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Bankruptcy Court Approves Releases Over Equity Committee Objection Through Use of Special Committee of Independent Directors

Posted In Plans, Releases

On November 1, 2016, Judge Carey of the Delaware Bankruptcy Court confirmed Hercules Offshore's chapter 11 plan.  A central component of the deal culminating in the Plan was a settlement reached with first lien holders which was approved by a special committee of independent directors.  The Plan proposed to transfer all of the debtors' assets to a wind down entity, permitting 100% recovery to general unsecured creditors,  The Plan proposed to subordinate the first lien lenders’ claims to provide $15 million guaranteed payment to common stockholders, and reduced the amount of the first lien lenders’ claim by $32.5 million. The plan also provided lenders, directors and officers, and other third parties with releases from claims held by the debtors and releasing parties.  The Official Committee of Equity Security Holders pursued several objections to confirmation, including objection to the plan releases and exculpation provisions regarding claims held by debtors and other third parties. The Court overruled these objections and confirmed the Plan. 

Bankruptcy Code section 1123(b)(3)(A) permits a plan to provide for a settlement of a debtor’s claims and include releases. The Plan sought to release the debtors’ claims against the their current and former officers and directors and other related professionals. The Equity Committee asserted that the estate may have claims against the directors and officers for orchestrating a liquidation and for failure to exercise fiduciary duties. After completing an analysis of the claims, the Bankruptcy Court concluded that the Equity Committee failed to support its arguments.

In January 2016, Hercules formed a Special Committee of the Board comprised of all independent directors.  The Special Committee was formed to pursue strategic alternatives available, including status quo analyses, asset sales, sale of Hercules as a whole, and consideration of issuing additional equity or debt securities or incurrence of additional debt.  The Special Committee retained separate counsel and financial advisors.  The financial advisors conducted a marketing process including multiple rounds of bidding.  The Special Committee was also involved in the bankruptcy process including mediation, which it along with the Board unanimously approved a settlement reached following mediation and the Plan, concluding that they were in the best interest of all stakeholders and provided more than sufficient consideration to support the releases.

The Court reviewed the Special Committee's decisions under the business judgment rule, which presumes that directors acted "independently with due care, in good faith, and in the honest belief that their actions were in the stockholders' best interests.  Op. at 37 quoting Williams v. Geier, 671 A.2d 1368, 1376 (Del. 1996).  The Court noted that the Special Committee's judgment must be upheld "unless it cannot be attributed to any rational purpose."   Op. at 38 quoting In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 74 (Del 2006).  Looking to Court of Chancery caselaw for guidance, the Bankruptcy Court noted that board decisions are upheld under the business judgment rule when the board made its decision on an"informed basis" such that it was counseled by its attorneys and financial advisors and relied, in part, on that advice in making its own "independent business judgment to the advice they received." Id. quoting Citron v. E.I. du Pont de Nemours & Co., 584 A.2d 490, 510-12 (Del. Ch. 1990).

The Bankruptcy Court concluded that the Board acted properly, consistent with its fiduciary duties.  The Special Committee and Board complied with their fiduciary  duties, and ultimately chose the option that they believed would conserve the value of the Estates and maximize recovery for all stakeholders, including equity holders.