'Delphi' May Encourage Formation of Equity Panels

While the appointment of a creditors’ committee is required in every chapter 11 case, equity committees are not.[FOOTNOTE 1] In fact, they “should be the rare exception.”[FOOTNOTE 2] Yet, recently, in In re Delphi Corp., et al.,[FOOTNOTE 3] the court directed the appointment of an equity committee — the expense of which will be borne by the Delphi estate — despite the rigorous objections of Delphi Corp., the U.S. Trustee, the Creditors’ Committee and General Motors. Interestingly, the request was made by Appaloosa Management L.P., a 9 percent shareholder of Delphi that had acquired its interest after the commencement of the case. Delphi joins Adelphia, Mirant and Kmart as recent cases with equity committees.[FOOTNOTE 4] In contrast, courts declined to direct the appointment of equity committees in Conseco, UAL, Worldcom, Global Crossing, Enron, and Pacific Gas & Electric.[FOOTNOTE 5] Factors courts consider in determining whether to appoint an equity committee include: (i) whether the interest of shareholders are otherwise adequately represented, (ii) the debtor’s solvency and the prospects for a meaningful distribution to equity, (iii) the complexity of the case, (iv) whether the stock was widely held and actively traded, (v) timeliness, and (vi) the balance between concerns for adequate representation and the cost to the estate.

Each of these major cases, including the six in which equity committees were denied, was complex and involved equity that was widely held and actively traded pre- and post-bankruptcy. Hence the distinguishing factors among cases in which equity committees were appointed and those in which they were not must be one or more of solvency, timeliness or adequate representation. While the few decisions on this subject are not clear, it is also likely that these factors are assessed in the context of the limited protections accorded equity under the Chapter 11 plan confirmation process. Because the absolute priority rule of Chapter 11 permits a plan to be “crammed down” upon a dissenting class if no junior class is receiving or retaining value under the plan, equity is particularly vulnerable to a “cram down,” provided that no class of creditors has received more than payment in full on account of their claims. Absent a negotiated result with creditor consent, recovery for equity depends upon whether the creditors’ claims exhaust the reorganized debtor’s value. Thus, one can appreciate why timing of the request for appointment of an equity committee, the solvency of the debtor, and adequate representation of equityholders in the chapter 11 process are key factors.