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Hearing Date: July 21, 2010 at 9:00 a.m. (EDT)Objection Deadline: July 18, 2010 at 5:00 p.m. (EDT) (as extended by Debtors)
Jay M. GoffmanMichael H. GruenglasGeorge A. ZimmermanSKADDEN, ARPS, SLATE, MEAGHER & FLOM LLPFour Times SquareNew York, New York 10036Telephone: (212) 735-3000Facsimile: (212) 735-2000
Counsel for the Official Committee of Equity Security Holders
UNITED STATES BANKRUPTCY COURTSOUTHERN DISTRICT OF NEW YORK
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In re:
CHEMTURA CORPORATION, et al.,
Debtors.
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Chapter 11
Case No. 09-11233 (REG)
Jointly Administered
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OBJECTION OF THE OFFICIAL COMMITTEE OF EQUITY SECURITYHOLDERS TO APPROVAL OF THE DEBTORS' DISCLOSURE STATEMENT
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TABLE OF CONTENTS
PAGE
Preliminary Statement .................................................................................................................1
Summary of Relevant Plan Provisions and Impact on Class 13a ..................................................7
Argument ..................................................................................................................................10
I. The Disclosure Statement is Missing Information Necessary to EnableStockholders to Determine Their Recoveries if they Reject the Plan ..............................13
II. The Disclosure Statement Fails to Explicitly Disclose and Justify the PunitiveTreatment to Class 13a Holders of Chemtura Interests Under the Plan...........................16
III. The Disclosure Statement Fails to Provide Sufficient Information to Enable theStockholders to Assess the Reasonableness of the Settlements Under the Plan...............19
1. Make Whole and No Call Settlements ................................................................21
2. Professional Fee Settlement ...............................................................................22
3. PBGC Settlement ...............................................................................................24
IV. The Disclosure Statement Does Not Disclose Any Benefits Contributed to theEstates by the Settling Parties ........................................................................................29
V. There is Inadequate Disclosure Regarding The Claims Reserves....................................30
1. The Environmental Claims Reserve Discussion Lack Adequate Disclosure........30
2. There is Inadequate Disclosure Regarding Treatment of Diacetyl Claims ...........31
VI. The Disclosure Statement Fails to Describe Alternative Plan Structures Proposedby the Equity Committee ...............................................................................................32
VII. The Disclosure Statement Fails to Describe the Equity Committee's Motion toTerminate Exclusivity....................................................................................................33
VIII. Deficiencies in Valuation and Related Financial Disclosure...........................................33
IX. Other Disclosure Infirmities that Must be Addressed .....................................................35
Notice ......................................................................................................................................37
Conclusion................................................................................................................................38
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iii
TABLE OF AUTHORITIES
PAGE(S)
CASES
In re Adana Mortgage Bankers, Inc.,14 B.R. 29 (Bankr. N.D. Ga. 1981) ..........................................................................11
In re City of Colorado Springs Spring Creek General Improvement District,177 B.R. 684 (Bankr. D. Colo. 1995) .................................................................13, 14
In re Duratech Industries, Inc.,241 B.R. 283 (E.D.N.Y. 1999).................................................................................11
In re Egan,33 B.R. 672 (Bankr. N.D. Ill. 1983) .........................................................................13
In re Ferretti,128 B.R. 16 (Bankr. D.N.H. 1991)...........................................................................14
In re Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey,160 B.R. 882 (Bankr. S.D.N.Y. 1993)......................................................................28
Guaranty National Insurance Co. v. Greater Kansas City Transportation, Inc.,90 B.R. 461 (D. Kan. 1988) .....................................................................................23
In re J.E. Jennings, Inc.,100 B.R. 749 (Bankr. E.D. Pa. 1989) .......................................................................23
JPMorgan Chase Bank, N.A. v. Charter Communications Operating, LLC (In reCharter Communications),419 B.R. 221 (Bankr. S.D.N.Y. 2009)..................................................................2, 21
In re Jeppson,66 B.R. 269 (Bankr. D. Utah 1986)..........................................................................10
In re Ligon,50 B.R. 127 (Bankr. M.D. Tenn. 1985) ....................................................................13
LTV Corp. v. Pension Benefit Guaranty Corp. (In re Chateaugay Corp.),115 B.R. 760 (Bankr. S.D.N.Y. 1990), aff'd, 130 B.R. 690 (S.D.N.Y. 1991),vacated and withdrawn, 89 Civ. 6012 (KTD), 1993 WL 388809 (S.D.N.Y.1993) .......................................................................................................................28
In re McLean Industries, Inc.,87 B.R. 830 (Bankr. S.D.N.Y. 1987)........................................................................11
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Momentum Manufacturing Corp. v. Employee Creditors Committee (In reMomentum Manufacturing Corp.),25 F.3d 1132 (2d Cir. 1994).....................................................................................10
In re National Health & Safety Corp.,No. 99-18339DWS, 2000 WL 968778 (Bankr. E.D. Pa. July 5, 2000)......................23
In re New Haven Radio, Inc.,18 B.R. 977 (Bankr. D. Conn. 1982) ........................................................................11
Oneida Motor Freight, Inc. v. United Jersey Bank,848 F.2d 414 (3d Cir. 1988).....................................................................................11
Pension Benefit Guaranty Corp. v. CF&I Fabricators of Utah, Inc. (In re CF&IFabricators of Utah, Inc.),150 F.3d 1293 (10th Cir. 1998) ................................................................................28
Pension Benefit Guaranty Corp. v. Skeen (In re Bayly Corp.),163 F.3d 1205 (10th Cir. 1998) ................................................................................28
In re Robinson,225 B.R. 228 (Bankr. N.D. Okla. 1998) ...................................................................23
In re Scioto Valley Mortgage Co.,88 B.R. 168 (Bankr. S.D. Ohio 1988).......................................................................10
In re UAL (Pilots' Pension Plan Termination),468 F.3d 444 (7th Cir. 2006)..............................................................................26, 27
In re United States Brass Corp.,194 B.R. 420 (Bankr. E.D. Tex. 1996) .....................................................................11
STATUTES
11 U.S.C. § 553 .............................................................................................................37
11 U.S.C. § 1125(a).......................................................................................................11
29 U.S.C. § 1342(a).......................................................................................................25
29 U.S.C. § 1342(c).......................................................................................................26
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OTHER AUTHORITIES
News Release, Pension Benefit Guaranty Corporation, PBGC Statement onContinued Pensions at Lyondell Chemical Co. (Apr. 30, 2010) available athttp://www.pbgc.gov/media/news-archive/news-releases/2010/pr10-30.html ...........27
News Release, Pension Benefit Guaranty Corporation, PBGC Hails SavedPensions at Reorganized Smurfit-Stone Container Corp. (June 30, 2010)available at http://www.pbgc.gov/media/news-archive/news-releases/2010/pr10-42.html ......................................................................................27
The Official Committee of Equity Security Holders (the "Equity Committee")
appointed in the above-captioned jointly administered chapter 11 cases (the "Chapter 11 Cases")
of Chemtura Corporation ("Chemtura") and its affiliated debtors and debtors in possession
(collectively, the "Debtors"), by and through its undersigned counsel, hereby objects (the
"Objection") to the approval of the Disclosure Statement for the Joint Chapter 11 Plan of
Reorganization of Chemtura Corporation, et al. [Docket No. 2923], as subsequently revised by
the Debtors on July 9, 2010 [Docket No. 3163] (as revised, the "Disclosure Statement").1 In
support of its Objection, the Equity Committee respectfully represents as follows:
Preliminary Statement
1. The Debtors' Plan and accompanying Disclosure Statement were devised
with no input from the Equity Committee. The Plan contains significant and material omissions
concerning the treatment of Class 13a equity interests which must be addressed before the
Debtors' Disclosure Statement can be approved. Otherwise, these fatal deficiencies make it
impossible for Chemtura's common stockholders to make an informed determination on whether
to accept or reject the Debtors' Plan.
2. Despite the fact that the Debtors' Plan acknowledges that the common
stockholders classified in Class 13a hold the fulcrum security in these cases, the disclosures that
most significantly impact their recoveries are obtuse, vague, misleading or incomprehensible.
Significantly, the Plan omits critical information regarding the nature and propriety of the Make-
Whole, No-Call, the Professional Fee, and PBGC Settlements, and the amount and nature of
claims with respect to the Environmental and Diacetyl Reserves, among other things. These
1 Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the JointChapter 11 Plan of Reorganization of Chemtura Corporation, et al. [Docket No. 2922], as subsequently revisedby the Debtors on July 9, 2010 [Docket No. 3153] (as revised, the "Plan") or the Disclosure Statement, asapplicable.
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unacceptable omissions create an information vacuum which prevents stockholders from
meaningfully participating in the disclosure and confirmation process. This District recognizes
that fulcrum security holders are entitled to full participation in chapter 11 reorganizations, and
the Debtors' current Plan denies the stockholders that fundamental right. See JPMorgan Chase
Bank, N.A. v. Charter Commc'ns Operating, LLC (In re Charter Commc'ns), 419 B.R. 221, 233
n.6 (Bankr. S.D.N.Y. 2009) ("In effect, holders of fulcrum securities are at the tipping point of
the capital structure (neither entirely in nor entirely out of the money) and given their impairment
and entitlement to vote for or against a chapter 11 plan are in a position to have considerable
influence over the outcome of a restructuring.").
