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Bingham restructures the world
A progression of opportunities
As capital flows globally in search of opportunity and value, cross-border financial restructurings and corporate recapitalizations play an increasingly important role. Bingham Offices Pictured: NASA World at Night map provided by GoogleTM
Legal environments and business customs are far from consistent, however, and an approach that works in one country may be untested or even unacceptable in the next.
In the roundtable discussion that follows, four of the firm’s leading practitioners share their perspectives on the evolving global marketplace and the legal and cultural realities that confront companies and investors involved in international restructurings today.
How long has Bingham been involved in cross-border financial restructuring? Michael Reilly (New York): The short answer might be “From the beginning,” when you take a look at the development and cross-border migration of insolvency law. In 1978, the amendments to the U.S. Bankruptcy Code created a streamlined Chapter 11 process that focused on preserving the value of the going concern with management in place, rather than chopping up and liquidating the business, which continues to be the legal course in many countries. That focus on going-concern value was, and still is, a distinguishing feature of U.S. law.
“Clients laud Hideyuki Sakai for marrying a ‘tenacious and persistent’ approach with a ‘controlled and composed’ demeanour…an authority in this area.” - Chambers Asia
James Roome (London): Let’s call that the American approach. By the early 1990s, the U.K. banks had adopted the London Approach, which developed in response to political concerns about the widespread use of liquidation-style receivership proceedings to address large corporate failures during the 1980s. The advent of the London Approach led to a surge in out-of-court restructurings for companies with large, multi-bank exposures. These
restructurings were assisted by the Bank of England through informal actions, backed up by its statutory powers as overseer of U.K. banks. However, whenever creditors lost faith in the consensual restructuring approach — due to the discovery of fraud or other serious problems — they had the option to revert to formal insolvency proceedings including the appointment of an administrator or receiver. Yuki Sakai (Tokyo): And Japan had a third system, grounded in a Japanese culture favoring long-term relationships and long-term goals, but inevitably shaped by economic events. Historically, a parent-child relationship existed between a Japanese company and its main bank. A main bank was viewed as a protector and would rescue a borrower facing financial trouble. Management, employees and trade partners all benefited from the rescue. The main bank often organized an out-of-court restructuring and led by example, assuming larger rates of losses if other lenders agreed to accept a principal haircut. So, although the difference between the American approach and the London Approach were of interest to restructuring practitioners, the tension between the two did not affect us in Japan. In the late 1990s, however, main banks found themselves unable to fulfill their prior role. Foreign capital purchased bad loans for market value and took over the positions of the Japanese main banks. The rescue plan of the foreign capital usually involved a change of ownership, an idea not yet commonly accepted in Japanese restructuring. Michael Reilly: The American approach and the London Approach collided in 1992 with the Maxwell case. In Maxwell, you had assets and businesses in many jurisdictions but primarily in the U.S. and U.K. So there were two parallel proceedings — one in New York and one in London — both focused on preserving goingconcern value. The case was incredibly complex, and judges in both countries began to talk to one another through representatives, >
“While both systems have evolved, there are still struggles over who drives the process: company management in the U.S., or an administrator in the U.K.”
trying to find a fair and equitable resolution. A great deal of this cooperation was overseen and encouraged by the late Tina Brozman, who was then a judge in the U.S. Bankruptcy Court for the Southern District of New York, and by her counterpart in England, Lord Hoffman. Tina rose to the position of chief judge of that court and later left the bench to become co-chair of Bingham’s insolvency practice. It is important to note, however, that while this initial collaboration forced cooperation between the courts, it did not resolve any statutory differences. While both systems have evolved, there are still struggles over who drives the process: company management in the U.S., or an administrator in the U.K. Ed Smith (New York and Boston): But the Maxwell process did plant the seeds for what became INSOL (the International Association of Restructuring, Insolvency & Bankruptcy Professionals), which facilitates the exchange of information and ideas on cross-border and international insolvency and credit-related issues. It also focused attention on the importance of judicial cooperation and a common legal framework for insolvencies and restructurings, and led to the development of a model on cross-border insolvency by UNCITRAL (the United Nations Commission on International Trade Law). Bingham lawyers have played key roles in the development of the model law on cross-border insolvency, which has influenced statutes in many countries, including the U.S. We are seeing all sorts of countries and cultures — and particularly investors — trying to find ways to do what the U.S. bankruptcy code has been doing for decades: emphasize the preservation of going-concern value over liquidation value in bankruptcy and restructuring proceedings. So the U.S. approach is becoming the dominant one? James Roome: Not really. There is still a great deal of tension between the interventionist, liquidation-focused approach and the U.S. going-concern approach. I would call Ed’s description the “glass-half-full” point of view. I think it is quite optimistic to see these matters resolving anytime soon. I have a “glass-half-empty” point of view at the moment, because the rest of the world — including Europe — is making slow progress
