Lecture 10 (Notes by Leora Schiff) 15.649 - The Law of Mergers and Acquisitions (Spring 2003) - Prof. John Akula Bankruptcy Law I. Chapter 7 – liquidation II. Chapter 11 – reorganization a. Advantages i. Automatic stay – 1. prevents creditors from pursuing debt collection 2. only have to continue to pay secured debt ii. Protection from lawsuit iii. Get out of bad contracts 1. Kmart and leases – able to reject leases 2. American Airlines – threatening to get labor contract rejected b. Disadvantages i. Full financial disclosure c. UCC filing i. Uniform Commercial Code Article 9 – 1. scheme for secured transactions 2. rights of secured party as against other creditors of debtor 3. creditor can perfect its security interest by a. filing a CUU-1 Financial Statement. b. By possession of collateral c. By control ii. Secured creditor can have lien placed on debtor’s assets iii. No lender can “prime” a properly filed UCC d. Involuntary bankruptcy i. Requires 3 creditors to file ii. Secured creditors wouldn’t do – can get collateral e. Priority of Distribution i. Secured creditors 1. continue to be paid while company is in bankruptcy 2. oversecured (collateral worth more than debt); undersecured (worth less) 3. can ask for relief by getting collateral ii. Administrative fees for bankruptcy actions – legal 1. cost is huge iii. Priority creditors 1. wage claims 2. taxesiv. Unsecured – trade debt v. Bond holders vi. Equity f. Debtor in possession – DIP i. Can find new lender to provide funds to survive 1. superpriority position over other debtors – a. requires approval bankruptcy courts b. lien only on assets purchased after Chapter 11 g. Out of court workouts – negotiate with creditors to stave off bankruptcy h. Preferences and Fraudulent Transfer Claims i. Payments made to unsecured creditors within 90 days of going insolvent on pre-existing debt ii. Creditor can be sued to return payment i. Bankruptcy auctions - Liquidating under Chapter 11 i. can get company better deals – going concern ii. more control over auction process III. Reorganization process a. Plan of Reorganization i. Contract between creditors and debtor – dictates how pre-petition debt will be repaid ii. Broken down into classes 1. administrative 2. secured 3. trade 4. impaired – class will not receive all of its state-law rights (ex. Terms of repayment changed by the plan) iii. unasserted claims 1. Proof of claim – creditor files with court what’s owed 2. if creditor doesn’t file proof of claim, claim can be barred iv. Creditors Committee 1. committee of unsecured creditors 2. 2/3 of $ amount and majority of number of creditors voting need to vote to approve 3. debtors need impaired class to vote in favor a. if can get 1 impaired class that votes in favor, courts can cram down other impaired classes b. Disclosure Statement i. Document like prospectus 1. Business under bankruptcy 2. Projectionsc. Plan and disclosure statement filed at same time – both need to be accepted i. Once court approves, sent to creditors for a vote ii. Exclusivity period – 120 days post bankruptcy filing during which debtor has exclusive right to propose plan of