3. There are material omissions in the Disclosure Statement. These
omissions related to the treatment of Class 13a recoveries and treatment and thus are necessary
to enable Class 13a to determine whether to vote to accept or reject the Plan. Among the
omissions that the Debtors need to correct are the following material deficient disclosures::
It is impossible for Class 13a stockholders to determine the value of their recoveries ifthey vote to reject the Plan. The Debtors must provide more precise information than justa spectrum of recoveries that might be available if Class 13a rejects the Plan. Forexample, the Debtors need to provide backup to how they reach the .5 – 9.0% recoveryrange and the assumptions they utilized to enable the stockholders to assess whether therange represents a legitimate estimate. This is relevant and critical information thatstockholders must have in order to make an informed judgment as to whether to forfeit acapped 5% recovery in favor of potentially greater values in they reject the Plan.
The Disclosure Statement does not succinctly advise Class 13a members of theconsequence of an accepting class vote. The Plan incorporates a perverse deathtrapfeature that allows Class 13a members to receive residual equity if they vote to reject thePlan, but a limited 5% recovery if they vote to accept the Plan. The Disclosure Statementdoes not clearly and plainly explain the consequences of a Class 13a rejecting oraccepting vote in the discussions pertaining to voting on the Plan. As a result, ordinarystockholders are not fully apprised of the consequences of their vote.
The Disclosure Statement fails to provide information to enable the stockholders to assessthe reasonableness of the settlements under the Plan. The Debtors don't explain why the
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Make-Whole, No-Call, PBGC and Professional Fee Settlements are necessary and whypaying the settlement amounts from stockholder recoveries is preferable to reinstating theconstituents' claims. Class 13a members must be informed that the settlement payments,which aggregate in excess of $120 million, are being paid to constituents who are alreadyreceiving payment in full plus interest on account of their Allowed Claims and thatstockholders would be entitled to these sums if the settlements were not entered into or ifthe settlements are not approved by the Court.
There is inadequate disclosure regarding the claims reserves. Stockholders have noinformation relating to the amounts proposed to be funded into the Environmental andDiacetyl Reserves, nor are they given any assessment of the anticipated amounts ofclaims to be satisfied through such reserves. This information is relevant to stockholdersbecause they are the recipients of any residual amounts in these reserves if stockholdersvote to reject the Plan.
The Disclosure Statement fails to describe the alternative plan structure proposed by theEquity Committee. The Equity Committee has asked the Court to terminate exclusivityto enable it to propose a superior plan which leaves Allowed Claims unimpaired andprovided for superior equity recoveries to existing stockholders. Voting stockholders areentitled to know that there exists an alternate plan proposal that maximizes value for theirrecoveries. The Disclosure Statement must address why the Debtors refused to consentto shortening exclusivity to allow voting stockholders to choose between the two planswhen all other constituents are paid in full or reinstated under both alternatives.
There are numerous deficiencies in valuation and related financial disclosures. Class 13amembers are entitled to understand the Debtors' valuation methodology so that they canaccurately assess the relative value of the recoveries they will receive under the Plan.With respect to the Debtors' proposed valuation range, they need to detail the universe ofprecedent transactions they used in their valuation analysis, the average EBITDAmultiples that were used in precedent transactions, and how much weight the Debtors'advisors assigned to this valuation methodology. Otherwise the stockholders cannot fullyunderstand whether the Debtors' valuation range is legitimate. Without understanding thecomponents that led to the valuation range, the stockholders cannot know whether theprojected range of equity value available to them has any factual basis. Similarly, theDebtors must disclose how they concluded that $750 million funded debt at emergencewas appropriate for these companies. The Equity Committee believes that reorganizedChemtura can sustain a higher leverage level, which will in turn reflect higher equityvalues for stockholders.
4. In particular, the disclosure with respect to the so-called "global
settlement" misrepresents the nature of the various settlements and requires updating in any
event because the lockup agreement that incorporates the global settlement is not currently
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before this Court for approval and terminates according to its terms if it is not approved by the
Disclosure Statement Hearing Date. First, the "global settlement" is not at all global. Rather, the
global settlement is merely an amalgam of four separate bi-lateral agreements between the
Debtors and a single creditor constituency that provides in the aggregate for over $120 million in
various "settlement payments" (which represents nearly 9% of the equity value of reorganized
Chemtura at Debtor's Plan valuation) relating to the Make-Whole, No-Call, PBGC and
Professional Fee Settlements. Nothing in the terms of any of these individual agreements require
all constituents to assent to the other one's settlement payment. As among the "settling" parties -
- holders of the 2016 Notes, holders of the 2026 Notes, the PBGC and the ad hoc committee of
bondholders (the "Ad Hoc Committee"), not one of them has any valid concern as to whether
any of the other ones "settle" a claim with the Debtors because they are each already receiving
payment in full plus accrued interest on account of their Allowed Claims exclusive of their
settlement payments. These do not approach the realm of traditional chapter 11 global
settlements where a benefit to one settling party corresponds to a detriment to another settling
party. Indeed, because the Plan provides for payment in full plus accrued interest of all allowed
unsecured claims, every payment made on account of these settlements is, dollar for dollar, taken
from recoveries to shareholders, who are not parties to the "global settlement."
5. The Debtors must disclose to the Court and voting stakeholders whether
the so-called "global settlement" is even valid at this point because the Debtors lack Court
authority to enter into the lockup agreement that purported to bind the parties to the terms of the
settlement (the "Plan Support Agreement"). The Debtors recently adjourned the hearing on the
PSA Motion, which clearly telegraphs their belief that they do not require the protection of the
PSA to proceed with solicitation of their Plan. As a result, it is questionable whether any of
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these individual "settlements" serve any legitimate purpose anymore. Rather, it appears that the
global settlement and PSA were a ruse in order to further marginalize stockholders' participation
in the plan process and implement further hurdles to the Equity Committee's ongoing efforts to
propose a competing plan.2 In fact, according to its terms, the Plan Support Agreement will
terminate if the Court does not enter an order approving the Plan Support Agreement and the
Debtors’ entry into it at or in connection with the Court’s hearing to approve the Disclosure
Statement. See Debtors' PSA Motion, Exh. 1 at § 7(a). Consequently, there is significant doubt
as to whether the Debtors are bound to consummate these settlements as part of the Plan given
that the PSA will have expired by its terms.
6. The Debtors must also inform Class 13 members that their vote is subject
to a distorted version of a deathtrap which the Debtors seek to enforce against Class 13a
members to require them to forfeit their entitlement to the residual value of the company. The
Plan incorporates this ill-conceived coercive voting provision by providing limited recovery for
stockholders if they acquiesce to the Debtors' Plan with an accepting vote, rather than distribute
all residual value to stockholders as they are entitled to receive. Specifically, under the Debtors'
Plan, if Class 13a votes to accept the Plan, it receives a capped 5% equity distribution and the
limited right to participate in the Debtors' rights offering up to an aggregate cap of $100 million.
If Class 13a votes to reject the Plan, however, it receives a speculative recovery that the Debtors
estimate to be anywhere from 0.5% to 9.0% of the new common equity. Thus, the Debtors
impose an artificial 5% cap on stockholder recoveries when, by the Debtors' own admission,
there may be residual value available to common stockholders of nearly double that amount.
2 See Debtors' Motion for Entry of an Order Authorizing the Debtors to Enter into a Plan Support Agreementwith the Creditors' Committee and Certain Holders of the Debtors' 2009 Notes, 2016 Notes and 2026Debentures [Docket No. 2926] (the "PSA Motion").
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There is no proper disclosure to Class 13a members that their vote as a class will have significant
consequences in that it may deprive them of their legitimate right to the residual value of the
enterprise.
7. This deathtrap puts Chemtura's common stockholders between the Scylla
and Charybdis of (a) a nominal capped recovery if they vote as a class to accept the Plan (which
could be significantly less than what they are entitled to as the holder of the fulcrum security)
and (b) a highly speculative and unsupported range of recoveries if they vote as a class to reject
the Plan. Moreover, it appears that the Debtors' estimated recovery range of 0.5% to 9% is
exclusive of residual claims reserves that are being established for Environmental and Diacetyl
Claims. The range also does not include over $120 million in settlement funds that will be
available when the various settlements are denied or limited by the Court. However, the
Disclosure Statement is devoid of necessary and critical information related to the potential value
of the residual equity. As a consequence, even if the Debtors' perverse deathtrap survives a
confirmation battle, at this stage of the reorganization it is impossible for Class 13a stockholders
to make an informed decision on the Plan because the Debtors do not provide sufficient facts to
allow stockholders to assess the relative value they could receive under an acceptance and
rejection scenario.3
8. The Disclosure Statement also contains woefully inadequate disclosure
regarding the unsupported settlements and the ill-conceived deathtrap and because of its
3 The Equity Committee has also objected to the Debtors' Motion for Entry of an Order (A) Fixing Dates andDeadlines Related to Confirmation of the Plan; (B) Approving Procedures for Soliciting and Tabulating theVotes on, and for Objecting to, the Plan; (C) Approving Rights Offering Procedures; and (D) Approving theManner and Form of Notices and Documents Relating to the Plan [Docket No. 3083] (the "SolicitationProcedures Motion") because those proposed procedures incorporate the death trap provision and seek toenforce it against Class 13a. See Objection of Equity Committee to the Solicitation Procedures Motion [DocketNo. 3295].
