'SunEdison': A Powerful Reminder for Investors
In her Distress Mergers and Acquisitions column, Corinne Ball of Jones Day writes: The SunEdison case serves as an important reminder to investors that a company's publicly-reported equity value may not be indicative of the company's true value. But this case also raises questions as to whether the process employed was the best way to arrive at the ultimate result.
August 23, 2017 at 02:04 PM
9 minute read
On the day that the debtors in the SunEdison Chapter 11 case (Case No. 16-10992) (the debtors) filed for bankruptcy, they also moved to appoint an examiner. The debtors made this request because of, among other things, problems with the debtors' prepetition internal controls over financial reporting. Indeed, only several months prior to filing for Chapter 11 protection, the debtors reported equity value in the billions of dollars. Ultimately, however, the debtors withdrew their examiner motion and the attendant investigative responsibilities were largely deferred to the Official Committee of Unsecured Creditors (the Committee). Notably, the Committee never filed an official report on the debtors' value.
During the debtors' Chapter 11 case, the debtors continued to publicly report substantial equity value. Notwithstanding these figures, the court twice declined to appoint an equity committee and ultimately overruled shareholder objections to confirmation of the debtors' plan, which argued that the debtors were improperly funneling value that belonged to shareholders (who received nothing under the plan) to creditors, in violation of the absolute priority rule. In making these determinations, the court ruled that the debtors were “hopelessly insolvent,” basing that conclusion on the unreliability of the debtors' publicly-reported figures and on evidence that the debtors' debts far exceeded the debtors' market value.
The SunEdison case serves as an important reminder to investors that a company's publicly-reported equity value may not be indicative of the company's true value. But this case also raises questions as to whether the process employed was the best way to arrive at the ultimate result. Among other questions—given that the Committee took on a role that preempted an examiner, should the Committee have been required to provide a report on its conclusions regarding the debtors' value? And, if the Committee had filed such report, how much easier would it have been for the court to deal with frustrated equityholders? It will be interesting to see how such issues are handled as similar cases are filed in the future.
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