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Intervention Energy: The Case Where the Golden Share Lost its ShineAuthored by: Michael H. Weaver
In connection with out-of-court restructurings, workouts and forbearance agreements, creditors often seek to include provisions that purport to limit the ability of a debtor to file for bankruptcy relief. However, bankruptcy courts generally are reluctant to enforce provisions in pre-petition agreements that interfere with a debtor’s rights under the Bankruptcy Code on public policy grounds. The enforceability of this type of provision was recently addressed by the United States Bankruptcy Court for the District of Delaware in In re Intervention Energy Holdings, LLC, 2016 Bankr. LEXIS 2241 (Bankr. D. Del. June 3, 2016).
EIG Energy Fund IV-A, L.P. (“EIG”) was owed more than $140 million by Intervention Energy Holdings (“IE Holdings”) and its wholly-owned subsidiary, Intervention Energy (“IE”), and the parties entered into a forbearance agreement (the “Forbearance Agreement”) in December 2015. The Forbearance Agreement required that EIG be admitted as a member of IE Holdings and receive one Common Unit (the other 22,000,000 Common Units were owned by Intervention Energy Investment Holdings, LLC) and that the Operating Agreement be amended to require approval of all common members in order to commence a voluntary bankruptcy. These enhanced provisions enabled EIG to hold a blocking position and what is commonly referred to as the “golden share”.
IE Holdings and IE (collectively, the “Debtors”) filed their voluntary petitions for relief under Chapter 11 on May 20, 2016 without first obtaining EIG’s approval. Four days later, EIG Energy Fund IV-A, L.P. (“EIG”) filed its motion to dismiss the bankruptcy filing on the basis that IE Holdings lacked the authority to file for bankruptcy relief pursuant to its Second Amended and Restated Limited Liability Company Agreement (the “Operating Agreement”).
The court noted the extensive line of cases supporting the “well settled principal [sic] that an advance agreement to waive the benefits conferred by the bankruptcy laws is wholly void as against public policy” and remarked that “contract[ing] away the right to seek bankruptcy relief is precisely what both parties have attempted to accomplish.”
Furthermore, the Court concluded that when a provision is inserted in an entity’s operating documents for the sole purpose of placing in “the hands of a single, minority equity holder the ultimate authority to eviscerate the right of that entity to seek federal bankruptcy relief, and the nature and substance of whose primary relationship with the debtor is that of creditor – not equity holder – and which owes no duty to anyone but itself in connection with an LLC’s decision to seek federal bankruptcy relief, [it] is tantamount to an absolute waiver of that right, and…is void as contrary to federal public policy.” Consequently, the court found that the Debtors possessed the requisite authority to commence their chapter 11 cases and denied EIG’s motion to dismiss.
The Intervention Energy holding highlights the challenges creditors face and issues they should consider when negotiating the terms of forbearance agreements. It also takes some of the shine off of the golden share.