The automatic stay is not offended by increasing the number of authorized shares in a closely held corporation when the debtor is a minority shareholder, according to Bankruptcy Judge Pamela W. McAfee of Fayetteville, N.C.
In her September 20 opinion, Judge McAfee went on to find no stay violation even though authoring new shares opened the possibility that the holdings of the debtor-minority shareholder could be diluted in the future were the corporation to issue and sell the newly authorized shares.
The individual debtor in chapter 7 owned about 2,400 shares, or 24% of the shares of a closely held corporation. The corporation’s president and sole director owned 71%. As the sole board member, the majority holder adopted a board resolution authorizing an increase in the number of authorized shares by almost 1 million, subject to the approval of shareholders.
Were all the new shares to be issued, the debtor’s 24% holding would be reduced to less than 1%. Significantly, the majority holder was not proposing to issue new shares, only to authorize an amendment to the articles of incorporation raising the number of authorized shares.
The trustee told the controlling shareholder that increasing the number of authorized shares would violate the automatic stay by exercising control over estate property. Were the majority holder to proceed, the trustee promised to seek sanctions.
So, the majority holder filed a motion in bankruptcy court asking Judge McAfee to declare that increasing the number of authorized shares would not violate the stay. She agreed with the majority holder.
Judge McAfee presumed that the increase in authorized shares was the prelude to a later action to raise additional capital by authorizing the issuance and sale of new shares. The majority shareholder admitted that diluting the debtor’s interest at a later time by selling newly issued shares would violate the automatic stay.
Judge McAfee agreed with a decision by recently retired Bankruptcy Judge Christopher S. Sontchi of Delaware in In re SS Body Armor I, Inc., 527 B.R. 597 (Bankr. D. Del. 2015). There, a shareholder of a corporate debtor was seeking to compel the corporation to hold an annual shareholders’ meeting, ostensibly to change management.
Judge McAfee characterized Judge Sontchi’s ruling as “the automatic stay does not preclude calling a shareholder meeting.” She went on to quote Judge Sontchi for saying that the right to convene a meeting is “not unfettered.” He reserved the right to enjoin the implementation of the results of a shareholders meeting if there were “clear abuse.” Id. at 607.
The trustee contended that the authorization of more shares would chill the interest in buyers who might purchase the debtor’s shares. Judge McAfee said the concern was “speculative,” because “a minority shareholder is always subject to the possibility that the Articles will be amended and additional shares authorized.”
Agreeing with Judge Sontchi’s reasoning, Judge McAfee held that “the automatic stay does not apply to . . . the amendment of its Articles of Incorporation to authorize the issuance of additional shares, and nothing more.” [Emphasis in original.] If there was no stay violation in SS Body Armor to oust the board of directors, “then a fortiori an amendment to the articles of a nondebtor corporation cannot be an effort to control the estate’s minority shareholder,” she said.
Judge McAfee saw no violation of the automatic stay but cautioned that actually issuing new shares “is not before the court.”
The automatic stay is not offended by increasing the number of authorized shares in a closely held corporation when the debtor is a minority shareholder, according to Bankruptcy Judge Pamela W. McAfee of Fayetteville, N.C.
In her September 20 opinion, Judge McAfee went on to find no stay violation even though authoring new shares opened the possibility that the holdings of the debtor-minority shareholder could be diluted in the future were the corporation to issue and sell the newly authorized shares.