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inadequacies does not meet the standards for approval. The Disclosure Statement lacks candid
and objective discussion regarding the Debtors' pursuit of over $120 million in questionable
settlements that take recoveries from shareholders' pockets, and the distorted deathtrap that
effects a forfeiture of stockholder recoveries on which to solicit shareholder votes. In its current
form, the Disclosure Statement does not provide adequate information to enable voting
stockholders to make a determination on whether to vote to accept or reject the Plan. The
Debtors must provide relevant information and disclosure regarding the propriety of the so-called
"settlements", the amounts to be funded into the Environmental and Diacetyl Claims Reserves
(together with the potential range of claims expected to be asserted against such reserves), and
the voting deathtrap that has neither legal nor logical basis.
9. Finally, as the Court is aware, the Equity Committee is seeking to
terminate the Debtors' exclusivity periods to enable it to promptly file a competing plan that will
pay in full (in cash) or reinstate all allowed claims against the Debtors and distribute
significantly greater equity recoveries to existing holders of Chemtura common stock (with
substantially greater rights to invest new capital through a rights offering). The fact that the
Equity Committee has an alternate plan at the ready that the Debtors are trying to squelch at
every opportunity is also relevant disclosure for stockholders to consider when they determine
whether to vote for or against the Debtors' Plan and must be addressed in the Disclosure
Statement. The Debtors must also address the alternate plan proposals put forth by the Equity
Committee during plan negotiations with the Debtors together with the Debtors' reasons for
declining to pursue those plans.
Summary of Relevant Plan Provisions and Impact on Class 13a
10. The Plan proposes to pay all of the Debtors' unsecured creditors (other
than intercompany claims) in full, with most creditors receiving postpetition interest in addition
8
to their allowed claims. Disclosure Statement § I.C(iii), at 16-18. Instead of reinstating any of
the Debtors' prepetition debt, the Plan provides for exit financing comprised of $750 million
from a new term loan and/or the issuance of new notes plus a new $250 million revolver. Plan
§ 1.1(82). Under the Plan, secured creditors are paid in full, in cash. Depending on the class of
claims, unsecured creditors will receive their recoveries either all in cash or in a mixture of cash
and stock. For purposes of calculating these distributions, total enterprise value is set at $2.05
billion plus certain amounts of cash as set forth in the Disclosure Statement. Plan § 1.1(109).
11. Recoveries to Class 13a, in turn, are subject to a coercive voting provision
that provides alternate treatment depending upon whether the class votes to accept or reject the
Plan. Under the Plan, holders of Chemtura common stock, classified in Class 13a, receive
varying recoveries depending on whether Class 13a votes to accept or reject. If Class 13a
approves the Plan, then equity holders will receive 5% of the stock in New Chemtura -- the
Debtors' new parent company that will be formed prior to the effective date -- as well as the
right to purchase up to $100 million of new common stock in New Chemtura at the Debtors'
valuation (the "Rights Offering"). Plan § 3.3(m)(i)(A). If Class 13a does not vote in favor the
Debtors' Plan, then existing stockholders will only receive a share of the value in the Debtors
after all of the Debtors' unsecured claims have been paid in full and will have no right to
participate in the Rights Offering. Plan § 3.3(m)(i)(B). The Debtors estimate that if equity
holders reject the Plan they will receive between 0.5% and 9.0% of the stock in New Chemtura.
Equity holders are also entitled to an residual amounts left over in the reserves after all allowed
claims are satisfied in full. Disclosure Statement § VIII.B(iii)(m)(ii), at 107. However, as
discussed herein, the Debtors do not include these residual reserve amounts in their projected
0.5% - 9.0% recovery range.
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12. Built into this plan structure are several unsupported and ill-conceived
provisions that materially affect recovery for equity holders. First, the Debtors propose to pay
$70 million in settlements to holders of the 2016 and 2026 Notes in addition to payment of
principal and postpetition interest. Plan §§ 3.3(f)(i), (h)(i). According to the Disclosure
Statement, these payments are on account of make-whole and no-call provisions in the 2016 and
2026 Notes. Disclosure Statement § IX.B(ii), at 149-155. In the Disclosure Statement, the
Debtors state that any litigation over this issue would be "uncertain" and therefore it is in the
Debtors' best interest to settle so that the Debtors can focus on confirmation and avoid
"unnecessary expense and harm." Disclosure Statement § IX.B(ii)(c), at 153. The Debtors do
not explain why they have chosen to settle these claims rather than reinstate the relevant
securities. They also do not explain that if the settlements are not approved, the $70 million
earmarked for those settlements -- over 5% of the equity value at the Debtors' valuation -- will
become available and that the stockholders are entitled to receive that value.
13. The Debtors' Plan also proposes to pay up to $7 million of the Ad Hoc
Committee's third-party fees and expenses on account of alleged "substantial contributions" that
the Ad Hoc Committee might claim to have provided. Disclosure Statement § IX.B(iii), at 154-
55.4 As set forth herein, in light of the Debtors' adjournment of the hearing to consider the PSA
Motion and the consequent termination of the PSA according to its terms, the Disclosure
Statement must be amended in certain relevant ways.
14. In addition, the Plan creates reserves for Diacetyl and Environmental
Claims that the Debtors will fund with Cash. Plan §§ 9.2, 10.2. Any excess Cash in these
4 The Equity Committee has filed an objection to the PSA Motion on the grounds, among others, that the Debtorshave no authority to grant administrative status to a claim and that the underlying claim of a substantialcontribution has no chance of success on the merits and therefore the settlement does not fall within the range ofreasonableness. The Debtors have adjourned the hearing on the PSA Motion to August 4, 2010.
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reserves is treated differently depending on how Class 13a votes. If Class 13a votes to accept the
Plan, excess amounts in the Environmental Reserve and the Diacetyl Reserve become a part of
the Disputed Claims Reserve. Plan §§ 9.4, 10.5. Any excess Cash in the Disputed Claims
Reserve, after all Allowed Unsecured Claims are paid in full, would then be "returned to the
Reorganized Debtors for general corporate use and with any excess New Common Stock being
cancelled or held as treasury stock." Plan § 8.5. By contrast, if Class 13a votes to reject the Plan,
excess amounts in the Environmental Reserve and the Diacetyl Reserve will become a part of the
Disputed Claims Reserve, and, after all Allowed Unsecured Claims are paid in full, each equity
holder will receive its Pro Rata share of such excess cash and New Common Stock. Plan §§ 8.5,
9.4, 10.5.
Argument
15. Full and meaningful disclosure that enables stakeholders to make an
informed judgment on the merits of a plan of reorganization is one of the hallmarks of the
reorganization process. Momentum Mfg. Corp. v. Employee Creditors Comm. (In re
Momentum Mfg. Corp.), 25 F.3d 1132, 1136 (2d Cir. 1994) ("Of prime importance in the
reorganization process is the principle of disclosure."). Bankruptcy Code section 1125 "was
intended by Congress to be the primary source of information upon which creditors and
shareholders would make an informed judgment about a plan of reorganization." In re Jeppson,
66 B.R. 269, 291 (Bankr. D. Utah 1986); see also In re Scioto Valley Mortgage Co., 88 B.R. 168,
170 (Bankr. S.D. Ohio 1988) ("The disclosure statement was intended by Congress to be the
primary source of information upon which creditors and shareholders could rely in making an
informed judgment about a plan of reorganization."). As the Third Circuit Court of Appeals has
stated, "[t]he importance of full disclosure is underlaid by the reliance placed upon the disclosure
statement by the creditors and the court. Given this reliance, we cannot overemphasize the
11
debtor's obligation to provide sufficient data to satisfy the Code standard of 'adequate
information.'" Oneida Motor Freight, Inc. v. United Jersey Bank, 848 F.2d 414, 417 (3d Cir.
1988).
16. Substantively, this means that a plan proponent must provide equity
holders and creditors with "information of a kind . . . that would enable [a hypothetical investor
typical of the holders of claims or interest in the case] to make an informed judgment about the
plan." 11 U.S.C. § 1125(a). Put differently, "[t]he purpose of the disclosure statement is not to
assure acceptance or rejection of a plan, but to provide enough information to interested persons
so that they may make an informed choice between two alternatives." In re United States Brass
Corp., 194 B.R. 420, 423 (Bankr. E.D. Tex. 1996); see also In re Duratech Indus., Inc., 241 B.R.
283, 289-90 (E.D.N.Y. 1999) (the purpose of a disclosure statement is to give creditors enough
information to make an informed decision on whether to reject or accept a plan); see also In re
McLean Indus., Inc., 87 B.R. 830, 834 (Bankr. S.D.N.Y. 1987) ("[S]ubstantial financial
information with respect to the ramifications of any proposed plan will have to be provided to,
and digested by, the creditors and other parties in interest in order to arrive at an informed
decision concerning the acceptance or rejection of a proposed plan.").
17. A disclosure statement is incapable of being approved when it fails to
provide relevant information relating to risks to voting parties. In re Adana Mortgage Bankers,
Inc., 14 B.R. 29, 31 (Bankr. N.D. Ga. 1981) (rejecting debtor's proposed disclosure statement
which failed to provide relevant financial information and did "not provide any information
relevant to the risks of the Creditors under the terms and provisions of Debtor's Plan"); In re New
Haven Radio, Inc., 18 B.R. 977, 979 (Bankr. D. Conn. 1982) (holding that a disclosure statement
12
should "provide the 'hypothetical investor' with the kind of information to evaluate the risk of
acceptance of the plan").