when it comes to formal restructuring proceedings. Nearly all the deals done outside the U.S. are still negotiated out of court when possible, and most court proceedings, particularly in Europe, are still forced liquidations — Parmalat and Eurotunnel being rare exceptions mandated by their sheer size and political importance. Indeed, because court-based insolvencies in Europe tend to be slow, cumbersome and expensive, there is a real incentive to stay out of court. Or, actually, two incentives: avoiding the cost and delays of going to court; and avoiding forced liquidation. Ed Smith: Unfortunately, that’s true. It’s not the legal institutions that are changing, as much as the financial marketplace and investor expectations. What’s really driving change in Europe, and starting to drive it in Asia, is the arrival of economically powerful U.S. investors and the greatly increased availability of capital. And that capital tends to be aggressive and impatient with the typical pace of Chapter 11-like court proceedings. Yuki Sakai: This is true in Japan as well. In many ways, the entry of U.S. investors into the Japanese distressed market after 1997 made a Japanese bankruptcy trustee’s job much easier. In reorganization cases, instead of purchases through a plan, pressure for speed led to asset sales similar to those under U.S. Section 363. An out-of-court purchase remained preferable to a purchase in a court proceeding. James Roome: Of course, in some European countries, there is still a great deal of pressure to push insolvent companies into court and under the control of an administrator or receiver. For example, you have Germany’s wrongful trading laws, which require a company director to file insolvency proceedings for a company within a maximum of 21 days, or risk going to prison. So while there may be an incentive to do deals out of court — particularly if the issue is merely liquidity and new capital is readily available — creditors are under constant threat that their debtor will be plunged into free-fall insolvency proceedings if they fail to cooperate. The only country that has loosened its standards so far is France — where you now have 45 days as a director of an insolvent company before you face liability for company debts. These are >
“Indeed, because court-based insolvencies in Europe tend to be slow, cumbersome and expensive, there is a real incentive to stay out of court.”
not statutes designed to encourage out-of-court solutions that preserve going-concern value.
“We are seeing many of the same investors who focused on Europe a decade ago looking now to Asia, where they will expect to get the same kinds of returns by being the first into the market with serious capital.”
Michael Reilly: All of which adds up to the importance of knowing the rules and techniques in each jurisdiction, knowing when and how to move an insolvency from one jurisdiction to another, which requires knowing the breadth of the possibilities in order to successfully place a particular workout in a particular country or group of countries… James Roome: …and knowing how one statute might work toward criminal liability in one jurisdiction, while simultaneously, in another jurisdiction, you might have the possibility of working things out with management still in possession. Ed Smith: That kind of knowledge is key to providing strategic advice, which is what we think distinguishes us as a firm. And once the legal strategy is in place, you need similar depth and breadth of knowledge to implement whatever solution or transaction you have crafted in the jurisdiction you have chosen. James Roome: We are seeing a number of restructurings move from Germany and France to the U.K. because we have a good way of implementing consensual transactions. With the EC Regulation and the UNCITRAL model law, creditors will move to a place where they can implement the deal they’ve agreed — given the legal opportunity to do so. Michael Reilly: But cutting across all these developments are efforts to preserve value — to preserve the going-concern value over liquidation value — whether that happens in a court or in negotiations that then become a prepackaged workout. So we have seen how new and aggressive capital moved into Europe and changed the landscape there. What about Asia? James Roome: We are seeing many of the same investors who focused on Europe a decade ago looking now to Asia, where they will expect to >
Michael Reilly “is recognised as ‘an excellent dealmaker.’” - Who’s Who Legal
“The ‘legendary’ James Roome has carved out a strong presence in the market, agree commentators. He is a hit with bondholder groups because ‘he has an excellent way of negotiating and dealing with clients.’ He is also noted for being ‘a creative solutions-finder.’” - Chambers UK
get the same kinds of returns by being the first into the market with serious capital. But this will be market-driven, because the law reform approach is likely to be slow-moving. Where Bingham can provide the greatest added value is by finding ways to work within the existing systems to maximize value. At times, this will likely include migrating an insolvency to a different system in a different country, being careful to ensure that when we do that, it will be binding on the players in the home country. Yuki Sakai: What is going on in Japan in this area needs to be viewed in a larger context. The government and business community recognize the benefit of outside capital and investment, so laws have been enacted to facilitate offshore investors. Implementation will take time, however, because the changes involve well-settled procedures and institutions. Start from the premise that saving a company through reorganization proceedings benefits society and the nation of Japan. Creditors accept financial sacrifices for the greater good of society; therefore, historically, reorganization proceedings were not used as anyone’s instrument for profit. It is fair to observe that some off-shore investors have been frustrated by the pace of change. Nonetheless, foreign investors are here to stay, and their patience should ultimately be rewarded.
“It is fair to observe that some off-shore investors have been frustrated by the pace of change. Nonetheless, foreign investors are here to stay, and their patience should ultimately be rewarded.”
