Judge Perez Confirms QVC’s Prepackaged Plan in Written Opinion, Overruling QVCG Preferred Shareholders Who Called It a ‘Pre-Ordained’ QVCG ‘Capitulation’

Relevant Document:
Opinion

In an opinion today Judge Alfredo Perez confirmed the QVC debtors’ prepackaged plan of reorganization, overruling objections from a group of QVCG preferred shareholders.

The 103-page opinion caps off almost 90 days of litigation since the QVCG preferred shareholder group mobilized with Glenn Agre around May 4. During the four-day confirmation trial, the QVCG preferred shareholders attempted to prove that the plan’s settlement between QVCG and QVC amounted to a “total capitulation” and the plan failed the Bankruptcy Code’s confirmation requirements with respect to QVCG because it lacked an impaired accepting non-insider class of creditors, among other arguments.

Judge Perez holds that the QVCG/QVC settlement negotiations were “a thorough, fair, and arm’s-length process.” The judge further holds that “[n]o disinterested fiduciaries capitulated to any other, and the ultimate outcome for stakeholders was not preordained.”

Under the confirmed plan, reorganized QVC would emerge from chapter 11 with an Octus-calculated net enterprise value of $1.6 billion to $1.9 billion. QVC’s funded debt holders – including the Simpson Thacher group (holding about $2.9 billion of QVC’s debt) and Davis Polk group (holding about $1.8 billion of QVC’s debt) – stand to receive 100% of reorganized equity prior to dilution by a management incentive plan.

Debtor QVCG is the QVC group’s top holding company. During pre-bankruptcy restructuring negotiations, it held about $170 million cash and a 62% stake in the company’s Cornerstone business. QVCG had no funded debt, but had about $1.27 billion in preferred equity units outstanding.

During pre-bankruptcy negotiations, independent directors appointed at QVC – the main operating company and a direct subsidiary of QVCG – threatened QVCG with over $3 billion in litigation claims relating to historic cash upstreams and tax-related obligations. QVCG’s independent directors agreed to settle those claims in the QVCG-QVC settlement incorporated in the plan. Under the settlement, QVCG would transfer substantially all of its assets to reorganized QVC in exchange for a release for itself and its preferred shareholders – with the preferreds receiving no other distribution.

At trial, the debtors argued the proposed settlement was the product of a fair negotiating process agreed to by QVCG’s independent directors with advice of counsel after extensive investigations. The debtors emphasized that the quantum of the threatened claims would swamp QVCG if even a fraction of the claims stuck.

The QVCG preferred shareholder group (predominantly institutional investors), characterized the QVCG-QVC deal as a “pre-ordained capitulation” forced on QVCG by QVC’s creditors. The group also maintained QVCG’s independent directors failed to use “hold up” value as leverage during negotiations and “folded” quickly during negotiations.

The preferred shareholder group also attempted to poke holes in the legal theories underlying the more than $3 billion in claims QVC threatened, including the premise that QVC was insolvent for purposes of fraudulent transfer claims and that a potential billion-dollar deferred tax liability would come due.

In his opinion, Judge Perez finds that “the ultimate outcome for stakeholders was not preordained” before the QVC/QVCG negotiations and the “equity holders received valuable releases of claims from the Debtor entities for distributions out of the Debtors’ assets totaling more than $450 million.”

The judge evaluated the settlement under the deferential “business judgment” standard, rather than the “entire fairness” standard that the preferred shareholder group advocated. Judge Perez explains that the more deferential standard applies after concluding “the investigation and negotiation of the Intercompany Settlement was not subject to a conflict” due to the involvement of the independent directors, as represented by independent counsel.

Each of the three settlement approval factors – the “probability of success” in the underlying litigation, the “complexity and likely duration” of litigation and “all other factors bearing on the wisdom of the settlement” – weigh in favor of approval, according to Judge Perez.

With respect to the negotiating process, Judge Perez finds that during QVC’s broader restructuring negotiations, the company and the various creditor constituencies with which it was negotiating “were not in agreement” as to any recovery for the preferred shareholders. Specifically, Judge Perez points to evidence that proposals for preferreds contemplated “as much as both a cash distribution and equity in the reorganized QVC or [Cornerstone], and as little as, potentially, nothing.”

Those facts run contrary to the preferred shareholders’ argument the settlement was “pre-ordained,” the judge says.