18. As a threshold matter, the Bankruptcy Code places a burden on the debtor
to provide adequate disclosure precisely so that shareholders are not required to speculate about
the value of their recoveries. But the Disclosure Statement abandons any pretense of providing
accurate or reliable information in its opening pages:
Neither this Disclosure Statement nor the Plan is or should beconstrued as an admission of fact, liability, stipulation or waiver. Rather, holdersof Claims and Interests and other parties in interest should construe thisDisclosure Statement as a statement made in settlement negotiations related tonumerous contested matters . . . .
[T]he timing and amount of actual distributions to holders ofAllowed Claims and, if applicable, Interest may be affected by many factors thatcannot be predicted. Any analyses, estimates or recovery projections may or maynot turn out to be accurate.
Making investment decisions based on the information containedin this Disclosure Statement and/or the Plan is therefore highly speculative.
Disclosure Statement at ii-iii.
19. Consequently, the Debtors' Disclosure Statement, which is supposed to be
a meaningful document upon which investors such as the Class 13a members can rely in order to
make an informed judgment on whether to accept or reject the Plan, lacks any meaningful
disclosure underpinning Class 13a potential recoveries if they vote to reject the Plan. In addition,
the caveats and disclaimers and reservations contained in the Disclosure Statement suggest that
the Debtors and their advisors do not have confidence in any of the data on which they are asking
their investors to rely. After reviewing the Disclosure Statement, the only thing that becomes
apparent is that the Debtors either do not have sufficient information to share with investors, do
13
not want to share relevant information with investors, or are not prepared to stand behind the
information they have disclosed.
I. The Disclosure Statement is Missing Information Necessary to Enable Stockholdersto Determine Their Recoveries if they Reject the Plan
20. The Debtors cannot possibly expect their common stockholders to make
an informed judgment as to whether to surrender a portion of the residual value to which they are
entitled on a plan that provides a broad range of recoveries for rejecting votes, with potentially
higher recoveries than accepting votes would yield where it is impossible for even the most
sophisticated investor to ascertain the relative value of the securities to be distributed upon a
Class 13a accepting or rejecting vote. The current form of Disclosure Statement is therefore
deficient because "even an extraordinarily knowledgeable investor could not be expected to
glean from the Debtors' assertions facts sufficient to support an informed judgment about the
plan." In re Egan, 33 B.R. 672, 676 (Bankr. N.D. Ill. 1983) (denying approval of disclosure
statement).
21. In particular, disclosure relevant to the value to be received by voting
classes is a vital component to a disclosure statement and a key factor that courts consider in
determining whether to approve a disclosure statement. See In re City of Colo. Springs Spring
Creek Gen. Improvement Dist., 177 B.R. 684, 690 (Bankr. D. Colo. 1995) (holding that a
disclosure statement which failed to "address the possibility or effect of a decrease in the
assessed value of the real property" failed to provide adequate information to bondholders
(citation omitted)); In re Ligon, 50 B.R. 127, 130 (Bankr. M.D. Tenn. 1985) (a "description of
available assets and their value is a vital element of necessary disclosure") (citations omitted). In
fact, the "purpose of a disclosure statement is to inform equity holders and claimants, as fully as
possible, about the probable financial results of acceptance or rejection of a particular
14
plan." City of Colo. Springs, 177 B.R. at 689 (emphasis added). In clear and unambiguous
terms, a disclosure statement must clearly and succinctly inform a stakeholder "what it is going
to get, when it is going to get it and what contingencies there are to getting its distribution."
In re Ferretti, 128 B.R. 16, 19 (Bankr. D. N.H. 1991) (emphasis added).
22. The Disclosure Statement does not even make a good faith attempt to
explain to Class 13a members "what they are going to get and when they are going to get it." It
is equally murky regarding the myriad contingencies that relate to a Class 13a distribution upon a
rejecting or accepting vote. As noted above, the Plan contains an unsupported deathtrap feature
that deprives common stockholders of their entitled residual equity if they acquiesce to their
unlawful treatment under the Plan. Plan § 3.3(m)(i). Whether Class 13a accepts or rejects the
Plan impacts how excess funds and New Common Stock are distributed. If Class 13a votes to
accept the Plan, excess amounts in the Environmental Reserve and the Diacetyl Reserve become
a part of the Disputed Claims Reserve. Plan §§ 9.4, 10.5. Section 8.5 of the Plan, in turn,
provides that "any excess Cash [in the Disputed Claims Reserve, after all Allowed Unsecured
Claims are paid in full, will be] returned to the Reorganized Debtors for general corporate use
and with any excess New Common Stock being cancelled or held as treasury stock." Plan §
8.5(a). This highly relevant fact that the death trap not only deprives common stockholders
of residual equity but also enables the Debtors to retain this residual value for working
capital purposes must be clearly and concisely disclosed to voting Class 13a interest holders
in the relevant parts of the Disclosure Statement, together with an unambiguous statement
that the Equity Committee believes that this is an impermissibly discriminatory voting
provision that has never been judicially condoned.
15
23. By contrast, if Class 13a votes to reject the Plan, excess amounts in the
Environmental Reserve and the Diacetyl Reserve will become a part of the Disputed Claims
Reserve, and, after all Allowed Unsecured Claims are paid in full, each equity holder will be
entitled to its Pro Rata share of such excess cash and New Common Stock. Plan §§ 8.5(b), 9.4,
10.5. But without the relevant information regarding the amounts of cash and/or stock that the
Debtors are funding into the reserves, and the range of claims that the Debtors estimate they will
pay out of the reserves, it is impossible to assess the potential range of residual value that may be
available to a rejecting Class 13a.
24. If Class 13a votes to reject the Plan, the Debtors estimate that each holder
of an Interest in Chemtura shall receive its Pro Rata share of "approximately 0.5% to 9.0% of the
New Common Stock, subject to dilution for the Incentive Plans and depending on, among other
things, the ultimate amount of Allowed Claims against the Debtors." Disclosure Statement §
VIII.B(iii)(m)(ii), at 107. This range from 0.5% to 9.0% does not include Class 13a’s right to
excess cash and New Common Stock in the reserves after all Allowed Unsecured Claims are
satisfied, but this is not clear in the Disclosure Statement – the right to the excess is not even
mentioned in Section VIII.B(iii)(m)(ii), at 107.
25. Put simply, if Class 13a votes to accept the Plan, the residual value of the
Debtors, after all Allowed Claims are satisfied, will revert to the Debtors instead of the equity
holders. Conversely, if Class 13a votes to reject the Plan, equity holders will be entitled to any
residual value of the Debtors after they satisfy all Allowed Claims. As indicated above, the
Debtors' own estimates reflect that a Class 13a accepting vote artificially limits recoveries to
equity holders to 5% when the Debtors concede that there is potentially more value available.
16
26. In light of the Plan's treatment of Class 13a, it is crucial that the Disclosure
Statement provide (i) estimates of the amount of cash (and in the case of the Disputed Claims
Reserve, cash and New Common Stock) that the Debtors will use to fund the Environmental
Reserve, the Diacetyl Reserve and the Disputed Claims Reserve and (ii) an estimated range of all
Allowed Environmental Claims, Allowed Diacetyl Claims and Allowed Disputed Unsecured
Claims, together with their assessment of the likely outcome of the disputes on the merits or
through settlements to provide perspective on the amounts that might ultimately be available
from the reserves. This information is critical for members of Class 13a to determine what
they get if they reject the Plan, which in turn is necessary to judge the relative value
available to Class 13a if they vote to accept or reject the Plan. The Disclosure Statement
does not include any of this information.
II. The Disclosure Statement Fails to Explicitly Disclose and Justify the PunitiveTreatment to Class 13a Holders of Chemtura Interests Under the Plan
27. The Debtors incorporated various improper and illegally coercive and
punitive provisions into the Plan in order to incentivize Class 13a to accept the Plan without
resistance or opposition. At a minimum, the Debtors must explain, in clear and unambiguous
terms, that the Equity Committee believes that the Class 13a treatment is improper and illegally
coercive and lacks any legal or factual basis and intends to oppose confirmation on these grounds,
among others. The Debtors should also be required to discuss their justification for the Class 13a
deathtrap when creditors are being paid at least in full and recoveries that would otherwise
belong to stockholders are being used to pay gratuitous claims to creditors.
28. First, the Debtors include a death trap provision in the Plan that changes
the Class 13a treatment from a certain fixed recovery to an uncertain -- and incalculable -- range
of recoveries, depending on whether the class votes to accept or reject the Plan. But this
17
employment of a death-trap has no legitimate place in a plan structure such as the Debtors' where
common stockholders hold the fulcrum security. In this case, the Chemtura common
stockholders who own the residual equity in the company are being asked to surrender some of
the value and to make this decision based upon inadequate information. In fact, it is highly
atypical to employ a deathtrap against a fulcrum security holder for the very reason that the
fulcrum security exist at the "tipping point" of the capital structure.
