NAVIGATING THE LITIGATION MINEFIELD WHEN EXERCISING PROXY RIGHTS
Exercising proxy rights under a pledge agreement can be a valuable tool for lenders in situations where the lender and borrower have reached an impasse over how to address an event of default in a credit agreement, or the lender is restricted – whether on a fund-level or otherwise – from formally taking ownership of pledged equity to effectuate a sale or other restructuring option.
Given that the exercise of proxy rights transfers governance power from existing equity holders to the lender, sometimes equity holders attempt to impede lenders from exercising such rights, such as disputing whether the proxy rights were validly exercised. Indeed, majority equity owners often seek to maintain control over a distressed company – especially where the equity is likely out of the money – to leverage a better outcome for themselves in a restructuring or alternative transaction, including obtaining some economic recovery or releases.
The Chapter 11 case In re CII Parent, Inc. (2023) provides a recent example of an equity sponsor attempting to block a secured lender’s exercise of proxy rights on various grounds, including the lender’s alleged failure to satisfy notice requirements in the relevant loan documents and that the continued exercise of such rights constituted a violation of the automatic stay imposed by the parent equity holder’s bankruptcy case.
CII Parent, Inc., the sole debtor and parent company, was a holding company that owned 100 percent of the equity interests of non-debtor Community Investors, Inc., which in turn, directly or indirectly owned all of the equity of certain non-debtor operating subsidiaries that were primarily software as a service companies (referred to herein as the ‘indirect subsidiaries’). CII Parent itself was indirectly owned by Falcon Structured Equity Partners, LP.
Apr-Jun 2024 issue
King & Spalding LLP