The use of special purpose entities in structured finance transactions has become increasingly common. Special purpose entities, which are designed to protect assets from becoming part of a bankruptcy estate, are sometimes structured so that a lender (or other party in interest) is given a “golden share” in a limited liability company (LLC). A “golden share” refers to a noneconomic membership interest which is issued to the lender for the sole purpose of allowing it to vote on a voluntary bankruptcy filing by the borrower. The “golden share” is accompanied by a provision in the borrower’s operating agreement which requires the unanimous consent of all members of the LLC to commence a voluntary bankruptcy filing. In essence, the “golden share” gives the lender a say in any subsequent decision by the borrower to seek bankruptcy protection. Lenders have long considered the “golden share” to be an effective mechanism for safeguarding their investments.
Recent rulings, however, have cast doubt on the effectiveness of the “golden share” structure. See In re Intervention Energy Holdings, LLC, 553 B.R. 258 (Bankr. D. Del. 2016); In re Lake Michigan Beach Pottawattamie Resort LLC, 547 B.R. 899 (Bankr. N.D. Ill. 2016). At their core, these cases suggest that a “golden share” is only enforceable if the holder thereof has a fiduciary duty to consider the entity’s best interests. The fiduciary duty requirement is particularly noteworthy in Delaware, where state law explicitly allows for the elimination of the fiduciary duties of the members of a LLC. This is in stark contrast to Delaware law on traditional corporations, which prohibits waiver of the duty of loyalty. The case of In re Intervention Energy Holdings, LLC, 553 B.R. 258 (Bankr. D. Del. 2016), is instructive of the tension that the fiduciary duty requirement has created between two core legal principles: (1) the freedom of contract under state corporate law and (2) the fundamental constitutional right to seek bankruptcy protection.
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