29. Nowhere do the Debtors disclose sufficient information for the
stockholders to assess whether they are better off rejecting the Plan to recover potentially higher
value than if they accepted the Plan. Critical information regarding the various reserves is
severely lacking. In large part, this deficiency is attributable to the lack of disclosure regarding
the Environmental Reserve, the Diacetyl Reserve and the Disputed Claims Reserve. But because
the Class 13a members are entitled to the residual value of these reserves if they reject the Plan,
they must have more than just a cursory range of recoveries that are incapable of being
independently confirmed as the basis for their decision. Quite simply, the Disclosure Statement
does not provide equity holders with enough information to assess whether they are better off
voting to accept or reject the Plan.
30. Given the lack of any legitimate reason to employ a death trap against
fulcrum security holders, it becomes abundantly clear that the death trap is employed only to
improperly coerce stockholders to accept the 5% capped recovery offered under the Plan and, in
the process, buy their silence regarding confirmation objections. If Class 13a votes to accept the
Plan, the Debtors, the Official Committee of Unsecured Creditors of Chemtura Corporation, et al.
(the "UCC") and the Ad Hoc Committee will likely rely upon that acceptance to defuse the
Equity Committee's confirmation objections. To remedy this unjust result, the Disclosure
18
Statement must state that neither the Debtors, the UCC, nor the Ad Hoc Committee will seek to
limit the Equity Committee's ability to object to the Plan at confirmation, even if Class 13a votes
to accept the Plan. As more fully set forth in the Equity Committee's Objection to the
Solicitation Procedures Motion, no authority permits the Debtors to impose this twisted version
of a voting deathtrap on fulcrum security holders to deprive them of residual equity values.
Holders of Class 13a interests are entitled to know how the Debtors justify this treatment and
whether they explored alternate plan scenarios without resorting to a distorted death trap
provision.
31. Moreover, there is no legitimate reason for the Debtors' determination to
redeploy the value of the claims reserves to the Debtors' working capital (after all Allowed
Unsecured Claims are satisfied) in the event that Class 13a votes to accept the Plan. See Plan
§ 8.5. As indicated above, the Disclosure Statement does not contain any clearly worded
discussion to alert Class 13a members that the residual equity value of the Debtors will revert to
the Debtors for working capital purposes upon their acceptance of the Plan. The Disclosure
Statement must contain explicit language that the fulcrum security holders' recoveries are
reverting to the Debtors in exchange for coercing them to accept the Plan and must also
announce that the Equity Committee believes this to be an impermissible voting provision and
intends to vigorously oppose it at confirmation.
32. The Debtors artificially cap the Rights Offering at $100 million and make
it available only if Class 13a votes to accept the Plan, without any justification for excluding the
Rights Offering from the Plan if Class 13a rejects the Plan and without any explanation for the
imposition of an arbitrary limit on the amount of new capital that shareholders can invest in the
reorganized enterprise. By imposing the $100 million cap, the Debtors allow their creditors the
19
exclusive opportunity to receive new equity (by equitizing claims rather than paying them off in
cash) without any articulated justification. In order for Class 13a to make an informed decision
whether to accept the Plan (and therefore be allowed to participate in the Rights Offering), the
Debtors must explain why the Rights Offering is limited to $100 million, especially in light of
the fact that the Equity Committee's own plan proposal provides a $235 million rights offering,
including how the limit was arrived at, what the consequences would be if there was no limit, or
a higher limit, and how the Debtors justify the imposition of the limit.
III. The Disclosure Statement Fails to Provide Sufficient Information to Enable theStockholders to Assess the Reasonableness of the Settlements Under the Plan
33. The Debtors' Disclosure Statement discusses a number of issues that are
being resolved pursuant to a so-called global settlement among the Debtors, the UCC and the Ad
Hoc Committee that purport to resolve issues relating to (a) certain make-whole provisions and
no-call penalties, (b) the Ad Hoc Committee's substantial contribution claim, and (c) the PBGC's
potential termination rights under the Debtors' pension plans. As indicated above, the Debtors
must advise the Court whether they remain bound to the terms of the settlements since they do
not have authority to enter into the PSA and the PSA terminates according to its terms on the
date of the Disclosure Statement hearing. To the extent the Debtors continue to pursue approval
of the settlements, every dollar paid in connection with these settlements is a dollar taken from
stockholder recoveries. As a consequence, Class 13a stockholders whose votes are being
solicited on the Plan are entitled to sufficient information regarding the reasonableness of
depriving them of in excess of $120 million in recoveries (representing approximately 9% of
pro forma equity at the Debtors' valuation) when they are receiving no benefit from the
settlements and they were not a party to settlement negotiations. The Debtors must explain why
the costs of these so-called settlements are being borne by Chemtura's equity holders. As the
20
fulcrum security in these Chapter 11 Cases, equity holders are entitled to understand how the
Debtors justify using recoveries that would otherwise be distributed to equity to "settle"
creditors' claims without any benefit to – or input from - equity holder representatives. There is
simply no quid pro quo to the stockholders for these settlements.
34. Importantly, the Debtors acknowledge that they caved to their creditors'
"take it or leave it" settlement ultimatum:
The terms of the Make-Whole Settlement and the No-Call Settlement wereavailable to the Debtors by the Creditors' Committee, the Ad Hoc Bondholders'Committee, the 2016 Notes Indenture Trustee and the 2026 Notes IndentureTrustee only if the Debtors settled all of the Claims and controversies as a wholeon the terms as offered.
See Disclosure Statement § VIII.D.(v), at 110 (emphasis added).
35. In light of this admission, the Debtors' characterization of the settlements
as "a good faith compromise and settlement of all Claims and controversies" relating to make-
whole premiums and no-call penalties is unacceptable. Disclosure Statement § VIII.D(v), at 110.
Voting equity holders are entitled to additional information regarding the propriety of these
settlements and the justification – if any – for excluding the Equity Committee from whatever
purported negotiations occurred particularly in light of the fact that the settlements are being
funded with equity recoveries.
36. In particular, the Debtors must explain the process by which they reached
these settlements, the benefits to the estate as a result of entering into each settlement, the range
of claimholder recoveries absent such settlements under best-case and worst-case litigation
scenarios, the analysis and consideration of alternatives, and the detriment to the fulcrum
security holders.
21
1. Make Whole and No Call Settlements
37. With respect to the 2016 Notes, the Debtors are paying a premium in the
form of the $50 million Make-Whole Settlement, which comes directly from shareholder
recoveries. In light of this, the Debtors are obligated to disclose the process by which they
reached the Make-Whole Settlement, the benefits to the estate as a result of entering into the
settlement, the range of stockholder recoveries if the settlement is not approved, their analysis
and consideration of alternatives, and the perceived detriment to the fulcrum security holders.
Specifically, the stockholders have a right to unambiguous disclosure that the 2016 Notes have a
below-market interest rate for the next six years and that, despite this obvious balance sheet
"asset," the Debtors opted to take on a higher rate of interest on their debt, pay off the 2016
Notes in full, and also agree to pay a $50 million premium in the form of a "settlement."
38. In particular, the Debtors must disclose whether they explored alternative
plan treatment to the 2016 Notes that would obviate the make-whole issue in its entirety and
preserve $50 million in value for distribution to equity holders. Specifically, the Equity
Committee believes that the 2016 Notes ought to be reinstated under the Debtors' Plan, thereby
preserving a low cost debt instrument for the benefit of the estate and freeing additional
consideration for distribution to equity holders. Significantly, the Debtors neglect to disclose
that reinstatement is a viable option with respect to the 2016 Notes, particularly in light of the
recent favorable reinstatement precedent in this District. See JPMorgan Chase Bank, 419 B.R.
221. The Debtors' recitation of arguments for and against the allowance of a make-whole
payment under the 2016 Notes is a side show. There is no need to litigate the make-whole issue
if the 2016 Notes are reinstated and, even if there were a valid cause of action under the 2016
Notes that survived reinstatement, the litigation could easily be addressed post-consummation.
22
39. Moreover, in light of the Equity Committee's opposition to the Make-
Whole Settlement, the Debtor must disclose that the Equity Committee intends to vigorously
oppose approval of the Make-Whole Settlement at confirmation and they should further disclose
whether and to what extent denial or limitation of the Make-Whole Settlement will impact
shareholder recoveries.
40. Similarly, with respect to the 2026 Notes, the Debtors are paying a
premium in the form of the $20 million No-Call Settlement, which payment comes directly from
shareholder recoveries. In light of this, the Debtors are obligated to disclose the process by
which they reached the No-Call Settlement, the benefits to the estate as a result of entering into
the settlement, the range of claimholder recoveries absent the settlement under best-case and
worst-case litigation scenarios, the analysis and consideration of alternatives, and the detriment
to the fulcrum security holders. Similar to the additional disclosure required for the 2016 Note
alternative treatments, the Debtors must disclose whether they explored alternative plan
treatment to the 2026 Notes that would obviate the no-call issue in its entirety. Specifically, the
Debtors should disclose that the Equity Committee believes that the 2026 Notes ought to be
reinstated, thereby preserving a low cost debt instrument for the benefit of the estate and
preserving $20 million for distribution to equity holders or passed through.
41. Moreover, in light of the Equity Committee's opposition to the No-Call
Settlement, the Debtors must disclose that the Equity Committee intends to vigorously oppose
approval of the No-Call Settlement at confirmation and they should further disclose whether and
to what extent denial of the No-Call Settlement will impact shareholder recoveries.
