A dramatic recreation of the fight over corporate authority to file bankruptcy.

The Fifth Circuit recently issued an opinion that federal bankruptcy law does not prohibit a bona fide shareholder from exercising its right to vote against a bankruptcy filing notwithstanding that such shareholder was also an unsecured creditor. This represents the latest successful attempt to preclude bankruptcy through golden shares or bankruptcy blocking provisions in corporate authority documents.

In this post on the Bankruptcy Cave, Bryan Cave Leighton Paisner attorney, Jay Krystinik, analyzes how the Fifth Circuit Affirms Dismissal of Bankruptcy Case Due to Lack of Corporate Authority to File (and potentially provides a blueprint for veto powers over bankruptcy filings).

“There is no prohibition in federal bankruptcy law against granting a preferred shareholder the right to prevent a voluntary bankruptcy filing just because the shareholder also happens to be an unsecured creditor by virtue of an unpaid consulting bill. . . . In sum, there is no compelling federal law rationale for depriving a bona fide equity holder of its voting rights just because it is also a creditor of the corporation.”

The Fifth Circuit was careful to limit its holding to the facts of this case. “A different result might be warranted if a creditor with no stake in the company held the right. So too might a different result be warranted if there were evidence that a creditor took an equity stake simply as a ruse to guarantee a debt. We leave those questions for another day.”