A tender offer that might not be possible outside of bankruptcy court is permissible in the Third Circuit, as the result of a May 4 opinion stemming from the reorganization of Energy Future Holdings Corp., the giant Dallas-based power generator and distributor whose chapter 11 plan was confirmed in December but not yet implemented.
In a decision that “does not constitute binding precedent” under Third Circuit rules, the appeals court held that the tender offer proposed by Energy Future “clearly did not violate the Bankruptcy Code.” The opinion by Circuit Judge Patty Shwartz said the offer was not forbidden by any provision in the Bankruptcy Code.
The indenture trustee characterized the process as a tender offer because the company made the proposal to creditors before the procedure was approved by the bankruptcy court. Judge Shwartz said, “[I]t was simply a means to convey a settlement offer to certain creditors.” The offering materials were given to creditors without prior approval by the Securities and Exchange Commission.
Energy Future filed for reorganization in April 2014 and got bankruptcy court approval in June 2014 to settle with holders of two issues of first-lien notes issued by the subsidiary that owns 80 percent of the company’s regulated Oncor power-line business. In substance, the bankruptcy court approved procedures and the settlement itself after the company had solicited acceptances.
The settlement allowed Energy Future to pay off first-lien debt with 5 percent extra for holders who gave up claims for a so-called make-whole, a premium for investors when their bonds are paid off early. The settlement was financed with a $5.4 billion loan approved by the bankruptcy court at the same time.
The indenture trustee for one of the noteholder groups appealed and contended that the settlement was a coercive tender offer that would not pass muster outside bankruptcy and should not have been allowed in bankruptcy, either. The district court in Delaware upheld the settlement in February 2015 and was affirmed by the Third Circuit over the indenture trustee’s objection that the process established a precedent opening “a Pandora’s Box of coercive tender offers in chapter 11.”
Although approval of the offer by the bankruptcy court in advance “may be preferable where possible,” Judge Shwartz saw “no reason to hold that the order of events dictates whether a settlement achieved by a tender offer is fair and equitable.” She examined the standards for approving settlements and found that none were violated.
The indenture trustee also contended that the offer violated the “equal treatment” rule in Section 1123(a)(4) because one set of noteholders got a 62 percent recovery of the make-whole premium, while the return was only 25 percent for the other “identically situated” group.
Citing the Third Circuit’s Jevic opinion from last year, Judge Shwartz said that the absolute priority and equal-treatment rules “are not categorically applied in the settlement context.” A certiorari petition in Jevic is pending in the Supreme Court.
Even though the bankruptcy court could have approved a settlement with unequal treatment if there were “adequate reason for doing so,” the appeals court said that “there was in fact equal treatment” because bondholders who rejected the settlement still had the right to make a claim for the entire make-whole.
“Mere differences in potential final outcomes resulting from choices made by individual creditors do not violate equal treatment protections in Section 1123(a)(4),” Judge Shwartz said.