A few years ago, I blogged about how the SDNY’s decision in the Tribune Company case revived a widely used safe harbor protecting former shareholders in an LBO from fraudulent conveyance claims that had been called into question by the SCOTUS’s Merit Management decision. This Ropes & Gray memo says that the 2d Cir. subsequently endorsed the SDNY’s approach, and that the SCOTUS recently declined to review that decision. This excerpt discusses the implications of the decision:
The Tribune decision provides a road map to secure bankruptcy safe harbor defenses for payments made in leveraged buyouts, certain leveraged recapitalizations, and other similar transactions. The Second Circuit’s opinion—now firmly established law in the influential Second Circuit—reaffirms the Bankruptcy Code’s protection from most fraudulent transfer clawback claims as long as the company making the payments is a “customer” of a traditional financial institution, and that financial institution acts as the company’s “agent” in connection with a securities contract.
Under Tribune, selling shareholders can obtain the protection of the safe harbor by using a bank or trust company as an agent in the transaction. While this is already commonplace in public company buyouts through the use of banks or trust companies as “depositaries” or “paying agents” in handling the exchange of shares for cash, this roadmap could also be applied to non-public company stock transactions and LBOs. Similarly, under the rationale in Tribune, structuring asset sales as stock transactions in the same manner can also preserve safe harbor defenses.
– John Jenkins