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The Insider’s Scoop: EFH Bidding Procedures Approved But Significant Modifications Necessary To Cure Fundamental Flaws
Upon commencement of this mega-chapter 11 case, the Debtors filed and pursued assumption of a restructuring support agreement (“RSA”), which contemplated, among other things, the tax-free spinoff of the Debtor entities that control the economic interest in their non-debtor affiliate, Oncor, a company that provides residential and commercial electricity in Texas and has been estimated by the Debtors to be worth as much as $18 billion. Over the summer, however, the Debtors were forced to abandon the RSA when certain bidders offered more value than was to be provided under the RSA transactions.
Post termination of the RSA, the Debtors sought approval of bidding procedures and schedule an auction (the “Motion”) for the sale of the reorganized equity in the Debtors’ parent, EFH, pursuant to a similar tax-free spinoff structure contemplated in the RSA. Due to competitive industry conditions, the Debtors alleged that a normal bankruptcy auction process would not maximize the value of the Debtors’ assets and, therefore, they put together bidding procedures that contemplated two rounds of bidding. Round one consists of private bidding for the right to be the stalking horse purchaser, and round two consists of an open auction. Their plan was to consummate the sale by March 2015, which would be tied into a plan of reorganization to be confirmed by the end of 2015. Four notable parties objected to the Motion: (i) the TCEH committee of unsecured creditors; (ii) an ad hoc group of TCEH unsecured noteholders; (iii) Wilmington Savings Fund Society, trustee for TCEH second lien notes; and (iv) Delaware Trust Company, indenture trustee for EFIH first lien notes. After a four-day evidentiary hearing, the Honorable Christopher S. Sontchi ruled that he would grant the Debtors’ Motion subject to certain significant conditions and modifications.
As a preliminary matter, the Court rejected the notion that it does not have jurisdiction to consider procedures for the sale of non-debtor assets, i.e., the equity in Reorganized EFH, finding that the right to enter into a contract that will serve as a basis for a proposed plan of reorganization is well within the confines of Bankruptcy Code section 363(b). However, the Court agreed with certain objectors that no greater deference should be afforded to the Debtors for seeking Court approval of the bidding procedures before entering into an agreement with a stalking horse purchaser. In the Court’s view, the bidding procedures must be scrutinized by the Court regardless of the timing, and especially in this case where most of the bidding will occur prior to the selection of the stalking horse, creditor and Court involvement is important.
The Court held that the Debtors exhibited flawed corporate governance due to its sparse records of board meetings and lack of any formal board approval. Thus, in order to alleviate these concerns, the Court required every Debtor-board to follow a more formal process, and for only the independent directors of the boards of TCEH and EFIH—where actual conflict of interest exist—to vote on the bidding procedures. Second, the Court found that the bidding procedures lacked transparency by the exclusion of all creditor involvement. While the Debtors’ proffered expert has significant M&A experience, he has in effect no restructuring or bankruptcy experience, which the Court attributed to the Debtors’ bidding procedures being inconsistent with those typically seen in bankruptcy. The Court required creditor involvement via the participation of the two official creditor committees on a real-time basis including the ability to communicate directly with bidders. Third, the Court required any material modifications to the bidding procedures to be consented to by both committees or approved by the Court. The Court found that the “cart blanche” and “unfettered” discretion to modify the bidding procedures that the Debtors reserved to themselves to be “offensive.” Finally, Judge Sontchi held that the timelines of the bidding process must be stretched out in order to give all potential bidders more time to put together alternative transactions geared toward maximizing value.
As with most bidding procedures, the Court declined to comment or rule on the substance of the Debtors’ proposed course of action finding that, especially during the period of continued exclusivity, the Debtors’ reorganization strategy should be afforded deference. The Court did, however, urge the parties to begin plan negotiations sooner rather than later.
Check back with Delaware Bankruptcy Insider for more important updates from this case as well as others.
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