Relief from covenants and other provisions of debt documents is generally analyzed as a contractual matter. Often such provisions enable a small debtholder to block a waiver or amendment of the key terms of debt documents that most debtholders favor. One of the primary benefits of executing a debt restructuring under Chapter 11 is its ability to bind the dissenter with a class vote. Hence, in situations where a company can avail itself of Chapter 11, a hold-out strategy may work, but it is expensive, requiring a third or more of a class of debt. In Europe, where a company may not have access to a restructuring regime with similar provisions, the hold-out strategy has been more prevalent. The rationale behind a holdout strategy is simple: An investor or creditor will seek to acquire a portion of debt large enough to ensure that a debt restructuring cannot proceed without meeting its demands. A contingent of several like-minded parties may conspire to acquire a blocking stake, particularly in large companies where the amount of investment required to acquire such a blocking stake can be extremely large. Historically in assessing a hold-out strategy there were two points of reference: the contract and the relevant insolvency regime. Now, at least in Europe, there is a third point of reference—choice of law.
In the European Union, the Insolvency Regulation1 determines the potentially applicable insolvency regimes, relying upon identifying the "center of main interest" or "COMI" for a company. Many insolvency regimes are not well equipped to effect a debt modification because they neither anticipate a rescue of the ongoing business nor provide a mechanism to bind dissenters. Companies operating in such regimes were fearful of hold-out strategies should the company need a modification or waiver of provisions in its bank debt. Recent experience, however, underscores that the assessment of the expected return from a potential hold-out strategy requires more analysis than simply calculating the blocking stake required under the relevant debt documents and understanding that insolvency is not an option. Now the analysis must also address whether the company can seek relief from the English courts. That question does not turn simply on whether a company can seek insolvency relief in the U.K., but also whether it can effect a scheme of arrangement under English law. In the case of a non-English company, the governing choice of law provision of the debt documents has previously proved the key factor in establishing a sufficient connection with England to effect a scheme of arrangement.
