On Jan. 17, 2018, the U.S. Bankruptcy Court for the Southern District of Mississippi granted a debtor’s request for certification of a direct appeal to the U.S. Court of Appeals for the Fifth Circuit of the Bankruptcy Court’s memorandum opinion considering the validity of a blocking provision given to an equity holder of the debtor. In re Franchise Servs. of N. Am., No. 1702316EE, 2018 Bankr. LEXIS 105, at *5 (Bankr. S.D. Miss. Jan. 17, 2018). The certification followed the Bankruptcy Court’s dismissal of the bankruptcy case filed by Franchise Services of North America (FSNA) because the filing was made without the consent of a party holding the so-called “golden share.” In re Franchise Services of North America, Case No. 1702316EE (Bankr. S.D. Miss. Dec. 18, 2017). In this case, the articles of incorporation of the Delaware putative debtor prohibited the corporation from seeking bankruptcy relief without the consent of a minority shareholder. In certifying direct appeal, the Bankruptcy Court noted the divergent Bankruptcy Court level decisions ranging from declaring such provisions void as against public policy to enforcement. In some of those decisions, the courts observed that with revisions such provisions might be enforceable. In this case, the Bankruptcy Court certified three questions: (1) whether a provision which gives a party (whether a creditor or equity holder) the ability to prevent a corporation from filing bankruptcy valid and enforceable or contrary to public policy; (2) same question, but in a scenario where the holder of blocking provision is both a creditor and an equity holder; and (3) whether Delaware law permits such provisions and, if so, whether Delaware law imposes on the holder of the provision a fiduciary duty to exercise such provision in the best interests of the corporation. On Feb. 8, 2018, the Fifth Circuit entered an order granting leave to appeal and permitting expedited consideration of the appeal. Franchise Svc. of North America v. United States Trustee, et al., Case No. 18-90006-GJC (5th Cir. Feb. 8, 2018). The Circuit will be the highest court to consider validity of such a provision.

Opinion on Motion to Dismiss

The controversy in this case stems from a multi-step M&A transaction resulting in a putative debtor’s acquisition of a car rental company. The transaction was spearheaded by an investment bank. In order to facilitate the acquisition, a wholly owned subsidiary of the investment bank invested $15 million in the putative debtor. In exchange, the subsidiary received 49.76 percent interest in the debtor in the form of preferred stock, becoming the largest single shareholder. For its work on the transaction, the investment bank was owed an advisory fee of $500,000, and an arrangement fee of $2,500,000 from the debtor. These fees remained unpaid after the closing of the acquisition transaction.