Fifth Circuit Avoids Deciding the Enforceability of “Golden” Shares

While the result is anticlimactic, the U.S. court’s observations are more interesting; they tend to reinforce doubts about the usefulness of this alternative bankruptcy proofing mechanism.

The Court of Appeals for the Fifth Circuit missed an opportunity to address some important questions about golden shares, an alternative form of bankruptcy proofing that requires the consent of certain equity holder(s). On May 22, it affirmed the dismissal of a bankruptcy petition that was filed without obtaining the consent of the preferred shareholder, whose consent was required under the debtor’s amended certificate of incorporation. In doing so, it side-stepped the main issue of interest, finding that the case did not involve a blocking provision.

Left unaddressed were several questions that the Bankruptcy Court for the Southern District of Mississippi had certified in the case, Franchise Services of North America. They include whether a blocking provision, i.e. a golden share, enabling a party to block a bankruptcy filing, is contrary to federal public policy and whether the veto right violates Delaware law.

Asset Securitization Report recently published a follow-up article authored by Dechert partner Shmuel Vasser, analyzing the decision and the issues it raises. The first article can also be found using the link below. 

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