Continued on page 10

CONSIDERATIONS OF POST-REORGANIZATION EQUITY IN

THE SECONDARY MARKETby Philip J. Flink and Timothy C. Bennett

The ongoing financial crisis and related surge in bankruptcies has left many distressed debt investors in the unfamiliar position of holding stock or other forms of equity in reorganized debtors. Investors holding these types of securities may seek to immediately monetize them through a sec-ondary market sale. Alternatively, investors may find a company to be an attractive investment after its reorganization, and look to increase their holdings in its securities. Recently, an active market in post-reorganization equity has developed, in shares of companies such as RDA Holding Co., Stallion Oilfield Holdings, Express Energy Services, Gateway Casinos & Entertainment and Hayes Lemmerz International. This article will discuss issues potential sellers and buyers of such securities should consider

CHINESE COMPETITION, LOST SUBSIDIES PUSH SOLAR

COMPANIES INTO BANKRUPTCYby Kirk ONeil

Increased competition from China-based solar product manufacturers and a reduction in state-sponsored subsidies for solar instal-lation in Europe have broken the backs of U.S. solar manufacturers, forcing several to file for bankruptcy over the past month.

Distress in the U.S. solar industry is expected to continue over the next couple of years, even if demand increases, as low-cost Chinese solar manufacturing contin-ues to expand and flood the U.S. market with low-priced products, according to bankruptcy attorneys and turnaround management consultants.

The string of solar company bank-ruptcies began with Marlborough, Mass.-based Evergreen Solars Chapter 11 filing on Aug. 15, followed by Hopewell Junction, N.Y.-based SpectraWatt Inc.s bankruptcy filing on Aug. 19 and culmi-

nating with Fremont, Calif.-based Solyn-dra LLCs filing on Sept. 6.

Both Solyndra and Evergreen Solar, which manufacture panels for solar energy systems, stated in their Chapter 11 filings that their distress was caused by an over-supply of solar panels worldwide that was exacerbated by an expansion of Chinese manufacturers who receive low-cost government capital and subsidies. The bankrupt companies also cited a reduction or elimination of government subsidies and incentives to purchase solar energy in Europe as a cause.

The problem with Chinese solar com-panies receiving subsidies from their gov-ernment and driving down the prices of solar products was addressed in a letter that Sen. Ron Wyden (D-Ore.) sent last Thursday to the Obama administration. Wyden, who is chairman of the Senate

Continued on page 8

IN THIS ISSUEFEATURES Chinese competition and lost subsidies are

pushing solar companies into bankruptcy.

Considerations for handling post-reorganiza-tion equity.

Patents provide value and challenges ...........2

NEWS IN BRIEFBankruptcy claims traded at the highest volume in a year in July; Chapter 11 filings increased in August; Tennenbaum raised $530M; New Mexico put $200M into a PIMCO distressed fund; Pennsylvanias school pension fund placed $100M with Brigade Capital; Kansas made a $30M commitment to a UBS real estate fund; a New York power company may file for bankruptcy; an Oregon publishers forbearance expired; a Hawaiian hotel owner is in a fight with Marriott; Iron Mining Group is in a dispute with its bridge lender; Chinas ShengdaTech hired a restructuring officer; Nutrition 21 plans an asset sale; and hirings & firings ..................3

DISTRESSED DEBT MONITORThe Distressed Debt Report lists the latest bank-ruptcies and debt defaults by publicly traded companies ........................................................7

http://distresseddebt.dealflow.com

CHAPTER 11FILINGS IN U.S.

Source: Epiq Systems

AMFJDNOS AJJM2010 2011

800

900

1,000

1,100

1,200

1,300

Th e Distressed Debt ReportNews, Information, and Analysis of Distressed Debt in the Middle MarketVolume VII, No. 16 distresseddebt.dealflow.com September 13, 2011

The Distressed Debt Report 2011 DealFlow Media 8 September 13 2011

For use by original recipient only. It is illegal to forward or otherwise distribute without permission.

