Locking Up Votes: Providing Meaningful Disclosure and Later Outs in Lockup Agreements

Tyge Duffy

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff

Section 1125 of title 11 of the United States Code (the “Bankruptcy Code”) provides the foundation for postpetition disclosure and solicitation of votes.[1] Plan Support Agreements (“PSAs”) or Restructuring Support Agreements (“RSAs”) are agreements negotiated prepetition by debtors and creditors pursuant to which they pledge to support a plan.[2] These agreements are supported within the Bankruptcy Code and are further encouraged under applicable case law.[3] Other prepetition agreements, such as impermissible lockup agreements, are contrary to section 1125 and cannot be enforced.[4]

The United States Bankruptcy Court for the Southern District of New York (the “Court”) in In re GOL Linhas Aéreas Inteligentes S.A. recently refused to enforce a lockup provision in the debtor’s plan, because the plan lacked “anyadequate information” required by Bankruptcy Code section 1125 and did not provide any conditions to terminate the agreement.[5]

The Debtor, GOL Linhas Aéreas Inteligentes S.A. (“GOL” or the “Debtor”), a Brazilian aerospace company, filed chapter 11 bankruptcy in January 2024.[6] In March and April, the Debtor filed motions seeking approval of agreements and stipulations with lessor counterparties to support any plan later filed by the Debtor as long as that plan supported the terms of the stipulations.[7] These agreements between the lessor counterparties and Debtor, which “lock up” votes for the plan, constitute the “lockup provision.”[8]

Both the United States Trustee and the committee of unsecured creditors objected to the approval of these motions.[9] The committee of unsecured creditors argued that the lockup provision in which they must support any plan at a later date so long as it contains the provisions agreed upon, violated section 1125(b) of the Bankruptcy Code because it was an “impermissible solicitation of creditor votes at this stage.”[10] The committee argued (a) the lockup provision would impair the rights of other unsecured creditors, (b) the fact that the lockup provision was severable from the stipulations meant it was unnecessary, and (c) that trading consideration for a plan vote constituted bad faith.[11] The United States Trustee argued that the absence of a termination provision made this agreement impermissible and distinguishable from PSAs and RSAs.[12] The Debtor argued that the lockup provision was permissible because it was conditioned on the approval of a disclosure statement, the plan included the stipulations the parties agreed on, and the lockup provision did not contain a specific performance clause.[13]

The Court ultimately did not approve the lockup provision because the Debtor was months away from filing its disclosure statement.[14] The Court also concluded that it left the counterparties with no meaningful outs.[15] The Court differentiated this lockup provision, in which the creditors must “agree[] to vote for any plan that includes the settlement terms" with merely agreeing to settlement terms that "must be included in any plan.”[16]

RSAs are widely used and accepted in bankruptcy.[17]  Courts consider two policy objectives in analyzing RSAs: (1) whether adequate and accurate information is provided to the creditors; and (2) whether it encourages productive negotiations.[18] The Court evaluated three cases involving RSAs, establishing that legal RSAs exist when “informed creditors knowingly and rationally agree[] to a particular plan structure or features and sign[] onto an agreement that creates consensus and moves the case forward.”[19] PSAs, in contrast to RSAs, include “lockups” that bind creditors to vote in a particular way.[20] The majority view is that these lockups are not per se invalid.[21] Courts generally consider two factors with respect to PSAs: (1) whether there is sufficient information about the plan itself; and (2) whether creditors had a meaningful choice to either agree during negotiations or based on information that becomes available later.[22] Cases in which PSAs with lockups are not approved lacked information about the plan terms and any meaningful outs or options to rescind the agreements.[23] Cases in which PSAs with lockups are approved generally show that creditors had either meaningful information from disclosures, or the option to rescind the agreement later on.[24]

In order to successfully lockup any future votes to accept a plan of reorganization, a debtor must disclose meaningful information about the plan or provide for conditions under which the creditors can terminate the agreement later.  Otherwise, a debtor risks a finding by a court that its heavily negotiated agreement contains impermissible lockup provisions.