Since the 1980s, financially distressed companies have utilized so-called prepackaged plans to restructure their balance sheets. Debtors facing bankruptcy have gone to their major creditors and persuaded them to sign “lock-up” agreements supporting a particular plan of reorganization before the debtors filed under Chapter 11. In theory and in practice, lock-up agreements have reduced the uncertainty of bankruptcy for debtors and creditors alike.
Now, two recent cases in the U.S. Bankruptcy Court in Delaware have added procedural complexities to that process. In Mpower Holding Corp.,No. 02-11046-PJW, and NII Holdings Inc.,No. 02-11505-MFW, bondholders who had executed lock-up agreements with financially distressed companies found themselves in rather unexpected positions — not on the creditors’ committee and, with respect to certain bondholders, with disqualified votes on the final reorganization plan. In short, the benefits of the lock-up agreements were undermined.
