A recent Eleventh Circuit case examines equity shareholders’ role (or lack thereof) in a reorganized entity. Vision-Park Properties owned an equity share of Seaside Engineering & Surveying, Inc. Seaside filed for Chapter 11 protection in 2011, and shortly thereafter proposed to reorganize and continue operations as Gulf Atlantic, LLC.
According to the proposed Chapter 11 plan, outside equity holders (such as Vision-Park Properties) were to receive promissory notes in the full amount of their equity interest accruing at 4.25% in exchange for their interest in the reorganized Gulf Atlantic, LLC. Vision-Park Properties objected, arguing that they should continue as a stockholder in the reorganized entity.
The Eleventh Circuit rejected Vision-Park’s argument. Where an equity holder is paid the full value of its equity interest, such equity holder may not demand to continue as a stockholder of the reorganized company.
This case illustrates the potentially limited role that equity shareholders may play in the Chapter 11 reorganization of a bankrupt entity. This type of fight centers around the valuation of a stockholder’s equity interest. If paid full value by the reorganizing debtor, a stockholder may be forced to relinquish its equity interest in the reorganized debtor.
