Dynegy's controlling shareholders, led by Carl C. Icahn, entered Chapter 11 with a roar, but they are about to leave rather meekly.
Still, they may have covered their tails. Maybe.
Dynegy's original Chapter 11 plan was all about saving the shareholders. Before its bankruptcy, the company engaged in a series of transactions that moved value from a Dynegy unit upstream to the parent company, which was not part of the original bankruptcy filing. The goal was to reorder the normal priorities of bankruptcy, and thus save a position for the shareholders after a series of failed attempts to solve Dynegy's problems out of court.
But then a court-appointed examiner found it all to be a fraudulent transfer. While the existing research on the topic shows that examiners can be quite expensive, this may be an example where the process worked out well.
Next Wednesday, the federal bankruptcy court in Poughkeepsie. N.Y., will begin hearings to consider confi rmation of the revised Dynegy plan. While we started out with a “save the shareholders plan,†the current plan calls for creditors to own 99 percent of the company when all is said and done.
That's more like it.
But before concluding that the shareholders wasted their time, keep in mind that they are getting to keep 1 percent of the company, with warrants to potentially acquire more. And most important, if the plan as currently drafted is approved, the shareholders, directors and management would be released from all liability in connection with their pre-bankruptcy activities.
In an odd twist, it is another group of shareholders (along with the United States government) that are objecting to the releases in the plan. These shareholders are the lead plaintiffs in a pending class action, whose class comprises those who bought Dynegy shares after the fraudulent transfer, but before it was revealed as such by the examiner.
There may have been some willful blindness here â€" the fraudulent transfer issue was being litigated in state court before the bankruptcy case â€" yet this group may have a point.
Specially, the question of giving non-debtors releases in plans is largely a matter of case law. The bankruptcy code specifically talks about such releases only in the context of asbestos cases, and even that provision essentially codifies case law that was developed during the path-breaking Johns Manville bankruptcy case.
But what case law there is suggests that bankruptcy courts should not be too casual about granting what amounts to a limited bankruptcy discharge to parties that have not themselves filed for bankruptcy.
It will be interesting to see how the bankruptcy court approaches this issue next Wednesday. But if it were to grant the release, I think you can count on an appeal.
If the bankruptcy court takes out the releases, then the controlling shareholders spent a lot of money on pro fessional fees to get 1 percent of the company, plus warrants. They probably could have gotten that deal in 2011.
Lead Plaintiff's Objection to Dynegy Chapter 11 Plan
Stephen J. Lubben holds the Harvey Washington Wiley chair in corporate governance and business ethics at the Seton Hall University School of Law and is an expert on bankruptcy.
