This article is the first in a series of articles discussing long-term disruptive trends and their impact on restructuring activity.
The English Oxford dictionary defines “disruption” as a disturbance or problems which interrupt an event, activity, or process. Disruption is ubiquitous in business. A few examples include customers filing for bankruptcy (Toys “R” Us Inc.), new laws (Tax Cuts and Jobs Act), labor strikes (work stoppage at the ports in Los Angeles and Long Beach), natural disasters (Hurricanes Harvey and Katrina), new technological innovations (the Internet and mobile phones), and changes in social, cultural or economic trends (America’s shrinking middle class). Management teams routinely make tactical and strategic decisions to prepare for or respond to disruptive change. Fortunately (for restructuring practitioners), not every decision will be the correct decision. As a result, disruption can be a precursor to restructuring activity. One disruptive trend that I believe will have a significant impact on future restructuring activity is bankruptcy venue reform.
In early January, Senators John Cornyn (R-TX) and Elizabeth Warren (D-MA) introduced the Bankruptcy Venue Reform Act of 2017 (the “Act”). In their view, the Act would prevent the practice of “forum shopping” in Chapter 11 bankruptcy cases and ensure fairness in the bankruptcy system by “requiring corporate debtors to file for bankruptcy in the district where their principal assets or principal place of business in the United States is located. Corporate debtors would no longer be permitted to file simply on the basis of their state of incorporation.”[ii] Senator Cornyn stated, “[c]losing the loophole that allows corporations to ‘forum shop’ for districts sympathetic to their interests will strengthen the integrity of the bankruptcy system and build public confidence.”
Proponents of the status quo believe this Act would effectively restrict access to the bankruptcy courts in Delaware and the Southern District of New York, which would be detrimental to the bankruptcy system because of the experience of the judges in these venues. That experience handling complex, large and/or cross-border bankruptcy cases translates into reorganized businesses, jobs and tax income preservation, and excess value for all stakeholders.
In my view, there is a distinct difference between venue analysis and forum shopping. Venue analysis is about evaluating the venues a distressed company can access given the existing statutory requirements to minimize risk and uncertainty (thereby, maximizing predictability). “Forum shopping” is about circumventing the statutory requirements (or the intent of the statutory requirements).
Regardless of your position on “forum shopping,” if passed, this Act would have a major impact on restructuring activity and corporate bankruptcies. How will attorneys and advisors factor the incremental uncertainty into their advice to distressed clients? Will the number of bankruptcy filings decrease (resulting from an increase in out-of-court restructurings)? How will lenders respond? Will lenders continue to provide debtor-in-possession financing; and if so, will there be any impact on pricing and terms? Will professional fees decrease? Will local economies win or lose (hotels and restaurants)? Most importantly, will stakeholders ultimately be better off (i.e., will unsecured creditors recover more than they would under the current system)?
Disruption is a fact of life in business. Management teams are paid to make strategic decisions to be the disruptor or, if caught flat-footed, respond to disruption. The disruptive trend regarding venue reform will require management teams and bankruptcy counsel in many industries to respond in ways that may have a negative impact on their existing businesses. Not all will respond in time, nor will all make the right decisions. Restructuring advisors stand ready to help.
[i] The views expressed herein are those of the author and are not necessarily the views of MorrisAnderson & Associates, Ltd., its management, subsidiaries, affiliates or other professionals.
[ii] Cornyn, Warren Introduce Bill to Prevent ‘Forum-Shopping’ in Bankruptcy Cases, January 8, 2018 (www.cornyn.senate.gov).
Todd A. Zoha, CTP, CIRA, is at AlixPartners. He has 16 years of experience as a C-level executive (CRO, CEO and CFO), seasoned restructuring professional and trusted business advisor. He specializes in crisis and interim management, corporate restructurings and transformations, financial and/or operational turnarounds, cash enhancement, and performance improvement initiatives.
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