. This Court should not countenance unlawful and inequitable conduct which perverts the beneficial and economically necessary policies of the Bankruptcy Code into a vehicle that allows debtors and certain creditors with a bare, unsupported valuation number that is only for settlement purposes to wipe out the Existing Equity interests of investors who have relied upon the Debtors’ multiple public filings in which a healthy and viable business with substantial Existing Equity was presented. As will be demonstrated below, the Debtors’ Disclosure Statement should not be approved for three reasons:
- There is no legitimate reason to truncate the Disclosure Statement approval process in the form of a ‘conditional approval’ except to force the Equity Committee to address the key issue of valuation in these cases without the necessary time and tools. Indeed, the Debtors have posited a valuation number for ‘settlement purposes only’ (the ‘Settlement Purposes Only Valuation’), which, by its own definition, can be used for no other purposes, and the Debtors have provided no substantiated valuation. The only stated basis for the expedited process is the significant administrative expenses being incurred monthly in these cases, which, while of concern, is the same in every sizeable case around the country. Incurrence of administrative expenses alone is not sufficient basis to limit the procedural protections provided under the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure for approval of disclosure statements and confirmation of chapter 11 plans.
- The Disclosure Statement fails to provide the requisite information necessary for parties to vote on and/or object to the Plan. Crucial to this Plan and the interests of Existing Equity, is the valuation of the Debtors. There is no such valuation in the Disclosure Statement; there is merely the $1.25 billion Settlement Purposes Only Valuation, a number provided only for settlement purposes and with no basis in fact. It cannot be that a Plan that proposes to wipe out Existing Equity provides in the accompanying Disclosure Statement only a valuation number and no basis for such valuation. Similarly, without an actual valuation of the Debtors, the Disclosure Statement fails to disclose the value of the stock in the Reorganized Debtors (the ‘Reorganized Equity’) that will be distributed to certain administrative creditors and classified creditors in partial or full satisfaction of their clams pursuant to the Plan, which creates the potential that such creditors are being overpaid on their claims in violation of the absolute priority rule. In addition, the Debtors fail to disclose the consolidated securities class action and other litigation that was commenced against the Debtors prepetition that has a direct impact on claims and the third party releases proposed under the Plan and discussed below.
- Finally, the Disclosure Statement does not explain why, prior to the filing of the Chapter 11 cases, the Debtors failed to pursue efforts to pursue additional financing that was offered, failed to dispose of certain assets, failed to sell certain assets, and entered into certain sale transactions at a loss, prior to promoting a Plan that extinguishes Existing Equity.
Indeed, nowhere in the Debtors’ Disclosure Statement do the Debtors provide any credible explanation as to the cataclysmic evaporation of the value of Existing Equity between: (1) the Debtors’ September 2018 10Q filed with the Securities and Exchange Commission (the ‘SEC’), wherein the Debtors stated that, as of September 30, 2018, the Company had (a) $2.860 billion in assets, (b) $1.885 billion in liabilities, and, therefore, (c) $975 million in value for Existing Equity, (2) the Debtors’ December 2018 10Q filed with the SEC, wherein the Debtors stated that, as of December 31, 2018, the Company had (a) $2.731 billion in assets, (b) $1.854 billion in liabilities, and, therefore, (c) $877 million in value for Existing Equity, versus (3) the position the Debtors took in their Disclosure Statement and Plan, in which they claimed there would be no recovery for Existing Equity. Thus, the Debtors base their Plan on their contention that over $850 million of value simply evaporated within six (6) months of filing for Chapter 11.”
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