PHI, Inc. – Equity Committee Objects to Debtors’ Disclosure Statement, Alleging Preferential Treatment of Controlling Shareholder and “Cataclysmic” $700.0mn Undervaluation of Debtors’ Estates

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June 3, 2019 – The Debtors' Official Committee of Equity Security Holders (the “Equity Committee”) objected viscerally [Docket No. 605] to the Debtors’ Disclosure Statement, citing numerous structural and informational deficiences, but saving special scorn for: (i) the Debtors’ willingness to give its controlling shareholder, Al Gonsoulin, the exclusive right to purchase a substantial interest in the Reorganized Debtors’ stock and (ii) "any credible explanation as to the cataclysmic evaporation of value" of the Debtors' estates between the end of 2018 and the filing of the Debtors' Chapter 11 Petitions. As to the latter point, the Equity Committee takes particular issue with Houlihan Lokey's valuation efforts in what they see as sleight of hand that has erased $700.0mn of potentially recoverable value.

The objection states, “Chapter 11 was not conceived as a device to enable a controlling shareholder to evade his fiduciary duties and wipe out the interests of all other shareholders in violation of applicable corporate law. Nor was Chapter 11 conceived to allow a controlling shareholder, during the period of exclusivity, to ‘purchase’ a substantial interest in the stock of the reorganized debtor, without (1) subjecting his proposed acquisition to a market valuation and (2) allowing shareholders, who would otherwise receive nothing under his plan, the opportunity to share in such acquisition. 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 corporate insiders to achieve personal objectives at the expense of investors who have relied upon multiple public filings which presented a healthy and viable business with substantial equity.

As will be demonstrated below, PHI’s proposed Chapter 11 Plan (defined below) cannot be confirmed, as a matter of law, for three reasons: 

(a) The Plan violates Louisiana corporate law by allowing the Debtors’ controlling shareholder, Al Gonsoulin (‘Gonsoulin’) the exclusive right to purchase a substantial interest in the Reorganized Debtors’ stock without allowing other shareholders, whose interests are being nullified under the Plan, an opportunity to participate in that acquisition and, accordingly, the Plan fails to satisfy the requirement of section 1129(a)(3) 

(b) The  Plan  fails  to  satisfy  the  criteria  for  “cramdown”  set  forth  in Bankruptcy Code section 1129(b)(2)(C)because, inter alia, it:   because, inter alia, it: 

  • (1) violates the absolute priority rule as interpreted and applied by the United States Supreme Court in North Lasalle, 
  • (2) provides for a Class senior to equity (Thirty Two LLC’s Class 2 Claim) with a distribution of potentially more than 100 percent of the value of its claim, and 
  • (3) is not “fair and equitable” and “unfairly discriminates” between equity holders;

(c) The Plan provides for extensive third party releases, under conditions which are not permitted in the Fifth Circuit and which are prejudicial to shareholders who do not receive ballots and, therefore, cannot ‘opt out’ of the releases."

The objection saves particular scorn for Houlihan Lokey's valuation efforts, accusing the Debtors and Houlihan Lokey of "sleight of hand" that magically disappears $700.0mn of potential estate value. The objection continues:

"Further, from the standpoint of whether the Disclosure Statement provides ‘adequate information’ to all interested parties, including shareholders, none of the foregoing issues presents what is perhaps the most fundamental defect concerning the Disclosure Statement and the Plan, which is sleight of hand that is being used to under-value the Debtors’ business. Valuation is the pretext behind the elimination of all equity interests in the Debtors and for the Debtors’ controlling shareholder to use his secured claim as currency to acquire a substantial interest in the Reorganized Debtors.

Indeed, nowhere in the Debtors’ lengthy Disclosure Statement do the Debtors provide any credible explanation as to the cataclysmic evaporation of value between (1) December 31, 2018, when the Debtors’ Annual Report represented that its business had a positive equity value of $473 million, (2) May 9, 2019 when the Debtors filed their SEC Form 10Q, in which they represented that, as of March 31, 2019, the Debtors had a positive equity value of $439 million versus (3) the position the Debtors took when they filed their First Amended Joint Plan of Reorganization on May 17, 2019 [Docket No. 495] (the ‘Plan’), in which they claimed to be insolvent by at least $300 million. Thus, the Debtors base their Plan on their contention that $700 million of value evaporated within four (4) months of filing for Chapter 11. 

Indeed, the Houlihan Valuation is particularly unreliable as a justification for providing no recovery to equity holders. Throughout its report, Houlihan reiterates that its valuation: (1) does not reflect the market value at which any of the Debtors’ assets could be sold or liquidated, (2) is not an opinion as to the fairness of the restructuring transaction embodied in the Plan, and (3) is based entirely on the Debtors’ projections which Houlihan admits it has not verified—but on which it has relied in calculating enterprise value, using a formula based on projected EBITDA…The Disclosure Statement fails to disclose the percentage of common stock of the Reorganized Debtors that will be distributed to each of the Classes that will be receiving stock pursuant to the Plan, or the Reorganization Value of the stock to be allocated to each Class. 

Therefore, there is no way for parties in interest to know, among other things, the percentage of stock ownership of the Reorganized Debtors which will be allocated to Thirty Two, Gonsoulin’s entity, or the value of that stock, and whether Thirty Two may be acquiring more value than the amount of its claim. The Disclosure Statement does not explain why the opportunity to purchase stock of the Reorganized Debtor was not given to all shareholders, as opposed to having been given exclusively to the controlling shareholder, contrary to the requirements of Louisiana law. The Disclosure Statement does not explain why, in September 2018, prior to the creation of the Special Restructuring Committee of the Board, when Thirty Two acquired the senior debt of Whitney Bank, the Debtors did not offer the opportunity to all shareholders, as opposed to Gonsoulin exclusively, contrary to the requirements of Louisiana law. The Disclosure Statement does not explain why the Debtors refused, and continue to refuse, to conduct a robust M&A process during their Chapter 11 cases, prior to promoting a Plan that extinguishes equity.”

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