The creditors committee in the Chapter 11 bankruptcy of Freedom Communications will be allowed to seek an alternative to the company's reorganization plan, a Delaware judge has ruled.
Following a hearing Wednesday, Judge Brendan Shannon granted the committee's request to allow its investment bankers to solicit alternative plan proposals using confidential business information from the owner of The Orange County Register in California, dozens of other newspapers and eight television stations.
Shannon cautioned that his ruling should not be seen as an opinion on Freedom's plan, which is subject to a hearing later this month and a final confirmation hearing in February.
"My ruling here should not be taken as an implicit suggestion that a different or better result is out there," the judge said, adding that he has doubts that the committee's effort will yield any significant results.
Freedom, based in Irvine, Calif., filed for Chapter 11 protection in September, citing a steep drop in advertising revenue.
Under a prepackaged reorganization plan developed by Freedom and its secured lenders the family and two investment firms that own Freedom would be left with no more than a 2 percent stake in the company. The rest of the stock would go to a group of 27 lenders owed nearly $771 million. The lenders, led by JPMorgan Chase & Co., would forgive most of that debt in return for control of the company.
Attorneys for the committee contend that Freedom's plan wrongly benefits shareholders who control the board of directors and hurts unsecured creditors.
"It is clear that having formed an unholy alliance with the consenting lenders, the debtors' board of directors and controlling shareholders have determined to 'stand pat' with a plan that inappropriately provides for distributions to the old equity interests who control the board, while inflicting massive impairment and discrimination on the debtors' general unsecured creditors," attorneys for the committee wrote in their court filing.
They also claim that a "no-shop" provision preventing Freedom from actively seeking an alternative plan is improper, and that Freedom has a fiduciary duty to maximize both the value of its bankruptcy estate and recoveries for creditors.
"What you have here is a lockup of the process ... and it's wrong," Robert Feinstein, an attorney for the committee, argued Wednesday.
Freedom, whose board rejected the committee's request, countered that its plan provides the most benefit to all stakeholders, including unsecured creditors who would share $5 million to which they otherwise would not be entitled.
Freedom representatives testified that it is highly unlikely that the committee could find a buyer who could cover the company's $770 million bank debt, or even its estimated valuation of between $400 million and $500 million.
"The process would effectively be a waste of time and resources," said Eric Winthrop, an investment banker hired by Freedom.
Chief Financial Officer Mark McEachen testified that allowing the committee to explore a sale process could unnerve advertisers and hurt employee morale while hampering management and restructuring efforts.
"We're already overwhelmed," said McEachen, who also expressed concern about competitors being allowed access to Freedom's confidential business information, saying nondisclosure agreements can be violated.
While granting the committee's request, Shannon agreed with Freedom attorney Robert Klyman that the committee should entertain offers only from financially credible entities, and that Freedom officials should not have to endure answering questions from, in the judge's words, "every tire kicker and bottom feeder on the planet."