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Preferred equity is a varied and flexible instrument, but, in practice, it typically has a limited number of common features. One feature is that it is entitled to a “liquidation preference” ahead of common stock. Whether the liquidation preference of preferred equity entitles preferred shareholders to priority over common shareholders in a Chapter 11 reorganization is a question that figured prominently in two recent high profile cases.
Preferred equity instruments have become increasingly popular as a source of financing for private equity sponsors executing large leveraged acquisitions. Investors seeking the risk profile of debt but also the return potential of equity are attracted to the hybrid nature of preferred equity, which generally ranks senior to common equity interests (like debt) and may entitle the holder to common equity-like upside. By law, preferred equity is a varied and flexible instrument, but, in practice, it typically has a limited number of common features. One feature is that the preferred equity is entitled to a “liquidation preference” ahead of common stock. The liquidation preference is typically triggered upon a “liquidation, dissolution or winding up” whether “voluntary or involuntary” and most often equal to a fixed dollar amount per share plus accrued and unpaid dividends to the date of the liquidation, dissolution or winding up.
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Seventh Circuit Applies Safe Harbor to Private Securities Transaction
By Michael L. Cook
“… [T]he term ‘securities contract’ as used in [Bankruptcy Code] §546(e) unambiguously includes contracts involving privately held securities,” The Seventh Circuit held in Petr v. BMO Harris Bank, N.A.
By Lawrence J. Kotler and Elisa Hyder
In Lafferty v. Off-Spec Solutions, the U.S. Bankruptcy Appellate Panel of the Ninth Circuit held that the discharge exceptions under Section 523(a) do not apply to corporate debtors under Subchapter V of Chapter 11 of the Bankruptcy Code.
Merchant Cash Advances Could Be More Trouble Than They’re Worth
By Joseph Pack and Jessey Krehl
As small-business owners have continued to struggle in an uncertain economy, a growing number have begun the dangerous practice of relying on merchant cash advances — essentially seeking financial shelter in a lion’s den.
Biotech Industry Bankruptcy Case Update: ‘Zymergen’ and ‘Humanigen’
By Edward E. Neiger, Marianna Udem and Joo Hee Park
This Bankruptcy Case Update focuses on the recent biotech industry bankruptcy cases of Zymergen and Humanigen.
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