2. Professional Fee Settlement
42. With respect to the Ad Hoc Committee's $7 million Professional Fee
Settlement, the Debtors do not provide adequate information to enable Class 13a members to
23
determine whether to vote to accept or reject such settlement. As a preliminary matter, the
Debtors have adjourned the hearing on the PSA Motion in which they seek approval of the
Professional Fee Settlement until August 4, 2010. Consequently, the Debtors must explain
whether there remains any reason to include the Professional Fee Settlement as part of the Plan
settlement. If there is no longer a justification to incorporate the Professional Fee Settlement, the
Debtors must clarify that the $7 million settlement amount will revert to the Class 13a recovery
and consequently they must revise their estimated recovery value to Class 13a.
43. To the extent the Debtors insist they have a legitimate basis to seek
approval of the Professional Fee Settlement in any other context, then it is incumbent upon them
to address whether they even have authority to grant administrative expense status to the Ad Hoc
Committee's professionals' fees in the first place. See In re Nat'l Health & Safety Corp., No. 99-
18339DWS, 2000 WL 968778, at *1 n.7 (Bankr. E.D. Pa. July 5, 2000) (court disapproved
settlement of attorney's section 503(b) claim and stated that "the Debtor cannot confer the
priority claim status; rather only the Court can"); Guar. Nat'l Ins. Co. v. Greater Kan. City
Transp., Inc., 90 B.R. 461, 463 (D. Kan. 1988) ("[t]he Code's language clearly indicates that
parties request the court to grant their claims administrative expense priority; they do not dictate
claim priorities to the court"); In re Robinson, 225 B.R. 228, 233 (Bankr. N.D. Okla. 1998)
("Parties are not free to elevate the status of a claim by agreement, especially when to do so
would operate to the detriment of other creditors . . . ."); In re J.E. Jennings, Inc., 100 B.R. 749,
752 (Bankr. E.D. Pa. 1989) ("[A]s we read § 503(b), court scrutiny is implicitly required as to all
administrative claims allowable pursuant thereto." (emphasis in original)).
44. Moreover, the Debtors must justify the basis for seeking approval of the
Professional Fee Settlement under section 1129(a)(4), as opposed to the more stringent standards
24
of section 503(b). The Debtors must further disclose the authorities they rely upon, if any, that
justify precluding the Equity Committee from opposing the reasonableness of the Ad Hoc
Committee's professionals' fees.5 The Debtors must disclose that the Equity Committee intends
to vigorously oppose approval of the Professional Fee Settlement at confirmation and that the
Equity Committee does not believe the Ad Hoc Committee has a credible claim for having made
a substantial contribution to the Chapter 11 Cases at this juncture. The Debtors must further
disclose whether and to what extent denial of the Professional Fee Settlement will impact
shareholder recoveries.
3. PBGC Settlement
45. With respect to the PBGC settlement, the Debtors do not provide adequate
information to enable Class 13a members to assess the merits of the Debtors' proposed $50
million contribution to its U.S. pensions plans to mollify the PBGC. In particular, the Debtors do
not justify their decision to trade a $50 million contribution in exchange for the PBGC's limited
agreement not to "pursue termination" of the U.S. pension plans. Disclosure Statement
§ IX.B(iv)(b), at 157. Moreover, the Debtors must disclose the precise terms of their settlement
with the PBGC. The Debtors' murky statement that they will make a one-time $50 million cash
contribution to the Chemtura Retirement Plan in exchange for the PBGC agreeing "not to pursue
such terminations based solely on the facts of the Debtors’ proposed restructuring plan in the
Chapter 11 Cases," Disclosure Statement § IX.B(iv)(b), at 157, is inadequate and provides no
meaningful disclosure of the nature and extent of the PBGC's forbearance.
5 Indeed, under the proposed Professional Fee Settlement as described in section 5.6 of the Plan, the EquityCommittee is not even entitled to receive or review the Ad Hoc Committee's professional invoices that arebeing paid out of its constituents' recoveries.
25
46. In an attempt to justify the settlement, the Debtors portray the PBGC's
abilities to terminate pension plans in a misleading way. The Debtors give the impression that if
they do not immediately contribute an extra $50 million, the PBGC would be able to use its
"broad discretion" to terminate the Debtors' Single-Employer Pension plans, immediately
generating huge costs to the Debtors' estates. Disclosure Statement § IX.B(iv)(b), at 156.
47. But, the Debtors' discussion simply does not mirror reality. To begin with,
of the four possible grounds upon which the PBGC can terminate a pension plan under 29 U.S.C.
§ 1342(a), only the "long run loss" provision allowing the PBGC to terminate an underfunded
plan if it determines that "possible long-run loss of the corporation with respect to the plan may
reasonably be expected to increase unreasonably if the plan is not terminated" could be
implicated in this case. If the PBGC, however, was successful in terminating the U.S. pension
plan (itself a doubtful proposition), any loss would move from a prospect to a certainty, and it is
difficult to imagine how guaranteeing a loss would be in the agency's long-term interest,
especially when there is every reason to believe that the Debtors will successfully emerge from
bankruptcy as going concerns. And, of course, whatever risk is involved is of the sort that the
PBGC takes all the time. So, while the agency may have "concerns about the Debtors' ability to
fund their obligations with respect to the Single-Employer Plans after the Effective Date . . . [in
view of] the Debtors' capital structure and financial projections upon emergence," Disclosure
Statement § IX.B(iv)(b), at 157, it is doubtful that the PBGC would willingly incur a $400
million liability today as a result of those concerns if it did not receive the settlement amount of
$50 million.
48. The Debtors must also be more candid about the process that the PBGC
would have to follow to terminate any pension plan. Even if the PBGC staff assigned to
26
Chemtura's pension plans were to recommend termination of the Debtors' U.S. pension plans, a
recommendation would merely commence a process involving both the Trusteeship Working
Group (the "TWC"), an internal working group, and the Executive Director of the PBGC and
would not, in and of itself, result in a definitive termination. And, in the unlikely event that the
agency's internal working group did find that grounds to terminate exist, it is highly unlikely,
given the current economic, political and policy environment, that the head of the agency would
seek to close these plans where the Debtors have "determined . . . not to seek voluntary
termination." Disclosure Statement § IX.B(iv), at 156.
49. And, even if the staff, the TWC, and the Executive Director decided to
disregard the Debtors' willingness and ability to continue the Single Employer Plans, the PBGC
would have to commence a legal action asking a court to find that "the plan[s] must be
terminated in order to protect the interests of the participants or to avoid any unreasonable
deterioration of the financial condition of the plan or any unreasonable increase in the liability of
the [insurance] fund." 29 U.S.C. § 1342(c). Contrary to the Debtors' discussion, it is far from
clear that a court would review the PBGC's determination on the deferential "arbitrary and
capricious" standard. Cf. Disclosure Statement § IX.B(iv), at 156. As Judge Easterbrook noted
in In re UAL Corp. (Pilots' Pension Plan Termination), "[n]othing in 29 U.S.C. § 1342(c), which
describes the judicial function after the PBGC files an action seeking termination, suggests that
the court must defer to the agency's view." 468 F.3d 444, 450 (7th Cir. 2006). In particular,
Judge Easterbrook noted that when the PBGC decides to seek termination it does not engage in
either rulemaking or adjudication. Instead, he observed that:
All the PBGC had done is commence litigation, and its position is no moreentitled to control than is the view of the Antitrust Division when theDepartment of Justice files suit under the Sherman Act. As the plaintiff, a federalagency bears the same burden of persuasion as any other litigant.
27
Id. (citation omitted).
50. The exact terms of the settlement are also not at all clear. The settlement
appears to leave PBGC with the broad power to seek termination based on anything other than
"the facts of the Debtors' proposed restructuring plan." Disclosure Statement § IX.B(iv)(b), at
157.
51. More likely, the PBGC settlement represents another misappropriation of
shareholder recoveries without any justification. Indeed, the recent wave of bankruptcy filings
has left the PBGC inundated with plan terminations from failed companies. In fact, rather than
seeking to force companies that maintain their pension plans to deplete their estates by paying
out extra money, the PBGC has issued laudatory press releases regarding those companies that
emerge from Chapter 11 with their pension plan intact. For example, when Lyondell Chemical
Co. emerged from bankruptcy, PBGC issued a press release stating that:
Too often, the outcome in bankruptcy is termination of the pension plan, reducedbenefits for retirees, and transfer of unfunded liabilities to the PBGC. We arepleased that Lyondell Chemical has maintained its pension plans throughout thereorganization process, and continues to honor the retirement promises to madeto its workers and retirees.
News Release, Pension Benefit Guaranty Corporation, PBGC Statement on Continued Pensions
at Lyondell Chemical Co. (Apr. 30, 2010) available at http://www.pbgc.gov/media/news-
archive/news-releases/2010/pr10-30.html; see also News Release, Pension Benefit Guaranty
Corporation, PBGC Hails Saved Pensions at Reorganized Smurfit-Stone Container Corp. (June
30, 2010) available at http://www.pbgc.gov/media/news-archive/news-releases/2010/pr10-
42.html ("The PBGC works actively with companies in bankruptcy to preserve worker pensions.
