February 26, 2021 - On February 25th, the LSTA hosted a webinar, “Trading Reorg Equity”, presented by Alston & Bird partners, Russell Chiappetta, Mark McElreath, Ken Rothenberg, and James Vincequerra. Investors in distressed bank debt may receive equity securities as settlement of their claim when the debtor emerges from bankruptcy. This raises the question whether there are any securities law restrictions imposed on the resale of those securities. In the recent LSTA webinar the panelists discussed the relevant exemptions from the Securities Law on this important and timely topic.
There are different exemptions from Section 5 of the Securities Act of 1933, as amended (the “Securities Act”) which provides that unless a registration statement is in effect as to a security, it shall be unlawful for any person to sell such security. Fortunately, the issuance, under a Plan, of Plan securities by a debtor, if it is at least principally in exchange for claims in the Chapter 11 case, is exempt under Section 1145(a)(1) of the Bankruptcy Code from the registration requirements of the Securities Act. Section 1145 was a necessary provision to the Code because the rigidity of securities laws conflicted with the need for flexibility in bankruptcy cases.
Although Section 1145 itself does not provide a direct exemption for the resale of the securities received under the Plan, it has the effect of an exemption by limiting the application of provisions of the Securities Act and rules generally to permit the free resale of those securities, except for sales by underwriters, the debtor’s affiliates, or dealers. The premise underlying the Chapter 11 standard for confirmation of a Plan is the same as the premise of the federal securities law — once parties are given adequate disclosure of all relevant information, they should be able to make an informed decision about a proposed Plan. Notably, Section 1145(b) suggests that “ordinary trading transactions” in Plan securities by non-issuers may also be exempt from the registration requirements of the Securities Act, provided that such transactions are limited in amount and do not involve special selling efforts.
Loan market participants were cautioned that Section 1145 does not provide any exemptions from the antifraud provisions of the securities laws. It is possible that Big-Boy type provisions in transaction documents may provide protection against some claims; however there is no assurance that these provisions will be enforceable. Click here for the slides and here for replay.