Judge Perez also notes that the QVCG independent directors’ counsel, Kobre & Kim, advised the independents on the strengths and weaknesses of QVC’s litigation claims and QVCG’s defenses. Judge Perez points to a Feb. 12 status update Kobre & Kim provided to the QVCG independent directors indicating “the QVCG Disinterested Directors were aware of how much leverage the QVC Disinterested Directors would have against them in the subsequent negotiations.”

The judge further notes the independent QVCG directors initially took an “aggressive” stance during negotiations and did not “capitulate” to QVC, even when the directors “did not insist on a distribution for Preferred Shareholders.”

According to Judge Perez, the “uncertainty” any litigation would carry was the “justification” for the QVCG independent directors agreeing to the settlement. The judge recognizes that QVC took the position that one of the potential QVCG liabilities the settlement resolved – an over $1 billion deferred tax liability – likely “would not materialize.” But the judge found the “magnitude of liability” was a “highly motivating factor for QVCG to settle QVC’s potential claims against it.”

Other factors, like QVCG’s limited cash on hand and only partial tax insurance coverage, highlight “the fact that even though the [deferred tax liability] had a low likelihood of materializing,” a “single digit risk of loss percentage on the DTL threatened to completely wipe QVCG out.”

Judge Perez also finds that the issue of solvency, central to QVC’s avoidance claims, was viewed by the independent directors as a “litigable issue.” The QVCG independent directors were “presented with the option of either arriving at speedy resolution which, in their view, was value maximizing, or litigating against an entity that has leverage on them, all while relying on a limited asset pool,” the opinion states.

Judge Perez concludes that “the facts here demonstrate that the Disinterested Directors believed settling, rather than litigating, claims, would be more beneficial to creditors generally.” Judge Perez also rejects the notion that to comply with the standard for settlement approval under Rule 9019 of the Federal Rules of Bankruptcy Procedure, “the Disinterested Directors had to expend all resources or exhaust all conceivable settlement options.”

Instead, the judge says it was enough that the QVCG independent directors “achieved a settlement” that “paid all outstanding trade vendor claims at the QVCG level, resolved all potential intercompany claims, took all QVCG’s tax risks off the table, and secured a release for the Preferred Shareholders for liability on the QVCG Preferred Dividends.”

During trial it was revealed that QVCG had less than $15 million of unsecured claims, with the bulk consisting of priority tax claims.

Judge Perez also rejects each of the preferred shareholders’ arguments that the QVCG plan fails to comply with the Bankruptcy Code’s confirmation requirements.

For example, the preferred shareholders argued that QVCG lacked the impaired accepting class of non-insider creditors necessary for plan confirmation under section 1129(a)(10) of the Bankruptcy Code. According to the preferred shareholders, even though the debtors listed QVC’s settlement claim as “unimpaired,” the claim was actually “impaired” because QVC settled its allegedly billion-dollar claims for a $400 million allowed claim.

Judge Perez rejects that argument and agrees with the debtors that the claim was unimpaired since it was the product of a valid settlement agreement. “Courts have interpreted [impairment] to mean that creditors can agree to treatment that is less than their full and equitable rights – by settlement, stipulation, or some form of agreement – and be considered unimpaired,” the judge explains.

After determining that all creditors’ claims against QVCG were unimpaired (and equity interests were irrelevant under the statute), the judge found that section 1129(a)(10) did not apply.

Judge Perez also rejects a section 1123(a)(4) Serta-based argument made by the preferred shareholders. The group argued that because some of their members did not receive prepetition distributions on account of the QVCG preferred shares, they would not benefit from the releases granted under the plan.

However, Judge Perez concludes that Serta is distinguishable because it involved a classwide indemnification rather than a classwide release. According to the judge, unlike indemnification, “a release does not create” an “affirmative right to payment,” meaning QVCG shareholders that received payments “do not receive different ‘payments of value’ under the Intercompany Settlement than those current Holders who did not receive any such dividends.”

Additionally, Judge Perez rejects the preferred shareholders’ argument that the plan violates the Bankruptcy Code’s best interests test, which requires that a creditor receive at least as much under the plan as in a hypothetical chapter 7 liquidation. The judge reasons that in such a hypothetical liquidation, a trustee could adopt the settlement agreement – ensuring the preferred shareholders the same recovery as under the plan.

In the alternative, Judge Perez reiterates that absent the settlement, litigation costs could wipe out QVCG’s cash. “The result would be that equity would still receive no recovery under this scenario, which is what they receive under the Second Amended Plan,” the opinion concludes.

The preferred shareholders filed a motion to terminate the debtors’ exclusivity periods, which would have allowed them to file an alternative plan. Judge Perez denies that motion as moot given his decision to confirm the debtors’ plan.