China and Japan have recently enacted Chapter 11-like laws. What does that mean for investors? Ed Smith: China does have a new bankruptcy law that many people are looking at with great optimism, but I think the courts there will need time to work through how best to implement it. In part, that’s because there is far more effort being put into the capital formation side rather than the back end — such as leasing laws, registration systems for security interests, those types of issues. In fact, credit is probably secondary in China and Hong Kong. It would seem to be mostly equity capital being pumped into joint ventures and similar investment vehicles. Yuki Sakai: In many ways, the U.K. out-of-court restructuring model is a better historical and cultural fit in Japan than the drawn-out, highly contentious process a U.S. Chapter 11 can sometimes become. And the focus on going concern rather than liquidation resonates here. That said, while Japan does have Chapter 11-type laws, they are new and in some ways different from a system that has served Japan well for many years. So there is some uncertainty as to how things will play out. As a firm, we have the great advantage of knowing how to operate in all three systems — U.S., U.K. and Japan — and we share this knowledge across all offices. What about the idea of foreign bidders? There have been instances when some non-Japanese investors have had a very rough time. Yuki Sakai: Indeed, some parties using a U.S. “hostile-takeover” approach have encountered serious resistance. This argues, for the time being, that a more patient, less aggressive presence may produce more success. Nonetheless, a number of Japanese commentators have acknowledged that the aggressive approach has at its foundation a very beneficial element — enhancing shareholder value. >
James Roome: In several European countries — France, Italy and Spain, for example — old creditors are in an especially difficult position. Faced with the alternative of a liquidation sale in which creditors have little information and less say, creditors often have little choice but to agree to terms for the infusion of new capital that may pay as little to creditors as to shareholders. What is the situation with creditors in Japan?
We were one of the implementers of the London Approach, and helped create an environment in the U.K. that facilitated foreign investment. Our lawyers were there at the inception of INSOL and at the United Nations, contributing to the work of UNCITRAL. And now we are in Tokyo and Hong Kong, participating in the migration of laws and capital. In a cross-border insolvency or restructuring, you can’t figure out what to do simply by opening a book of statutes and reading up. You actually have to have done it. And Bingham has.
Yuki Sakai: New capital injected by “sponsors” drives restructurings in Japan because the sponsor becomes the new equity. When it comes to unsecured creditors, there are significant differences in our insolvency proceedings. In Japan, unsecured creditors do not receive stock; rather, they are paid a discounted amount on their claim over time. In the late 1990s, many large Japanese banks sold non-performing loans to foreign funds. These funds tried to become vocal in insolvency cases and also often injected cash as the sponsor. Transactions that are akin to a 363 sale are the way bankrupt companies are acquired in Japan. As business and finance become more global and complex, how can you be everywhere at once? Ed Smith: Clearly, you can’t, but you don’t need to be. The key is to have the right network in the right places, meaning that in countries where a law firm doesn’t have a physical presence, it must have strong working ties to that country’s leading practitioners. It takes time to build those relationships, and we have been working with many of these firms for a decade or more, giving us experience that is critical to establishing trust and confidence. Michael Reilly: Bingham lawyers, either in their present positions or at legacy firms, were there at the inception of the modern bankruptcy code in the United States, and helped to build the going-concern models of the 1980s.
Ed Smith is “outstanding” and “‘probably knows as much about the UCC as anyone in the country,’ agree sources, and is ‘the person in the firm that you look to for answers to difficult questions.’” - Chambers USA
“In a cross-border insolvency or restructuring, you can’t figure out what to do simply by opening a book of statutes and reading up. You actually have to have done it. And Bingham has.”
Who’s Who Legal “We have no hesitation in declaring Bingham McCutchen LLP the world’s leading firm for Insolvency & Restructuring expertise.” Bingham was awarded Insolvency & Restructuring Law Firm of the Year in both 2006 and 2007.
Chambers Asia Bingham’s merger with Sakai & Mimura adds “significant restructuring and insolvency expertise to the firm’s market-leading domestic and cross-border work…The firm boasts an impressive clientele, including major US and European companies in Japan and Asia, as well as nearly 500 Japanese-affiliated companies.”
Practical Law Company For the second-straight year, Bingham was selected as a leading law firm for restructuring and insolvency in England by PLC in its Cross-Border Handbook: Restructuring and Insolvency 2008/09. Bingham was the only U.S. firm to achieve this top-tier ranking. Jane’s Transport Finance Bingham was awarded 2007 “Aircraft Restructuring Deal of the Year” for Delta Air Lines restructuring. Chambers USA “This group has built up a strong creditor practice through its ‘deep involvement’ in both new and distressed investments… Clients praised the team’s related corporate and securities strengths, and appreciate its ability to deal with ‘the most heated and ugly litigation.’” © 2008 Bingham McCutchen LLP
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