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Enforceability of Governance Provisions Restricting Access to Seek Bankruptcy Relief
For more than six years there has been an ongoing debate regarding the enforceability of governance restrictions, whether blocking rights, golden shares and other provisions designed to manage access to bankruptcy relief.
Following the failure in 2009 of attempted bankruptcy remote protections in each of various real estate projects in General Growth Properties, 409 B.R. 43 (Bankr. S.D.N.Y.), there has been a series of cases in different jurisdictions addressing the enforceability of governance provisions restricting a company’s ability to seek bankruptcy relief.
The scale, at least in nonoperating situations or single asset real estate companies, is tilting toward enforcement. In 2018, the Fifth Circuit dismissed a bankruptcy case commenced by a Delaware corporation due to a failure to abide by governance restrictions on commencing bankruptcy in Franchise Services, 891 F.3d 198.
In 2020, Delaware Bankruptcy Judge Mary F. Walrath “respectfully declined” to follow the Fifth Circuit, denying a motion to dismiss for failure by a Delaware corporation to abide by governance restrictions on commencing a bankruptcy case in Pace Industries, No. 20-10927, ruling that a “blocking right … is void as contrary to federal public policy that favors the constitutional right to file bankruptcy.” The following year New Jersey Bankruptcy Judge Michael B. Kaplan granted a motion to dismiss a bankruptcy case commenced by a Delaware LLC that failed to obtain the consent of the holders of its preferred membership interests as set forth in its LLC agreement.
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