The opinion by Judge Allan Gropper in the Tronox bankruptcy case has already received a fair share of attention, but having spent most of an afternoon reading it in all of its 166-page glory, I can say that the opinion is even more interesting than the initial reports suggest.
Namely, the opinion suggests that at best Kerr-McGee entered into a radical revamp of its corporate structure in an attempt to avoid past environmental legacies, all without considering the effect of such a move on its creditors, and any countermoves they might make. Or it was willfully blind to the effect on its creditors. Take your pick.
And the opinion also leaves open the real possibility that Kerr-McGee’s lawyers and bankers dropped the ball on this one.
The basic idea is that Kerr-McGee, of “Silkwood†fame, had a viable oil and gas business. Unfortunately it was tainted by decades of environmental misdeeds, which sucked up a good bit of its earnings.
To solve this problem, it created a new holding company to which it transferred the “good†oil and gas subsidiaries. The new holding company renamed itself “Kerr-McGee†and was acquired by Anadarko for $16 billion.
The old Kerr-McGee became Tronox, which had a small chemical business and enough environmental liabilities to choke numerous horses and other animals, too. By early 2009 Tronox gave up the ghost and entered Judge Gropper’s bankruptcy courtroom.
The really odd thing about the Kerr-McGee split is that it’s hard to figure out what sort of transactions were actually involved: Did the old company sell its subsidiaries to the new holding company? Was there some sort of merger? Kerr-McGee seems to have simply made it so.
Tronox didn’t get any payment at all for giving up its oil and gas subsidiaries. But corporations don’t just give away shares of operating subsidiaries for kicks. Normally.
Judge Gropper had an easy time finding that the transaction was both an actual and a constructive fraudulent transfer. An actual fraudulent transfer involves a transaction designed to “hinder, delay or defraud†creditors.
A constructively fraudulent transfer involves a transaction for less than “reasonably equivalent value†that leaves the one who makes the transfer insolvent. Transferring your key operating subsidiaries in exchange for a smile counts as a lack of reasonably equivalent value.
New Kerr-McGee tried to defend on this point by arguing that Tronox could not have been insolvent, because it was spun off in an initial public offering that resulted in actual proceeds to Kerr-McGee.
Judge Gropper comes really close to saying that the prospectus filed in connection with the I.P.O. is not to be trusted. I wonder if the Securities and Exchange Commission is paying attention to bankruptcy court opinions?
The other interesting thing the opinion brings out is how little was done on a transactional level to avoid future problems. In a normal distressed transaction, one would expect to see opinion letters on either the debtor’s solvency or the payment of “reasonable equivalent value.†A fairness opinion would also help. None were produced here.
So transactional formalities were widely ignored throughout this deal. New Kerr-McGee was advised by Simpson Thacher & Bartlett and Lehman Brothers. For obvious reasons, that just leaves the lawyers.
Transferring subsidiaries for no consideration, without compliance with the relevant bits of the Delaware corporate code, seems like a strange thing coming from such a well-respected law firm.
Do they have any potential liability here? We really don’t know, because Kerr-McGee asserted attorney-client privilege throughout this litigation. At lot will turn on whether the client proceeded in the face of contrary advice from Simpson.
Otherwise, Kerr-McGee might be looking for some help paying.
The parties are still fighting over the total damages, but the numbers start at $5 billion and go up from there.
Stephen J. Lubben is the Harvey Washington Wiley Chair in corporate governance and business ethics at Seton Hall Law School and an expert on bankruptcy.