So we are pleased to report success as Smurfit-Stone today emerges from Chapter 11 with its
pension plans ongoing. . . . We salute Smurfit-Stone and its lenders for completing a
28
reorganization that does not burden retirees or the pension insurance program."). Thus, it is a
stretch for the Debtors to claim that there is any real threat of the PBGC terminating the Debtors'
pension plans, especially when the below market amount of leverage in the Debtors' Plan would
actually make the pension plans more secure, not less.
52. Finally, the Debtors must clarify that while the PBGC might "assert that
its claim for pension underfunding is entitled to priority because the termination liability should
be considered an administrative expense and/or a tax," Disclosure Statement § IX.B(iv), there
would be no merit to such an assertion. Well settled case law holds that, with the small
exception of benefits that accrued post petition, PBGC's claims would receive no such priority.
See Pension Benefit Guar. Corp. v. CF&I Fabricators of Utah, Inc. (In re CF&I Fabricators of
Utah, Inc.), 150 F.3d 1293, 1298 (10th Cir.1998) ("Although mandated by statute, there is simply
no credible argument that the required payments fund either a function of the United States or
any of its undertakings. It thus follows PBGC's claim for unpaid minimum contributions is not to
be accorded tax priority."); Pension Benefit Guar. Corp. v. Skeen (In re Bayly Corp.), 163 F.3d
1205, 1208 (10th Cir. 1998) (holding that PBGC's claim was not a tax claim because it was not a
claim incurred by the estate postpetition); In re Finley, Kumble, Wagner, Heine, Underberg,
Manley, Myerson & Casey, 160 B.R. 882, 892 (Bankr. S.D.N.Y. 1993) ("The postpetition
termination of the Pension Plan, if and when it is terminated, does not transform this contingent
claim into a postpetition claim worthy of an administrative priority."); LTV Corp. v. Pension
Benefit Guar. Corp. (In re Chateaugay Corp.), 115 B.R. 760, 778 (Bankr. S.D.N.Y. 1990)
("[T]his Court finds that the post-petition termination of the pension plans did not give rise to
post-petition claims. Nor are the PBGC claims, except for a small portion attributable to post-
petition services of LTV Steel's employees, entitled to administrative priority pursuant to §
29
503(b)(1)(A). Consequently, the PBGC's claims are therefore properly classified as general
unsecured claims."), aff'd, 130 B.R. 690 (S.D.N.Y. 1991), vacated and withdrawn, 89 Civ. 6012
(KTD), 1993 WL 388809 (S.D.N.Y. June 16, 1993). Further, the Debtors fail to disclose that the
Debtors' U.S. pension plans are largely frozen, making it likely that postpetition accrual, if any,
would be immaterial
53. In light of the forgoing, the Debtors are obligated to disclose the process
by which they reached the PBGC Settlement, the benefits to the estate as a result of entering into
the settlement, the range of claims or damages absent the settlement under best-case and worst-
case litigation scenarios in the event the PBGC attempted to terminate the Debtors' pension plans,
and the Debtors' analysis and consideration of alternatives.
IV. The Disclosure Statement Does Not Disclose Any Benefits Contributed to the Estatesby the Settling Parties
54. The Debtors' Disclosure Statement is silent with respect to any benefits
that the estates reap by entering into the Make-Whole, No-Call, Professional Fee and PBGC
Settlements. It is therefore impossible for Chemtura stockholders to assess the terms of the
settlements without any understanding of how they benefit the estate. The reason for the lack of
disclosure is apparent: the estates reap no quantifiable benefit from the settlements other than
the security of accepting plan votes from the Debtors' creditor constituents who are being richly
rewarded on account of a manufactured settlement of phantom claims. Indeed, because the costs
of these settlements are coming directly from equity holders' recoveries, the Debtors should be
required to disclose how much the settlements are costing the equity holders. Furthermore,
equity holder ballots should contain a separate vote on whether or not to support the payment of
the settlements out of their recoveries.
30
55. The Debtors should also address in their Disclosure Statement whether
their Plan would be confirmable in the absence of the settlements. For example, even if half of
the settlements were disapproved, the value of the stockholders' recovery would nearly double
in value (assuming the mid-point of the Debtors' projected recovery range). The Equity
Committee intends to scrutinize the aspects of the settlements in connection with its confirmation
discovery and, to the extent that it can demonstrate to the Court that the settlements do not meet
this Circuit's Iridium factors, the Debtors' voting constituents should understand whether the Plan
can still be confirmed and how the absence of the settlements would affect creditor and
shareholder recoveries.
V. There is Inadequate Disclosure Regarding The Claims Reserves
1. The Environmental Claims Reserve Discussion Lack Adequate Disclosure
56. As indicated above, the Disclosure Statement fails to provide any
information regarding the value of the asserted Environmental Claims and the amount that will
be included in the Environmental Reserve (and potentially available to stockholders pursuant to
Article IX of the Plan if Class 13a votes to reject the Plan). This continued pattern of
suppression of relevant information required for equity holders to assess their recoveries cannot
be countenanced in this regard. The amount of asserted Environmental Claims and the amount
to be funded in the Environmental Reserves directly impact the Class 13a members' ability to
intelligently assess whether to accept or reject the Plan because a rejecting Class 13a vote entitles
the class to recover the remnants of the Environmental Reserve.
57. Further, the Disclosure Statement merely states that Environmental Claims
will either be settled or satisfied from the Environmental Reserve and paid in cash, or reinstated.
Disclosure Statement § VIII.B(iii)(k), at 106. Whether these claims are reinstated or paid in cash
makes a significant difference in the size of the claims pool and, therefore, in the potential
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recovery value if Class 13a rejects the Plan. Thus, without further information on what claims
will be reinstated and an estimate of the value of such claims, Class 13a members cannot
properly evaluate the consequences of accepting or rejecting the Plan.
58. Moreover, the Debtors' disclosure regarding the nature and size of their
environmental liabilities is inadequate. The Disclosure Statement provides that "potentially
significant environmental liabilities and obligations" exist. See Disclosure Statement § VII.K.vi,
at 83. This is hardly the type of meaningful discussion that the Bankruptcy Code requires,
particularly when Class 13a will receive the residual amounts of the Environmental Reserves if it
votes to reject the Plan. This should not be an objectionable burden on the Debtors - it appears
that the Debtors are capable of extrapolating this information based on the redline of the
Disclosure Statement against their initially filed Disclosure Statement. On page 94 of the
redlined version of the Disclosure Statement, the definition of General Unsecured Claim has
been amended to exclude Environmental Claims; however, the estimated amount of Allowed
General Unsecured Claims against Chemtura and the subsidiary Debtors on page 96 has not been
similarly amended to exclude the amount of Environmental Claims from the approximately $214
million to $249 million estimate. See Disclosure Statement §§ VIII.B(iii)(d), at 94,
VIII.B(d)(vii), at 96. Once the Debtors deduct the Environmental Claims from this range, they
can easily provide an estimate of the amount of cash needed to fund the Environmental Reserves.
2. There is Inadequate Disclosure Regarding Treatment of Diacetyl Claims
59. As noted above, the Disclosure Statement utterly fails to provide any
meaningful disclosure regarding the value of the asserted Diacetyl Claims and the amount that
will be included in the Diacetyl Reserve and potentially available to Class 13a members if the
class votes to reject the Plan.
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60. In particular, in light of the recent disclosure that Chemtura Canada will
become a co-Debtor in these cases, it is imperative for shareholders to understand whether
Chemtura Canada's diacetyl liabilities are additive to the overall amount of Diacetyl Claims, as
defined in the Disclosure Statement. See Disclosure Statement § I.C(ii), at 11 ("The Debtors'
ultimate liability on account of Diacetyl Claims will also depend on the amount of insurance
coverage available with respect to Diacetyl Claims. The aggregate liability owed on account of
Diacetyl Claims will impact the amount of recovery available to holders of Interests in Chemtura
if they do not vote in favor of the Plan.").
61. Because the potential scope of the legal exposure of Chemtura Canada is
substantially different than that of Chemtura Corporation, whose only role was that of a pass-
through seller for approximately seven years, the Debtors must provide significantly greater
detail regarding the impact that Chemtura Canada's chapter 11 filing will have on the
quantification and estimation process, together with how it will impact the funding of the
Diacetyl Claims Reserve.
62. Finally, the Plan does not contemplate reinstating any Diacetyl Claims.
The Debtors must disclose their justifications for choosing not to pursue reinstatement of these
claims at the expense of stockholders.
VI. The Disclosure Statement Fails to Describe Alternative Plan Structures Proposed bythe Equity Committee
63. The Debtors' Disclosure Statement is silent regarding the Equity
Committee's numerous alternative plan proposals, all of which provided for greater recoveries to
stockholders than the Debtors' Plan and all of which the Debtors summarily rejected. The
Debtors should disclose that, over the course of several months, the Equity Committee discussed
numerous plan alternatives with the Debtors and proposed term sheets that demonstrated that
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higher equity recoveries were achievable and that the Debtors could sustain more leverage than
is contemplated under their Plan. The Debtors should also be required to provide a cogent
reason why the Debtors refused to meaningfully consider any of the Equity Committee's
alternate plan structures. The Debtors must disclose to their voting stockholders that they
refused to meaningfully consider plans that returned greater value to stockholders and explain
why they believe that their proposed Plan is superior.
