LEGAL ANALYSIS: Oi shareholders’ right to vote on the Judicial Recovery plan

28 September 2017

Oi S.A.’s (“Oi”) bondholders, in advance of a creditors’ meeting scheduled for 23 October, have asked the court to prohibit creditors that also hold the company’s equity from voting on the plan, regardless of the size of their debt position, based on an unclear section of the Brazilian Reorganization Law. In this Special Report, the Debtwire legal analyst team takes a closer look at the litigation between Oi and bondholders, on the brink of the creditors’ meeting.

 

CLICK HERE for the Debtwire legal analyst team’s primer on the Brazilian restructuring system.

 


Last minute vote challenge

 

On the eve of having Oi’s reorganization plan submitted for a ballot procedure, several issues remain outstanding, with court rulings pending on a number of matters including substantive consolidation,[1] the proper classification of ANATEL’s claims,[2] bondholders’ individual rights to vote on the plan[3] and matters regarding the Dutch Supreme Court bankruptcy rulings and the limits of participation by affiliates’ trustees/liquidators in the Brazilian Judicial Recovery process.[4]

 

CLICK HERE for our latest review of the Oi jurisdictional issues.

 

On 19 September certain bondholders[5] added one more controversy by asking the restructuring court to prohibit creditors that are also Oi shareholders from voting at the creditors’ meeting. Based on an interpretation of Section 43 of Brazilian Reorganization Law, these objecting bondholders argue that there is a conflict of interest between the creditors and the company’s shareholders, no matter how large of a debt position these shareholders might have.

 

The bondholders argue that major Oi shareholders are reaching out to other bondholders to propose plan support agreements to cross holders of debt and equity. However, it is not absolutely clear whether or not a creditor with a minor equity position – specifically, one with less than 10% of the shares of the company – can vote on the company’s reorganization plan, as described below.

 

Considering the difficulties in identifying these cross holders before the meeting as Oi is a publicly held company whose shares—and bonds for that matter--are freely traded, the bondholders asked the restructuring Court to explicitly prohibit all cross holders from voting on the plan. To enforce the requested order, the bondholders have asked the court, following the creditors’ meeting, to order the Judicial Manager to:

 

(i) publish a list of all creditors who attended and voted in the creditors’ meeting; and

(ii) require all Class II (Secured Claims) and Class III (Unsecured Claims) creditors with claims greater than BRL 50,000.00 to sign a statement confirming that they do not hold Oi equity interests, with the potential penalty of criminal charges for disclosure of false information under Section 170 of Brazilian Reorganization Law, in the case of an untrue statement.

 

Debt/Equity cross holder voting rights

 

Section 43 of Brazilian Reorganization Law states that “the partners of the debtor, as well as affiliated companies, controllers, controlled entities or those who have a partner or shareholder with a share of more than 10% (ten per cent) of the debtor's share capital or in which the debtor or one of its partners holds more than 10% (ten percent) of the capital stock, may participate in the general meeting of creditors, without having the right to vote and will not be considered for the purpose of verifying the quorum of installation or for deliberation”.

 

It is undeniable that the purpose of the legal prohibition is to prevent creditors with conflicting interests from voting at the creditors' meeting, attempting to nullify the impact of those who might undermine the true scope of the creditors’ meeting. But Oi’s bondholders are asking for a larger limitation, seeking to exclude the votes of those with equity holdings less than 10% of the company’s capital stock, seemingly beyond the reach of the statute. Debtwire’s legal analyst team has not been able to identify a Judicial Recovery process where a limitation stricter than that found in Section 43 was implemented, nor any precedent on a wider voting prohibition for debt/equity cross holders.

 

There is, however, another pending case presenting a similar request to that of the Oi bondholders. In the TPI – Triunfo Participacoes e Investimentos SA Extrajudicial Recovery request, financial creditor and shareholder BNDES argued that its claim should be included in the extrajudicial reorganization, as its stake in the company is less than 10%. The company responded that the public bank’s claim might not be considered because it is also a shareholder, and the amount of its equity holding is irrelevant in determining whether or not the bank might be impaired by the reorganization process. A ruling is still pending in that case.

 

The issue is that the statute lacks clarity on exactly what the 10% holding limitation modifies. Notably, a proposed legislative reform to Section 43 has been drafted that would make it clear that cross holders with less than 10% in equity holdings could still vote on a plan of reorganization.

 

Conclusion

 

While the question of cross holder voting rights considers a potential conflict of interest in any bankruptcy proceeding, the matter is even more complex for Oi given that the company’s reorganization plan contemplates debt equitization, something cross holders—depending on their equity positions—may attempt to manipulate as they are both being diluted by the equitization while also benefitting from it as a creditor. According to the plan, Oi’s stake will be shared among (i) current shareholders, (ii) creditors (bondholders that accept to convert their claim for shares) and (iii) investors who contribute to an equity capital raise. Thus, certain cross holders may—depending on their overall holdings—support a proposal that is a bigger benefit to current shareholders than creditors. Whether the court will permit that potential will set precedent for Judicial Recovery cross holders in the future.

 

Endnotes

 

[1] On 20 September, the Rio de Janeiro State Court of Justice ruled that the Oi economic group must present separate creditor and asset lists for each one of the seven entities by 28 September, and that on 23 October the creditors of each company shall vote, separately, on whether they prefer a consolidated reorganization plan or separate plans.
[2] The company listed the regulator’s claim in the unsecured creditors’ class, but ANATEL argues that its claims should not be impaired by the in-Court restructuring process, as they are charged in the same way as tax claims. On 19 September the same court denied the urgent relief request made by the regulator to reverse the decision that included its credits in the bankruptcy protection proceedings. However, further appeals on the same issue are pending.
[3] Another appeal – one filed by the company – of a decision that authorized bondholders to vote individually on the plan during the creditor meeting, rather than being represented by the trustees, is awaiting a state court ruling. After seeing its proposal for an electronic voting system proceeding rejected by the court, which held that there wouldn’t be time enough to analyze such a complex matter so close to the scheduled meeting, the referenced appeal on the holders’ rights to vote is scheduled to be ruled 3 October.
[4] The Rio de Janeiro State Court is entitled to rule whether or not the Dutch Supreme Court bankruptcy rulings regarding the group’s foreign affiliates are valid, as well as to define the limits of their trustees’ powers to act on behalf of their creditors under the Brazilian jurisdiction. However, as of now there is no indication of when there will be a ruling on the appeals filed by the trustees.
[5] The petition was filed by two groups of Oi bondholders which have as their legal representatives Pinheiro Neto Advogados and Sergio Bermudes Advogados, respectively, and are financially advised by Moelis and G5.

 

 

Arthur Almeida is a former restructuring attorney. Prior to joining Debtwire as a Legal Analyst, he practiced with Passos & Sticca Advogados Associados, as well as working in the legal department of Banco Fibra S.A. Arthur’s experience includes participating in major civil litigation on credit recovery. He has represented creditors such as banks and financial institutions in high-profile restructurings.
Any opinion, analysis or information provided in this article is not intended, nor should be construed, as legal advice, including, but not limited to, investment advice as defined by the Investment Company Act of 1940. Debtwire does not provide any legal advice and subscribers should consult with their own legal counsel for matters requiring legal advice.