Sanctioning of LBT Composition Plan Becomes Final

Following a consent solicitation process (unprecedented in the Netherlands) which ended on 25 January 2013, the LBT Composition Plan, as proposed by the debtor LBT in its Dutch bankruptcy, was accepted by an overwhelming majority (of 99 percent in number and 96 percent in amount) at the so-called Claims Admission Meeting (verificatievergadering) (“CAM”) held in the Amsterdam District Court on 7 March 2013. The accepted LBT Composition Plan was subsequently sanctioned (i.e., confirmed) by the Amsterdam District Court in a sanction decision of 22 March 2013.[1] In this Alert, new SRZ London restructuring partners Peter J.M. Declercq and Sonya Van de Graaff[2] provide insights on the expected first distribution under the LBT Composition Plan and the current state of affairs in the Dutch bankruptcy of LBT.

As no appeal was lodged by 2 April 2013, the sanction decision and therefore the LBT Composition Plan have now become final and no longer subject to appeal (in kracht van gewijsde gegaan). As a result, a first distribution in the Dutch bankruptcy of LBT to creditors based on the LBT Composition Plan can now be expected to be made in the course of April 2013. Following the CAM, the so-called LBT Notes that were blocked in the context of the consent solicitation process, have become unblocked in the relevant clearing systems. They can be traded in the same way as they were traded prior to becoming temporarily blocked.

Brief Background

While LBT’s former ultimate parent company, Lehman Brothers Holdings Inc. (“LBHI”) entered into a voluntary US Chapter 11 proceeding on 15 September 2008, LBT was subjected to a Dutch suspension of payment proceeding (surséance van betaling) on 19 September 2008, which proceeding was converted into a Dutch bankruptcy proceeding (faillissement) on 8 October 2008.

In the bankruptcy of LBT, the assets of the estate almost exclusively consist of the intercompany claim LBT has against LBHI (the “LBT Intercompany Claim”) for lending on the proceeds of the LBT Notes. LBT issued approximately $34bn worth of LBT Notes in approximately 3,800 different series. The LBT Notes benefit from a New York law governed guarantee from LBHI and the large majority of the LBT Notes are governed by English law (with a small minority being governed by other foreign laws). Most of the LBT Notes are bespoke structured notes pursuant to which a so-called Final Redemption Amount is linked to a reference value (e.g., a basket of equities or other securities (certain of which may not be publicly traded) or an index)). As a result, the contractual claim under many LBT Notes fluctuates. A key feature of the LBT Notes is further that their terms and conditions do not contain any automatic acceleration provisions. Many LBT Notes therefore remained unmatured until long after the LBT bankruptcy date. This gave rise to complex legal questions on the appropriate valuation of the claims under each individual LBT Note and in turn this created the potential for long, complex and expensive litigation about these valuation issues.

In the LBHI US Chapter 11 proceedings, the LBT Intercompany Claim was settled at an amount of $34.548bn in the context of the Third (Amended) Plan, which was confirmed in December 2011 after being accepted unanimously by all classes entitled to vote. Around the same time, the joint bankruptcy trustees of LBT (the “JBTs”) published in their 10th public report of 11 November 2011 the so-called “Definitive Valuation Principles” which would be used by them to determine the so-called LBT Note Valuation for each LBT Note.

When in March 2012 the first significant distribution was received by the LBT estate from the LBHI estate, the fear expressed by many interested parties was that these funds may now be stuck in the Netherlands for a long time. The question was therefore how can we best “unlock” the situation in the Netherlands so as to allow for a speedy first distribution to creditors in the Dutch bankruptcy of LBT?

The LBT Composition Plan offers a very practical solution to a complicated situation and fits within the framework of the Dutch Bankruptcy Act by ensuring that the Definitive Valuation Principles apply to all LBT Notes and as a consequence it creates certainty as to the exact amount of liabilities of LBT. The LBT Composition Plan further does not stipulate that a creditor must have filed its claim in the Dutch bankruptcy of LBT to be entitled to a distribution on its claim pursuant to the LBT Composition Plan. As a result, the LBT Composition Plan also provides an efficient way to distribute the estate assets among the LBT creditors.

According to the 15th public report of 5 March 2013, the two distributions received from LBHI so far amount to a total of $2,672,723,740.32 and the next LBHI distribution is announced for 4 April 2013.

Corporate Governance Going Forward

As part of the overall settlement between LBHI and LBT, 100 percent of the shares in LBT were transferred to a Dutch foundation, Stichting Lehman Brothers Treasury Co. (the “Foundation”). The board of the Foundation consists of the JBTs together with Mr. H.P. de Haan.

The fact that the sanction decision and therefore the LBT Composition Plan have become final and no longer subject to appeal also results in the occurrence of the so-called Effective Date (as defined in the LBT Composition Plan). Following the Effective Date, the articles of association of the Foundation will be amended to allow for a change in corporate governance to administer a liquidation proceeding (vereffening) overseen by the JBTs as joint liquidators (vereffenaars).

As part of the change in corporate governance, the board of LBT (and therefore also the joint liquidators) will in principle have to follow the directions given by the Foundation, thereby creating a supervisory role for the Foundation. Every quarter, the board of LBT/the joint liquidators will have to report to the Foundation about the progress made in executing the LBT Composition Plan. This obligation mirrors the obligation of LBT under the LBT Composition Plan to provide an update report to the creditors through the LBT website.

The board of the Foundation consists of three members. In case a vacancy arises, the board will fill the vacancy only after consultation with the president of the insolvency department of the Amsterdam District Court. In case the board fails to fill the vacancy, each interested party is entitled to request the summary injunction judge (Voorzieningenrechter) of the District Court of Amsterdam to appoint a new director. The amended articles of association of the Foundation also provide for creditors’ protection against certain amendments to the articles of association going forward or certain other significant resolutions, all of which will require the prior consent from the president of the insolvency department of the Amsterdam District Court. Prior to appointing or firing a director of LBT, advice from the president of the insolvency department of the Amsterdam District Court and the so-called Board of Advisors of the Foundation (if one has been created) is required. Following the Effective Date, the JBTs will step down as directors of the Foundation and be replaced by Mr. J.L.R.A. Huydecoper and by Mr. M.H. Reuchlin.

The board of the Foundation is entitled to appoint a Board of Advisors consisting of creditors of LBT. In the execution of its duties, the Board of Advisors is required to consider the interests of the joint creditors. The Board of Advisors will have the right to provide advice to the board of the Foundation on the appointment, suspension or resignation of directors of LBT and/or the joint liquidators. The Board of Advisors is further entitled to receive all necessary information in the interest of the execution of its tasks.

Next Steps

As distributions from the LBHI estate are expected to be received by the LBT estate for at least the next four years, it will take at least another four years before the liquidation of LBT is fully completed.