Continued from front page

DDR Post-Reorganization

when negotiating, documenting and set-tling their trades in the post-reorganiza-tion equity of reorganized debtors.

The Legal FrameworkOften, as part of a reorganization, a

debtor may offer creditors equity in its reorganized entity in exchange for loans or other prepetition claims.

Section 5 of the Securities Act requires the registration of every offer and sale of securities with the SEC unless there is an exemption from reg-istration available. A commonly used exemption for the issuance of post-reorganization equity is Section 1145 of the Bankruptcy Code. Section 1145 pro-vides an exemption from the registration requirement, under certain circumstanc-es, for securities issued by a debtor, prin-cipally in exchange for claims against or interests in the debtor pursuant to a plan of reorganization.

Not all issuances of securities by newly reorganized debtors fall within the exemption offered under Section 1145. For example, some debtors rely on the traditional private placement exemptions from registration afforded under Section 4(2) and Regulation D under the Securi-ties Act. Also, shares acquired in a rights offering by an issuer to raise new money may not qualify for an exemption under Section 1145.

Section 1145 also permits such secu-rities to be resold without registration, provided that the seller is not acting as an underwriter. Rule 144A, which permits resales to qualified institutional buyers in certain circumstances, and the so-called 4(1) exemption, which essentially permits private resales to accredited investors, are frequently used in the resale of restricted securities. Also, even if securities are held by a seller act-ing as an underwriter, Section 1145(b) permits ordinary trading transactions, which has been interpreted to include sales of securities through normal bro-kerage transactions if the public infor-

mation and volume limitations under Rule 144 are otherwise satisfied.

Sellers and buyers need to be aware that, in contrast to bank debt or bank-ruptcy claims transactions, federal securities laws apply to trades of post-reorganization equity. In particular, Rule 10b-5 under the Exchange Act requires a party in possession of material, non-public information about an issuer or its securities obtained in confidence or via a fiduciary or other similar relationship to either disclose such information or refrain from trading.

In addition to any restrictions on transferability that may be based in the securities laws, there may be docu-ments or agreements relating to post-reorganization securities which also impose restrictions. Such restrictions could be based in the organizational documents of the issuer or agreements between the issuer and its sharehold-ers. For example, an issuers articles of incorporation or bylaws may have spe-cific provisions regarding the transfer of equity, including eligibility criteria for assignees, mechanics for recording the transfer and restrictions on the number of permitted shareholders. Similarly, stockholders agreements often con-tain provisions that may limit, impair or outright prohibit the assignment of shares, including rights of first refusal, tag- and drag-along provisions and lock-up agreements.

Documenting the TradeFrequently, parties to a distressed

loan trade enter into a binding trade commitment prior to the effective date of a plan of reorganization, but then are unable to settle the trade until after the effective date of the plan and the loans are converted into proceeds which can take the form of cash, new loans or equity in the reorganized entity. In such circumstances, the parties normally doc-ument the settlement of their trade using the form of proceeds letter promulgated

by the Loan Syndications and Trading Association (LSTA). Under the LSTA proceeds letter, a seller assigns to a buyer all right, title and interest in and to the underlying claims and resulting pro-ceeds of the loans.

Parties to a trade for non-legended, unrestricted post-reorganization secu-rities (i.e., the parties specifically enter into a trade for the securities, not for the original underlying loans or claims) customarily settle such trades without any additional documentation executed, or representations made, by either party. However, when the securities to be transferred are subject to restrictions, it is beneficial for both the buyer and the seller to enter into an agreement where they receive the protections of repre-sentations and warranties made by the other party. While there is no standard form of agreement to document specific trades for post-reorganization equity entered into after the effective date of an underlying plan of reorganization, a market form of purchase and sale agree-ment has developed and is used by most broker-dealers and other market par-ticipants. In addition to concepts com-mon to the LSTA proceeds letter and, indeed most secondary market trad-ing contracts, such as title, sophistica-tion and non-reliance these forms of agreement for secondary market equity trades often include specific securities law compliance representations made by the seller and buyer.

