An “affiliate” of a public company is barred from reorganizing under the Small Business Reorganization Act, or SBRA, even if the public company controls less than 20% of the stock entitled to vote on filing a bankruptcy petition, according to Bankruptcy Judge Sage M. Sigler of Atlanta.
The SBRA became effective in February and is codified primarily in subchapter V of chapter 11, 11 U.S.C. §§ 1181 – 1195. Subchapter V is designed for chapter 11 reorganizations to be more streamlined and less costly for small businesses.
A corporation filed a chapter 11 petition and elected treatment under subchapter V, claiming it had less than the maximum of $7.5 million in secured and unsecured debt. The primary lender objected to the debtor’s right to proceed under subchapter V, arguing that the debtor is an affiliate of a public company under the Securities and Exchange Act.
The public company owned about 27% of the debtor’s voting securities. However, the public company had only 6.5% of the shares entitled to vote on a bankruptcy filing. The debtor argued that it was not an “affiliate” because the public company had less than 20% of the stock that could vote on filing bankruptcy.
The outcome was governed by Section 101(51D)(A), which provides that the debtor in subchapter V must be “a person engaged in commercial or business activity” who has not more than $7.5 million in secured and unsecured debt, “not less than 50 percent of which arose from the commercial or business activities of the debtor.”
Subsection 51D(B)(iii) precludes the use of subchapter V by a debtor that is an “affiliate” of a reporting company. In turn, Section 101(2) defines an “affiliate” as an “entity that directly or indirectly owns, controls, or holds with power to vote, 20 percent or more of the outstanding voting securities of the debtor.”
In her October 19 opinion, Judge Sigler held that the public company “owns more than 20% of Debtor’s voting securities, and the Court’s inquiry ends there.”
To reach her conclusion, Judge Sigler confirmed that the public company was an “issuer” under the Securities and Exchange Act of 1934, a requirement under Section 101(51D)(B)(iii)(I). Next, she determined that the 27% owned by the public company consisted of “voting securities.”
The debtor contended that the relevant percentage was not 27% but rather 6.5%, the percentage of the stock held by the public company that could vote for bankruptcy. To that, Judge Sigler said it “is irrelevant what percentage of the voting securities held by [the public company] were authorized to vote on Debtor’s bankruptcy filing or Subchapter V election.”
The debtor wanted Judge Sigler to limit the calculation of “voting securities” to shareholders with the power to vote on the matter before the court. “But,” she said, “this limitation does not exist within the language of § 101(2)(A).” In that respect, she disagreed with courts that “characterized the relevant inquiry as whether the alleged affiliate had the opportunity to exert control over the debtor through its voting securities.”
An ‘Affiliate’ of a Public Company Is Barred from Reorganizing Under Subchapter 5
An “affiliate” of a public company is barred from reorganizing under the Small Business Reorganization Act, or SBRA, even if the public company controls less than 20 percent of the stock entitled to vote on filing a bankruptcy petition, according to Bankruptcy Judge Sage M. Sigler of Atlanta.
The SBRA became effective in February and is codified primarily in subchapter 5 of chapter 11, 11 U.S.C. §§ 1181 – 1195. Subchapter 5 is designed for chapter 11 reorganizations to be more streamlined and less costly for small businesses.
A corporation filed a chapter 11 petition and elected treatment under subchapter 5, claiming it had less than the maximum of $7.5 million in secured and unsecured debt. The primary lender objected to the debtor’s right to proceed under subchapter 5, arguing that the debtor is an affiliate of a public company under the Securities and Exchange Act.
The public company owned about 27 percent of the debtor’s voting securities. However, the public company had only 6.5 percent of the shares entitled to vote on a bankruptcy filing. The debtor argued that it was not an “affiliate” because the public company had less than 20 percent of the stock that could vote on filing bankruptcy.