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Selling CITGO--Timing and Process

posted by Mark Weidemaier

Yesterday was the deadline for opening briefs regarding the writ of attachment and potential execution sale of PDVSA’s shares in PDVH, the parent company of US oil refiner CITGO. As expected, Venezuela has asked the court to set aside the writ of attachment. Other briefs argue about what an execution sale should look like, if a sale goes forward. An execution sale is typically an informal, auction-on-the-courthouse-steps kind of thing. That’s not the usual way to sell a multi-billion dollar oil company.

Here’s a very quick summary of the filings, with links to the briefs. And here’s a bit more background, focusing on the timing and process of any execution sale.

  • As expected, Venezuela has asked the court to set aside the writ of attachment on the theory that PDVSA is no longer its alter ego, meaning PDVSA assets can no longer be attached to satisfy claims of the Republic’s creditors. The basic argument is that the US now recognizes Juan Guaidó and the National Assembly as the representatives of the Venezuelan government, and that the Guaidó team has taken steps to restore PDVSA's operational independence. This is going to be a steep hill to climb. In the first place, while the Guaidó team has tried to reform PDVSA's governance, it has little practical control over the company (which, at least in Venezuela, is functionally controlled by the Maduro government). Second, why should a shareholder that has abused the corporate form be allowed to retroactively shield an asset from creditors by improving corporate governance? If it can do this, what incentive is there to observe good governance practices in the first place? Of course, Fed. R. Civ. P. 60 does let a court set aside a judgment when warranted by changed circumstances. (That's simplified, but whatever.) And Venezuela is no ordinary shareholder and its current government isn't responsible for the prior misuse of PDVSA's corporate form. Still, it's a lot to ask. No judge will be enthusiastic about invoking changed circumstances to set aside a judgment when the party asking for relief has controlled the circumstances all along (albeit through a changing series of agents).
  • PDVSA has filed a motion to quash the attachment, on two grounds. One is that, for certificated stock, Delaware requires the attachment of the physical stock certificate, which PDVSA doesn’t have. Second, and cleverly, PDVSA argues that the court’s hasn't actually determined that PDVSA is Venezuela's alter ego, at least not in the way necessary to allow the attachment of PDVSA property. Recall that the court’s alter ego finding was based solely on Venezuela’s extensive control over PDVSA; it did not rule that Venezuela had used its control to defraud or otherwise harm Crystallex. Based on this finding, the court ruled that PDVSA’s property was not immune under the FSIA. But, PDVSA now argues, this does not mean the property is attachable. That question is governed by Delaware law, which will not impute ownership of the property to Venezuela without a finding of both control and some kind of fraud.
  • Crystallex and Venezuela/PDVSA each filed briefs on what an execution sale process should look like. Crystallex argues for a public auction managed by the US Marshals Service, which will no doubt be super enthusiastic about being told to oversee the hasty sale of a major oil company. Crystallex also suggests (p. 7) that, despite the current US sanctions regime, which blocks not only the actual sale of PDVH but any "concrete steps in furtherance" of a sale, the court may authorize an execution sale with closing made conditional on the grant of an OFAC license. (Crystallex has also applied for a license.) Venezuela and PDVSA, by contrast, take the position that the sanctions must be lifted before any part of a sale process can begin. They also want any sale delayed until Crystallex demonstrates how much it has already been paid by the Maduro government. And finally, if a sale does go forward, Venezuela wants to run a traditional sale process through retained financial and legal advisers.
  • Finally, there is a brief by entities affiliated with ConocoPhillips, which holds a judgment against Venezuela and wants in on the enforcement action. The brief is generally supportive of Venezuela’s arguments about the sale process. That's not surprising, as the courthouse-steps sale envisioned by Crystallex seems designed to suppress sale value, leaving little or nothing left over for other creditors or for PDVSA. The brief also asks the court to take steps that would be somewhat unorthodox outside the context of a bankruptcy proceeding, such as issuing an order protecting any buyers from the effect of a reversal or modification of the sale order on appeal.


But wont the bondholders (and Rosneft) have a proirity charge over the proceeds of the shares - given that the shares (50.1% and 49.9% respectively) are already lawfully pledged to them?

Or is there a way for pledge to be set aside, and assets sold for the benefit of Crystallex first? It is not clear to me who has priority charge.

Has the National Assembly-led Gov't improved corporate governance, anyway? If anything I'd say they the intertwined relationship between the State and PdVSA has become even more so, under the purported "Guaido admninistration." On the other hand what does it mean that "Venezuela is no ordinary shareholder"? or that "its current government isn't responsible for the prior misuse of PDVSA's corporate form"? You do understand that the debtor is the Venezuelan State and not a particular Veny Gov't, right?
The writing is on the wall: CITGO's assets will be sold at a tiny fraction of the full value they'd have fetchd at an organized sale through an investment bank a few years ago (on top of everything the price will be further dragged down by the industry's crash in the past couple of months), and neither the Venezuelan treasury nor PdVSA will see a single dime of it for years to come, as the proceeds will be held in some form of escrow in which the U.S. Treasury will be calling the shots

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