VII. The Disclosure Statement Fails to Describe the Equity Committee's Motion toTerminate Exclusivity
64. The Debtors' discussion on exclusivity must be amended to describe the
Equity Committee's Motion to Terminate Exclusivity, including the outcome of the motion. See
Disclosure Statement § VII.L, at 83-84. Stockholders of Chemtura are entitled to know that the
statutory committee appointed to protect their interests are seeking relief to propose a competing
plan that will pay allowed unsecured claims in full or reinstate them and provide greater equity
value to stockholders. They are also entitled to know how the Debtors believed it to be an
exercise of their fiduciary duties to oppose the Motion to Terminate and attempt to squelch any
meaningful alternatives for stockholders to realize value.
VIII. Deficiencies in Valuation and Related Financial Disclosure
65. The Debtors fail to provide adequate information related to the inputs and
methodologies they employed for their discounted cash flow, precedent transactions analysis and
comparable company analysis, nor do they discuss the valuation (or range of valuations) for the
Debtors that each methodology produced, or the relative weighting of each methodology to
arrive at a valuation range for the Debtors of $1.9 billion to $2.2 billion. For example, the
Debtors should disclose the universe of precedent transactions they used in their analysis, the
average EBITDA multiples that were paid by buyers in connection with such transactions, and
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how much weight the Debtors assigned to this valuation methodology relative to the other two
valuation methodologies employed by them. Similar disclosure should be given with respect to
the Debtors' discounted cash flow and comparable company analyses.
66. The Debtors must also explain how they determined their leverage level to
be $750 million of funded debt at emergence and why they believe that it is the appropriate
amount of leverage for reorganized Chemtura. For example, the Debtors should provide their
analysis that supports their conclusion on leverage (such as TEV / total debt of comparable
companies), or else they should indicate in the Disclosure Statement that no such analysis was
performed.
67. In order for stockholders to be able to rely upon the Debtors' valuation and
leverage conclusions, the Debtors must elaborate on the universe of comparable companies they
used to arrive at their conclusions on valuation and leverage and the relative weights assigned to
US-based and non US-based chemicals company. In addition, the Debtors should disclose that
non US-based chemicals companies tend to have lower valuation multiples and lower leverage
than US-based chemicals companies and, if given less weight in the Debtors' analysis, the
valuation multiples and indicia of appropriate leverage would certainly increase. While the
Debtors have significant operations overseas, so do other US-based chemicals companies which,
on average, maintain more levered balance sheets and are rewarded with higher valuation
multiples.
68. Finally, the Debtors should explain in more detail the elements of the $71
million of "obligations" that they are passing through the Chapter 11 cases, and why in their
valuation analysis such amounts are deducted from enterprise value to arrive at equity value.
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IX. Other Disclosure Infirmities that Must be Addressed
69. In addition to the deficiencies addressed above, the Disclosure Statement
is deficient or erroneous in numerous other ways that must be corrected. These are set forth
below, in the order in which they appear in the Disclosure Statement:
Throughout: In multiple sections, the Debtors qualify that their acts and
decisions with respect to treatment of claims will be done in consultation with the UCC and the
Ad Hoc Committee. This language was presumably drafted when the Debtors intended to enter
into a lockup agreement. Given that the Debtors have adjourned the hearing on the PSA Motion
and the PSA terminates if it has not been approved by the Court as of the Disclosure Statement
hearing date, these references must be deleted throughout the Disclosure Statement.
Page 1: The Equity Committee should be entitled to include a letter to
voting stockholders regarding its views of the Plan.
Page 4: The Equity Committee disputes that the Debtors engaged in
"good faith" negotiations with it in developing the Plan.
Page 5: The Equity Committee's position should be included with the
Debtors' and the UCC's position in the bold, capitalized text.
Page 10: The definition of New Chemtura Total Enterprise Value ("TEV")
is not used consistently throughout the Disclosure Statement. For example, on page 10, the
Debtors say that it consists of $2.05 billion, plus cash available to satisfy claims, plus cash to be
retained following the Effective Date, which is expected to be approximately $125 million
However, on page 11, the New Chemtura Total Enterprise Value is defined as a flat $2.05 billion.
This is not merely a matter of making defined terms consistent. As a substantive matter, if cash
available to satisfy claims is included in the definition of TEV (which is expected to be
approximately $165 million), the TEV at which the Debtors will be equitizing unsecured claims
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becomes much higher and thus the return to equity would exceed (likely by a significant margin)
the 0.5 % to 9% recoveries estimated in the Disclosure Statement if Class 13a votes to reject the
Plan. Moreover, the Disclosure Statement is misleading to the degree it states that recoveries to
stockholders will depend on, among other things, the holders of Allowed Unsecured Claims
being paid in full based on the Total Enterprise Value. Rather, the Debtors must further disclose
that the Total Enterprise Value may be subject to dispute by other parties and is subject to a final
order of the Court finding the amount of the Total Enterprise Value.
Page 11: Factors affecting recoveries to Class 13a equity interests should
also include, at a minimum, the estimated amounts of the Disputed Claims Reserve and the
Environmental Reserves and the Debtors' ultimate liability thereunder.
Page 20 -21: The death trap enforced against Class 13a must be clearly
referenced in the discussion related to voting on the Plan to adequately inform Class 13a of the
consequences of an accepting or rejecting class vote. Corresponding disclosure must be made in
Article X on page 158 of the Disclosure Statement as well.
Page 107: The reference to the Rights Offering Record Date in the
description of Class 13 Interests appears to be in error, because it provides that members of Class
13a will receive their stock distribution on the Rights Offering Record Date – when in fact any
distributions will be made on the Effective Date or the distribution date under the Plan.
Page 107: There should also be a reference to the Diacetyl Reserve and
the Environmental Reserve in the second paragraph under "Estimated Recoveries to Holders of
Interests in Class 13a for Chemtura Corporation." In fact, in each instance where the reserves
are discussed in the context of treatment of Class 13a, each of the contemplated reserves should
be addressed.
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Page 112: The Debtors should make an affirmative statement, if true, that
they do not anticipate a Shortfall Adjustment if Class 13a votes to reject the Plan.
Page 115: Given the addition of the sentence under "Section 1145
Exemption" regarding the potential need to register the Rights Offering under the Securities Act,
the Debtors should discuss the issues that could result in such registration being required and any
effect on Plan implementation and timing and procedures that might result from the likely delay
that the registration process would entail should also be addressed.
Page 121-22: The Debtors must disclose why they are incorporating New
Chemtura and the reasons for forming a new holding company as well as the reasons for the
other proposed Restructuring Transactions. If there are implications to holders of new common
stock, such as potential negative effects on the reorganized Company's tax attributes, such factors
must be disclosed.
Page 125: The discussion related to the Debtors' right to setoff must be
amended to refer only to claims, and not to interests. See 11 U.S.C. § 553.
Notice
70. Notice of this Objection has been provided to (a) counsel to the Debtors;
(b) the Office of the United States Trustee for the Southern District of New York, 33 Whitehall
Street, 21st Floor, New York, New York 10004, Attn: Susan Golden, Esq.; (c) counsel to the
statutory committee of unsecured creditors appointed in these chapter 11 cases, Akin Gump
Strauss Hauer & Feld LLP, One Bryant Park, New York, New York 10036, Attn: Philip C.
Dublin, Esq.; (d) counsel to the agent for the Debtors' postpetition and prepetition secured
lenders, Shearman & Sterling LLP, 599 Lexington Avenue, New York, New York 10022, Attn:
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Fred Sosnick, Esq.; (e) the Internal Revenue Service and the Environmental Protection Agency,
Assistant United States Attorney, Southern District of New York, 86 Chambers St., 3rd Floor,
New York, New York 10007, Attn: Matthew L. Schwartz, Esq.; (f) the Trustee for the 2016
Corporate Notes, U.S. Bank National Association, Corporate Trust Services, 60 Livingston
Avenue, St. Paul, Minnesota 55107, Attn: Cindy Woodward; (g) the Trustee for the 2009
Corporate Notes, the Bank of New York Mellon Trust Company, 6525 West Campus Oval Road,
Suite 200, New Albany, Ohio 43054, Attn: Donna Parisi; (h) the Trustee for the Corporate 2026
Debentures, Manufacturers & Traders Trust Co., 25 South Charles Street, 16th Floor, Baltimore,
Maryland 21201, Attn: Robert D. Brown; (i) counsel to the ad hoc committee of bondholders,
Jones Day, 222 East 41st Street, New York, New York 10017, Attn: Richard L. Wynne, Esq. and
Lance E. Miller, Esq.; (j) the Securities and Exchange Commission; and (k) all those persons and
entities that have formally requested notice by filing a written request for notice, pursuant to
Bankruptcy Rule 2002 and the Local Bankruptcy Rules.
Conclusion
Wherefore, based upon all of the foregoing facts and authorities, the Equity
Committee respectfully requests that the Court deny approval of the Disclosure Statement and
grant such other relief as is just and proper.
Dated: New York, New YorkJuly 18, 2010
SKADDEN, ARPS, SLATE, MEAGHER &FLOM, LLP
By: /s/ Jay M. GoffmanJay M. Goffman
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Jay M. GoffmanMichael H. GruenglasGeorge A. ZimmermanFour Times SquareNew York, New York 10036-6522Telephone: 212-735-3000Facsimile: 212-735-2000Email: [email protected],[email protected],[email protected]
Counsel for the OfficialCommittee of Equity Security Holders