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Plan Optionality: Extreme Edition (A Pick-Your-Own-Adventure Restructuring with Shopko)

posted by Adam Levitin

I've seen some Chapter 11 plans that include some optionality, such as allowing the debtor, based on subsequent market conditions or litigation outcomes to undertake a transaction or change the way a class is paid.  Such optionality has always troubled me because I don't think a disclosure statement can provide "adequate information" in the face of debtor optionality--a hypothetical investor might understand that the debtor has options A or B, but the uncertainty about which option will be selected makes it hard to make an "informed judgment about the plan":  the investor might like option A, but dislike option B--without knowing the likelihood of A or B, how can the investor make such an informed decision?  To be sure, it is possible to get two disclosure statements approved, one for option A and one for option B, but then creditors would be able to vote separately on each plan, rather than voting on a plan that gives the debtor optionality.  

A disclosure statement I looked at today, however, takes such optionality to an extreme I've never previously seen.  Specifically, Shopko's proposed disclosure statement is for a plan that "contemplates a restructuring of the Debtors through either (a) a sponsor-led Equitization Restructuring or (b) an orderly liquidation under the Asset Sale Restructuring."  As explained:  

The Plan includes a "toggle" feature which will determine whether the Debtors complete the Equitization Restructuring or the Asset Sale Restructuring. The Plan thus provides the Debtors with the necessary latitude to negotiate the precise terms of their ultimate emergence from chapter 11.  

In other words, what is being disclosed is "we might liquidate or we might reorganize, our pick."  The plan has, of course, two separate distributional schemes, depending on which restructuring path is chosen.   I really don't get how such a single disclosure statement for a single plan with optionality can be approved given the huge difference between these two paths.  A creditor can't know what outcome it is voting on and might like one, but not the other.  Maybe others have seen this move before, but I suspect this will be a first for the Bankruptcy Court for the District of Nebraska.  

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