The continued development of contentious restructurings as litigation

Following a series of important decisions in England and across Europe, it is now beyond doubt that court-based restructuring processes should be approached from the outset as pieces of litigation.

We have seen increasingly sophisticated challenges to restructurings, which the courts are willing to accommodate. In appropriate cases, the courts have also refused to sanction restructurings. 

Successfully navigating this landscape will require parties to carefully apply the guidance from the courts to de-risk their overall strategy from day one, whether proposing, supporting or challenging a restructuring. The pitfalls are many and serious - and there are some particularly cautionary tales from the recent court decisions.

Restructuring as litigation in England 

These are fundamental issues that go to the heart of a party’s approach to a court-sanctioned restructuring. As the restructuring toolkit available to parties around the world continues to develop at pace, approaching all aspects of the process as litigation should be the starting point for all those involved.

In a series of decisions, detailed guidance has been provided to all those involved, including proposing companies, experts, challengers, other stakeholders and these parties’ advisers. These include the Court of Appeal decision in Adler and the more recent cases of McDermott and Aggregate, which follow the useful first instance decisions in Smile Telecoms and others. With the rise of restructuring processes with inherently more contentious features – notably cross class cram down - more cases are sure to follow.

What might ‘success’ look like in this context?

It is possible to view success in litigation as boiling down to a court finding in a party’s favour following detailed disclosure, exchange of witness and expert evidence and a fully contested trial of all the relevant issues. 

However, in the context of a contentious restructuring process, ‘success’ for any party is more likely to take the form of de-risking matters as much as possible to pave the way for the successful restructuring on its projected timetable and without escalating costs. This means deploying an appropriate strategy to achieve the best possible terms at the earliest possible stage - without leaving matters to a potentially high-risk and costly (and open) debate in court, at which point the parties’ room for manoeuvre will be severely constrained by the process.

This requires all those involved to adopt a full litigation mindset from the outset in respect of all aspects of the restructuring, including the key terms; engagement with stakeholders; the timetable; disclosure and privilege; preparation of evidence; and many other issues. 

We now have several cases studies where a number of these important issues have played out before the courts – highlighting the features of a successful approach. These ongoing developments in the court’s expectations and guidance, and the increasingly sophisticated strategies that parties are pursuing, should be noted by all those involved in a court-based restructuring.

• For companies proposing a restructuring, de-risking potential issues as far as possible is paramount. This means structuring the deal with a view to potential challenges, including in respect of the timetable; managing experts and documents well to deal with any criticism head-on; and co-ordinating effective stakeholder management.  The goal should be to neutralise any challenges to the greatest extent possible, whether by accommodating them with minimal value leakage or by laying the groundwork against any real prospect of a successful challenge so comprehensively that it is not seriously pursued.
   
• For challengers, developing an early clear strategy will be key, which may involve identifying pressure points in the proposed restructuring, taking steps to address any information imbalance, and applying the court’s guidance from its recent decisions. The goal will often be to drive the company towards better terms, not to jettison the entire process and challengers are most likely to be able to achieve that by engaging early before the terms have crystallised. 
   
• For experts, they will need to ensure that they fully understand their role in the litigation process. This will mean ensuring that all aspects of their instruction and evidence meet the court’s expectations and that they are fully prepared for their evidence to be contested and to stand in the witness box.

What are some of the key considerations?

There are a number of key themes emerging from recent court decisions. These include:

1. Choice of forum: there are numerous factors, outside the scope of this blog, which will drive a choice between the available restructuring regimes around Europe and further afield. A nuanced understanding of the features of those processes in terms of what they can substantively achieve and the process for proposing and challenging is essential, as is disinterested advice in which is most appropriate.
    
2. Structure: Proposing companies should consider structuring the transaction in a way that reduces the risk of challenges succeeding. This means considering early engagement with stakeholders, the class analysis, jurisdictional questions and the fairness and ‘give and take’ of the compromise (among other things) through a litigation lens. For challengers, it will be crucial to think about potential substantive legal objections to the overall structure at an early stage. This could result in early concessions at a lower cost.
    
3. Disclosure:The courts now expect adequate and timely disclosure by the proposing company and expect the restructuring timetable to accommodate this as far as possible. In particular, proposing companies need to develop a strategy for disclosing materials to stakeholders. Disclosure is fundamental to parties pursuing and defending challenges to a restructuring, particularly in respect of disputes concerning valuation issues. As part of this, parties also need to consider issues relating to legal privilege and confidentiality at all times. Parties may be able to strategically leverage the disclosure process and the materials disclosed to strengthen their position, and this strategy will need careful thought from the outset. Being well prepared on this front will also better enable the Company to manage the timetable.
    
4. Expert evidence: The role of experts in a contentious restructuring now mirrors their role in general civil litigation. Experts and their instructing parties need to understand the expectations and requirements of this role; and the process for preparing expert evidence needs to be carefully managed. The court has provided clear guidance in a number of decisions. In Great Annual Savings, the court made it clear that experts should “kick the tyres” on information provided by their instructing party. While in Adler, the court made clear its expectation that, in appropriate cases, the timetable should provide enough time for experts to confer and be cross-examined. Identifying suitable experts (in terms of experience and expertise) early and engaging them appropriately (particularly with a view to privilege) will be key to this.
    
5. Procedural timetable: The courts expect the timetable for a restructuring to accommodate a fair procedural process for any challenges, with multi-day hearings and full cross-examination in appropriate cases. The courts will take a dim view of ‘urgent’ restructurings where the only urgency is based on predictable factors such as maturity dates, as observed in Adler. The court's readiness to adjourn hearings, as demonstrated in McDermott, underscores its flexibility to accommodate complex or evolving circumstances as fairly as possible between the parties.  The court may also be willing to grant a stay on implementation of restructuring plans or schemes of arrangement in appropriate cases, as with Link Fund Solutions, but appropriate cases may be few and far between.

What’s next?

The contentious restructuring toolkit continues to develop and parties are deploying it in increasingly sophisticated ways – with the support of the courts. 

There is much here for parties to consider. It is fundamentally important to a party’s success in de-risking a restructuring process that they fully understand and engage with the litigation process - with its many intricacies and potential pitfalls - from the very beginning.