The Issuance of Securities by a Chapter 11 Debtor
| Publication year | 1989 |
| Pages | 465 |
| Citation | Vol. 18 No. 3 Pg. 465 |
1989, March, Pg. 465. The Issuance of Securities By a Chapter 11 Debtor
The Securities Act of 1933, as amended(fn1) ("Securities Act"), requires that, in the absence of an exemption, an issuer satisfy certain registration and prospectus delivery requirements, before any offer or sale of securities.(fn2) Chapter 11 of the Bankruptcy Reform Act of 1978(fn3) ("Bankruptcy Act") recognizes that most reorganization efforts require the issuance of new securities in order to effect the reorganization. The flexibility of the debtor to formulate a plan of reorganization would be restricted by the issuance and resale limitations imposed by the Securities Act, while the value and marketability of the securities issued is determined in large part by their liquidity.(fn4)
Therefore, in addition to and, in certain circumstances, in lieu of, the registration requirements and exemptions set forth in the Securities Act,(fn5) the Bankruptcy Act specifically sets forth certain provisions designed to exempt or modify the application of the Securities Act, as well as the Trust Indenture Act of 1939, to certain issuances of securities in Chapter 11 cases.(fn6)
Except by virtue of the express preclusions in §§ 3(a)(9) and (10) of the Securities Act, no provision of the Bankruptcy Act or the Securities Act prevents a Chapter 11 debtor from reliance on any appropriate provision of the Securities Act for the issuance of securities.(fn7) Sections 3(a)(9) and (10) have been expressly repealed with respect to bankruptcy reorganization.(fn8) However, with the enactment of the Bankruptcy Act, Congress restricted the Securities Exchange Commission ("Commission") from interference in the organization proceedings. Congress also overrode the narrow interpretations imposed by the Commission on the issuance of securities under the prior Bankruptcy Act.(fn9)
The difficulty remains for the Chapter 11 debtor to navigate the complex waters of applicability or preemption of the Securities Act provisions, particularly with respect to subsequent resales of securities by creditors and investors who may be considered affiliates or underwriters under either or both Acts. This article provides a brief overview of the regulations governing the issuance of securities where the issuer is a Chapter 11 debtor.
In addition to the normal avenues of financing in compliance with the provisions of the Securities Act, the Bankruptcy Act and the Securities Act provide specific, limited exemptions from the registration requirements of the Securities Act for the purpose of financing a reorganization in bankruptcy. Section 3(a)(7) of the Securities Act provides an exemption from the registration and prospectus delivery requirements for so-called "trustee certificates."(fn10) These are certificates issued during reorganization by a receiver, a trustee or a debtor-in-possession in a case under title 11 of the United States Code, with the approval of the court.
The Bankruptcy Act expands the exemption substantially. Section 364(f) provides that, except in the case of an underwriter as defined in § 1145(b)(1), the registration and prospectus delivery requirements of the Securities Act, state and local laws and the provisions of the Trust Indenture Act of 1939 do not apply "to the offer or sale under this Section [§ 364] of a security that is not an equity security" (emphasis added).(fn11)
In addition to debt securities, the Bankruptcy Act exemption may extend to the issuance of debt securities convertible to equity because such securities are not included within the definition of "equity security" under § 101(15) of the Bankruptcy Act.(fn12) However, the clear meaning of the definition is clouded by an unrelated section of the legislative history of the Bankruptcy Act indicating that Congress considered the § 364(f) provision to mean any security that is "not an equity security or convertible into an equity security."(fn13) Further, while not expressly required, a financing under § 364 may require court approval, since it is likely to be an "out of the ordinary course of business" transaction.(fn14)
Both exemptions are intended to provide some measure of flexibility in financing the bankrupt estate through the reorganization process. Although the § 3(a)(7) exemption is clearly stated
in terms of a securities exemption, the Commission has indicated that it considers it to be only a transaction exemption.(fn15) A "securities exemption" eliminates any Securities Act registration and prospectus delivery requirements for securities issued in reliance on the exemption, as well as for subsequent resales by the original purchasers or subsequent holders.
This exemption contrasts with a "transaction exemption," which is available only for specific transactions (such as private offerings) and which does not exempt the securities from further compliance with the registration and prospectus delivery requirements of the Securities Act on resale. In addition, issuance of a security pursuant to a Securities Act exemption does not automatically mean that the security is exempt from compliance with state laws and regulations.(fn16)
The significant benefit represented by the Bankruptcy Act exemption is the breadth of the express exclusions conveying immunity from the registration requirements of federal, state and local regulations. However, the exclusion is a transaction exemption similar to that of § 3(a)(7). Moreover, the Bankruptcy Act exemption is more clearly defined for compliance.
The conservative approach to the vagaries of both statutes is to assume that both create transaction exemptions for the issuance of debt securities (which may be convertible to equity) and that the exemptions do not permit subsequent resales by a purchaser without compliance with the registration requirements of the Securities Act or without reliance on further exemption from such registration. It is important to understand that neither exemption provides a safe harbor from the civil and criminal liabilities of the Securities Act.(fn17)
The corporate advisor may consider the issuance of a debt security, creating an administrative claim against the estate, exchangeable on reorganization for reorganization securities.
Except with respect to underwriters, § 1145(a)(1) exempts from the registration and prospectus delivery requirements of the Securities Act the offer or sale under a plan of a security of the debtor in exchange for, or principally in exchange for, a claim against, interest in or a claim for an administrative expense in the case concerning the debtor.(fn18) Section...
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