A seller is generally expected to rep-resent and warrant that it has not taken any actions that would subject the sale of the transferred securities to a registration requirement. An aggressive buyer also may seek the seller to make the broader representation that there have been no acts or omissions by the seller that would render the transaction violative of any applicable securities laws.

A seller typically requests its buyer to represent and warrant that the buyer is purchasing the transferred securities

The Distressed Debt Report 2011 DealFlow Media 9 September 13 2011

For use by original recipient only. It is illegal to forward or otherwise distribute without permission.

DDR Post-Reorganization

for the buyers own account, for invest-ment purposes, and not with a view towards a resale or other distribution of the securities. This cautious approach serves to provide the seller comfort that it would not be deemed to be acting as an underwriter engaged in a distribution of the securities. A buyer is also generally asked to acknowledge to its seller that the buyer understands the securities it is purchasing have not been registered with the SEC, and could be subject to other restrictions on transferability as well (such as those contained in a stockhold-ers agreement).

In addition to memorializing the terms and conditions of the trade on a purchase and sale agreement, the par-ties to the transaction often will need to execute additional documentation and submit it to the issuer of the securi-ties, its counsel or to third parties such

as transfer agents in order to settle the trade and reflect record title in the name of the assignee. If the securities are subject to a stockholders agreement, purchasers of the securities are likely to need to execute a form of joinder to the agreement and submit it to the issuer, agreeing to be bound by the terms and conditions thereof. Issuers may have specific requirements for example, market participants trading shares of Stallion Oilfield Holdings have been executing a separate form of assignment and assumption agreement to docu-ment the transfer of the registration rights which accompany the underlying transferred shares. Many issuers, such as RDA Holding Co., require officers certificates wherein the parties to the trade make specific representations as to their status and holdings directly to the issuer. Stock powers are often a

necessary require-ment to affect the legal transfer of shares of stock. F inal ly, issuers may require deliv-ery of an opinion of counsel, stat-ing that the sale is exempt from the registration requirements of the Securities Act, in order to effec-tuate the transfer of the shares.

Tips for SettlementParties con-

templating pur-chasing or selling p o s t - r e o r g a n i -z a t ion secur i -ties should take some basic steps to improve their chances of expe-

diting settlement. A thorough under-standing of the issuers organizational documents and other binding documents such as stockholders agreements and strict compliance with all procedures, requirements and deadlines required for the transfer of equity set forth therein is a must. Further, it is recommended that parties to a transfer reach out to the issuer or its counsel and its transfer agent, if applicable, early in the pro-cess to ascertain whether any additional documentation (such as a legal opinion) will be required and, practically, to get a sense of timing in order to plan settle-ment.

Finally, as with any complex or sig-nificant transaction, parties should retain sophisticated advisors with experience in securities law, bankruptcy law, and dis-tressed investing to guide them through the process.

Philip J. Flink is a partner in Brown Rudnicks Corporate Department. He can be reached at 617-856-8555 or pflink@brownrudnick.com. Timothy C. Bennett is an associate in Brown Rudnicks Corporate Department and practices in the distressed trading markets. He can be reached at 1-212-209-4863 or tbennett@brownrud-nick.com.

Unless your company holds a multi-user license, it is a violation of U.S. copyright law to photocopy or reproduce any part of this publication, or forward it electronically, without first obtaining permission from DealFlow Media. For details about upgrading your license, contact Lenny La Sala at (516) 876-8006 or lenny@dealflow.com.

The largest and most influential event in the small cap equities market. Investors, company management teams, investment bankers, and other finance professionals will gather for two days of education, networking, and deal-making.

Register by Sept. 16 for only $1,345 ($200 savings). Subscribers to The PIPEs Report receive a 2-for-1 coupon.

To register: 516-876-8006 or www.dealflow.com

November 1 2New York Marriott Downtown

THE PIPEs CONFERENCE 2011