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February 9, 2021 – In a continuing offensive against the Debtors' proposed Plan, the Debtors' Official Committee of Equity Securities Holders (the “Equity Committee”) objected to the Debtors’ Disclosure Statement and, in a related objection, to the Debtors' request for authority to enter into a plan support agreement (the "PSA") and an equity backstop agreement, each of which underpin the Debtors' Plan [Docket Nos. 878 and 879, respectively]. The objections follow on the Equity Committee's recent filing with the Court of their own Plan and Disclosure Statement which, in addition to touting the relative advantages of their competing Plan (which they are not yet authorized to distribute to stakeholders, given the Court's recent rejection of their request to have the Debtors' Plan exclusivity terminated) detail that Committee's objections to the Plan as otherwise amplified by the current objections. We cover the Equity Committee's competing Plan and challenges to Plan exclusivity separately.
The Debtors' present objections continue to hammer home their earlier arguments as the Debtors' currently proposed Plan, a Plan which the Debtors had only months ago themselves characterized as a "sweetheart" deal "inescapably, a sale of controlling equity of a Delaware corporation [whereby] the Debtors would be selling virtually all of the voting power and residual economic value of GMI to a handful of institutional investors for cash."
The Disclosure Statement objection follows two main lines of argument (or "infirmities") rendering the Plan the Disclosure Statement purports to adequately describe "unconfirmable": (i) a failure to treat shareholders equally, transferring $1.3bn of value to a group of shareholders with "a slim majority" and (ii) the failure to meet Delaware law requirements (requiring, inter alia, shareholder approval at the two-thirds level) in respect of a sale of the Debtors to a group of shareholders.
The objection to the PSA and Equity Backstop Commitment Agreement finds particular issue with the fact that those agreements require Honeywell to be "locked into voting in favor of the COH Plan through the Coordination Agreement, which prohibits them from considering competing plans that treat them equally" with that "locked in" requirement, in respect of a PSA, executed before the Debtors' Chapter 11 filings, usurping the Power of the bankruptcy Court wuith a sub rosa plan ("It is an impermissible sub rosa plan that should not be approved under the guise of a plan support agreement.").
Objection to Disclosure Statement
The Disclosure Statement objection states, “The Disclosure Statement describes a Chapter 11 plan that would result in a needless transfer of over $1.3 billion of value away from thousands of shareholders owning 42% of GMI (many of which are small, retail investors) to a handful of hedge funds – members of the COH Group – that own a slim majority. The Debtors themselves acknowledged the inequitable nature of the COH Group’s proposal since the beginning of the Chapter 11 Cases, describing it as a ‘coercive,’ ‘sweetheart’ deal with a subset of the GMI shareholders, handing them the voting power and residual economic value of GMI. As the Debtors noted in connection with an earlier iteration of the COH Plan, it is, ‘inescapably, a sale of controlling equity of a Delaware corporation [whereby] the Debtors would be selling virtually all of the voting power and residual economic value of GMI to a handful of institutional investors for cash.’
While the COH Plan suffers from many defects that render it unconfirmable (and which the Equity Committee will address at the proper time), two infirmities render it patently unconfirmable and require denying approval of the Disclosure Statement.
First, the COH Plan does not provide equal treatment to GMI shareholders, in violation of Section 1123(a)(4) of the Bankruptcy Code. Only a select group of shareholders – Centerbridge, Oaktree and the Additional Insider Shareholders – would receive the right to purchase $1.05 billion of the COH Convertible Series A Preferred Stock (subject to the $200 million rights offering available to existing GMI Shareholders, including the COH Group). The remaining, non-insider shareholders may only elect between having their shares reinstated (and substantially diluted by the COH Convertible Series A Preferred Stock, subject to the rights offering) and the $6.25 Cash-Out Option. This unequal treatment of shareholders cannot be justified by any purported ‘new value’ provided by the COH Group because, under Supreme Court precedent, new value must mean full value. Where, as here, a debtor offers an insider an exclusive investment opportunity without allowing other shareholders to participate ratably, there is no new value as a matter of law.
Second, the COH Plan is patently unconfirmable because it violates Delaware law. As the Debtors themselves have acknowledged, Section 203 of Delaware General Corporation Law requires that a sale of the Debtors to a group of shareholders (like the COH Group here) holding more than 15% of the common stock be approved by both the board of directors and a 66.6% majority of the outstanding voting stock not owned by the interested stockholder. The Debtors have not obtained that approval. Furthermore, the fiduciary obligations of the Debtors’ directors are subject to entire fairness review because the COH Group shareholders – which hold 58% of GMI shares – are standing on both sides of the transaction and receiving a unique benefit not shared with the other shareholders. The Debtors have not, and cannot, show that the COH Plan passes muster under this heightened standard of review. Accordingly, the COH Plan is being proposed by ‘means forbidden by law,’ in violation of Section 1129(a)(3) of the Bankruptcy Code. The Court should not approve the Disclosure Statement for the additional reason that it fails to provide adequate information concerning numerous issues that are of immense importance to shareholders, including (i) the magnitude of dilution suffered by unaligned shareholders as a result of the COH Plan; (ii) allocation of value between the ASASCO and GMI Debtors; (iii) analysis of the Honeywell settlement and why the Debtors believe it is more beneficial than reducing Honeywell’s claims through litigation; and (iv) the Debtors’ analysis of alternatives to the COH Plan – including the Equity Committee’s Stand-Alone Plan – and why the Debtors decided not to pursue them.”
Objection to PSA and Backstop Support Agreement
The Equity Committee’s objection provides: “The Debtors seek approval of a Plan Support Agreement and a Backstop Commitment Agreement that are not designed to maximize value, but instead are crafted to chill competition from the Equity Committee. The Court should deny the requested relief. The Debtors and the COH Group tout the purported benefit of a settlement with Honeywell to justify their agreement to the proposed COH Plan, the Plan Support Agreement and the Backstop Commitment Agreement. In substance, that settlement is a pretext to justify the dilution of shareholders that are not ratably participating in the COH Plan. If the COH Plan is approved, Honeywell would receive an allowed claim in the face amount of $1.2 billion. But, according to the Debtors and the COH Group, only the COH Group is entitled to that settled claim amount. Honeywell would receive Series B Preferred Stock with a specified amortization schedule and certain governance rights. But only the COH Group is entitled to provide Honeywell that treatment. In exchange for the benefits to Honeywell for this allowed claim and treatment, Honeywell is locked into voting in favor of the COH Plan through the Coordination Agreement, which prohibits them from considering competing plans that treat them equally (or better) and that are more favorable to shareholders, some of which are Honeywell retirees. This is neither fair nor equitable. It is an impermissible sub rosa plan that should not be approved under the guise of a plan support agreement."
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