Recently, Judge Kevin J. Carey, Chief Judge of the United States Bankruptcy Court for the District of Delaware, issued a decision in the Spansion bankruptcy denying a motion for the appointment of an official committee of equity security holders. See In re Spansion, Inc., et al., Case No. 09-10690(KJC)(December 18, 2009). The decision is helpful as it provides a summary of the law in this and other jurisdictions on when is it appropriate for a bankruptcy court to appoint a special committee of creditors or security holders.
Spansion designs semiconductors that are used in a broad range of applications, including cell phones, consumer electronics and automobiles. The company filed for bankruptcy in Delaware on March 1, 2009. In October of 2009, Spansion filed a disclosure statement and plan of reorganization which proposed no distributions to common equity holders. The security holders, acting through an informal "ad hoc committee," argued that the Debtors' reorganization value was based on projections that were too conservative. Opinion at *9. The security holders therefore asked the Court to create a special committee of equity holders in order to supervise the Debtors' reorganization and protect their interests.
The Court began its analysis by looking to section 1102(a)(2) of the Bankruptcy Code which allows for the creation of additional committees within a bankruptcy proceeding. Under section 1102(a)(2):
On request of a party in interest, the court may order the appointment of additional committees of creditors or of equity security holders if necessary to assure adequate representation of creditors or of equity security holders. The United States Trustee shall appoint any such committee.
Citing a decision in the Edison Bros. bankruptcy, the Court noted that the ad hoc committee, as the party seeking the formation of a formal committee, has the burden of proving that an additional committee is needed for adequate representation. Victor v. Edison Bros. Stores (In re Edison Bros. Stores, Inc.), 1996 WL 534853, *4 (D.Del. Sept. 17, 1996). The Bankruptcy Code does not define "adequate representation." Id. at *3. Instead, the decision whether to appoint an additional committee falls within the discretion of the court based upon the facts of the case. Opinion at *5, citing In re Dana Corp., 344 B.R. 35, 38 (Bankr.S.D.N.Y. 2006). Finally, whether to grant a request and appoint an additional committee is considered extraordinary relief that is the exception, not the rule. Opinion at *6.
In deciding whether to grant or deny the motion, the Court examined the evidence offered by the ad hoc committee and the Debtors regarding the valuation of the Debtors' business. Specifically, the ad hoc committee argued that the Debtors' proposed value excluded several assets that could signficantly increase the company's value. Debtors, on the other hand, argued that certain assets were appropriately excluded from the valuation analysis because the value of these assets was too speculative. In the end, the Court found that the equity holders had not met the required burden as the "only thing certain from the record before [the Court] is the uncertainty of the proffered valuations."
After finding that the equity holders failed to carry their burden and establish they would receive a distribution from the Debtors, the Court turned to whether the equity holders would have adequate representation in the bankruptcy proceeding without the creation of a special committee. The equity holders argued that the proposed plan and disclosure statement disenfranchised existing shareholders. Further, the equity holders argued that their interests were not represented by the Debtors or the Official Committee of Unsecured Creditors. However, the Court noted that even if it were to agree with the equity holders and find that the Debtors and Committee did not represent their interest, the Court nevertheless found that the equity holders were "well organized, well represented by counsel, and adequate to the task of representing its interests without 'official' status." Based on these findings, the Court denied the request for formation of a special committee.
Judge Carey's decision in Spansion illustrates an interesting aspect of bankruptcy practice. Although the security holders were denied their request for the creation of a formal committee, the Court nevertheless went to great lengthes to examine the security holders' claims against the Debtor. By this, the Court considered whether Spansion's valuation of its business was too conservative. Although the Court found that the equity security holders did not make a sufficient record to show Spansion improperly valued the company, the equity holders did receive the full attention of the Court. This point is important as it illustrates how interested parties, as a group, can have their concerns addressed in a bankruptcy proceeding without the formation of a special committee.