Stock Trading Injunctions in Chapter11

The implementation of restrictions on stock and/or claims trading has become almost routine in large Chapter 11 cases involving public companies on the basis that such restrictions are vital to prevent forfeiture of favorable tax attributes that can be triggered by a change in control. Continued reliance on stock trading injunctions as a means of preserving net operating loss carry forwards, however, may be problematic, after the controversial ruling handed down in 2005 by the Seventh Circuit Court of Appeals in In re UAL Corp., 412 F.3d 775 (7^th Cir. 2005). In that case, the Court sharply criticized stock trading freezes and suggested that the quid pro quo for preventing trading should be a bond or some other form of security posted by the Chapter 11 debtor to compensate stockholders for any losses sustained as a consequence of their inability to trade. Although courts continue to impose stock and claims trading restrictions as part of customary 'first day' orders in Chapter 11 cases filed by publicly-traded companies, the possibility that trading injunctions will be harder to obtain begs the question whether other means of preventing significant shifts in equity ownership are available. Carefully tailored measures implemented by a debtor-corporation's board of directors, such as 'poison pills,' may be one option.