McDermott International’s proposed Chapter 11 reorganization plan has drawn objections from some shareholders and the Securities and Exchange Commission. The Houston-based engineering and construction giant filed for Chapter 11 bankruptcy protection last month, and a hearing on the plan is scheduled for March 12 in the U.S. Bankruptcy Court for the Southern District of Texas. The plan, which will allow McDermott to receive more than $2.8 billion in financing and shed $4.6 billion of debt, has the support of two-thirds of its creditors.
The shareholder objection filed with the bankruptcy court earlier this week argues that the prepackaged plan is unfair and imbalanced toward McDermott management, officers and directors.
The shareholders, whose interests will be wiped out under McDermott’s proposed plan, argue that the proposal provides McDermott’s management with 7.5% of newly issued equity in the restructured company, “while leaving the equity shareholders with nothing.”
In addition to the equity, McDermott executives and key employees are in line to receive up to $106 million in bonuses.
The filing said this arrangement appears to violate the absolute priority rule, which holds that creditors’ claims have a priority over shareholders’ claims. According to the rule, investors are compensated only after the claims of the creditors are settled to the satisfaction of the bankruptcy court.
The group, made up of 21 shareholders with a total of 1.6 million shares, requested that the current Chapter 11 plan be denied and that the new plan include the following items:
- That it is restructured to provide that no nondebtors are released from any possible claims or causes of action.
- That all insurance is available for any claims or liabilities asserted by any equity shareholders.
- That it does not allow management to have a right to 7.5% of the new equity while current shareholders get nothing.
- That it allows for the appointment of an equity holders committee to review and analyze potential claims and causes of action.
The filing also calls into question the veracity of McDermott leaders' comments and actions late last year and in early 2020 as they fought to stave off bankruptcy. Instead of selling its petrochemical and refining technology group, Lummus Technology, and paying off shareholders during this time, McDermott undertook a series of actions aimed at short-term solvency, and solicited a new financing arrangement to keep the company afloat. Over the course of the third and fourth quarters of 2019, McDermott’s stock value neared free fall, the filing says.
“While its public representations surrounding the financing were rosy, it now appears that the financing was to sustain the company as it prepared to enter bankruptcy,” the filing states.
While the bankruptcy offers hope for priority creditors to recover their investment in McDermott — and even receive equity in the reorganized company — the bankruptcy will wipe out common stockholders, it notes. The company's stock was delisted from the NYSE on Feb. 6.
This week, McDermott announced that will move forward with the Lummus Technology sale, to a previously announced joint partnership between the Chatterjee Group and Rhône Capital, for $2.7 billion.
In addition to the shareholder filing, last week the SEC lodged its limited objection to the Chapter 11 plan, due to provisions that would release various third parties from liability, including current and former McDermott officers, directors, principals, employees and current and former equity holders.
Citing Section 524(e) of the Bankruptcy Code, SEC attorney Sonia Chae argues in the filing that only a debtor that has submitted to the burdens of the bankruptcy process is entitled to the benefits of a discharge. The SEC also finds fault with the fact that the releases grant immunity for “scienter-based” behavior, including fraud, willful misconduct and gross negligence.
“Because public investors often receive little or no distribution in bankruptcy cases, their only source of recovery may be their ability to pursue claims against wrongdoers,” wrote Chae. “And if misconduct by management contributed to the loss of their investments, they may have meritorious scienter-based claims.”
She asked that these releases be denied in part because they deprive public shareholders of their rights and critical protections under the law.
“Such provisions are at odds with sound public policy considerations underlying the rights of creditors and investors to pursue legitimate claims against wrongdoers,” the filing states.