Bankruptcy Code Violation: Lockup Provision in Settlement Agreement – Detailed Analysis
Chapter 11 of the Bankruptcy Code is founded on the principle that stakeholders should have access to relevant information to make informed decisions regarding the acceptance or rejection of a chapter 11 plan. The Code mandates that any solicitation of votes for or against a plan must be accompanied by a disclosure statement approved by the bankruptcy court, outlining the case background and key plan provisions. Votes solicited outside this process may be disallowed.
While the Code prioritizes disclosure and vote solicitation requirements, courts interpret the term “solicitation” narrowly to encourage communication and negotiation between debtors and stakeholders. In some instances, debtors and stakeholders may enter into agreements before a disclosure statement is approved, with conditions for supporting a plan.
A recent case in the U.S. Bankruptcy Court for the Southern District of New York, In re GOL Linhas Aéreas Inteligentes S.A., addressed the approval of a global settlement with aircraft lessors. The court rejected an impermissible lockup provision obligating lessors to support any future chapter 11 plan that mirrored the settlement terms. The court emphasized the importance of the disclosure and vote solicitation process, ruling that the provision did not meet the required standards.
Solicitation and Disqualification of Votes on a Chapter 11 Plan
Section 1125(b) of the Bankruptcy Code mandates that votes for a chapter 11 plan can be solicited postpetition only after stakeholders receive a court-approved disclosure document with adequate information. Violations of this section can result in disqualification of votes under section 1126(e), which is considered a drastic remedy with a heavy burden of proof.
The definition of “solicitation” remains unclear, with courts generally interpreting it narrowly to avoid inhibiting creditor negotiations. Most courts agree that solicitation should be limited to the formal polling process involving disclosure statements and ballots, rather than chilling postpetition negotiations.
RSAs, PSAs, and Lockup Agreements
RSAs and PSAs have been generally accepted by courts as compliant with the Bankruptcy Code’s solicitation requirements, as they provide a framework for plan confirmation and allow signatories to withdraw support under certain conditions. However, postpetition lockup agreements have been scrutinized, with some courts deeming them violations of the Code.
In the case of In re GOL Linhas Aéreas Inteligentes S.A., the bankruptcy court rejected a lockup provision in settlement agreements, citing the lack of adequate information about plan terms and the absence of meaningful choices for signatories. The court emphasized that such provisions undermine creditor rights and violate the Code’s disclosure requirements.
Outlook
The GOL Linhas case highlights the evolving jurisprudence surrounding RSAs, PSAs, and lockup agreements in chapter 11 cases. While these agreements can aid in plan confirmation, they must adhere to disclosure and vote solicitation standards. The utility of such agreements and the sophistication of parties involved are relevant factors, but they cannot override the Code’s requirements.
In conclusion, the case serves as a reminder of the importance of transparency and fairness in bankruptcy proceedings, emphasizing the need for clear communication and informed decision-making among stakeholders. As the landscape of bankruptcy law continues to evolve, adherence to the Code’s principles remains paramount for successful restructurings.
Overall, the GOL Linhas case sheds light on the complexities of bankruptcy proceedings and underscores the critical role of proper disclosure and vote solicitation in ensuring equitable outcomes for all parties involved.