EPTInfact, the weirdness is so off the wall that I become curious as to whether or not I need to backaway. You know, run? Fear for my fine and dandy reputation in life? Maybe keep a watch out over night to keep a close eye on just what's going on here anyhow..
Back in October I spotted a situation -- an investable situation. If you even know what that word means. This company, a major player in the Solar Industry, was nearly put out of business by a gnarly series of days where they spent and spent -- to the tune of one milion dollars a day -- and made practically zero revenues to compensate. Basically, the management of the Company were doing exactly the wrong stuff to succeed.
They did one thing right, though.l They filed for Chapter 11 Restructuring Bankruptcy. This is a special type of bankruptcy designed for Company's to get around costly legal battles. Its a pretty unique device under the law. Its like being able to file a lawsuit to escape a contract without having to go through the proper civil litigation procedures. There is of course a proper set of procedures -- but the advantage of Chapter 11 is that they (the legislators) make it easy to get infront of a Judge who will rule and perform a type of mediation in settling major contract disputes that otherwise may take several years in the "normal" route.
So Chapter 11 (Restructuring) is interesting because it helps folks get out of bad contracts. The thing is though, there has been much abuse of the Chapter 11 process. All of the abuse of course has been covered up -- its mostly the investors who got screwed who even know about the abuse. And even then, most people are not very savvy of the law -- so they think their company legitimately went bankrupt. But that's simply not always the case of Chapter 11. And nor is it the primary purpose of this special bankruptcy law. The main purpose is to faciliate company's escape from contractual obligations which didn't work out, but which will be hard for each Company to negotiate out of without being infront of a Judge who gives that essential 3rd vote.
What's the Abuse though? Well, simply, when Company Management enters into Chapter 11 they have the opportunity to sell the Company to a new set of bidders. Highly hypothetical, of course, this isn't an accusation of any sort on any particular Company, but I'll tell you this. A cursory review of the Chapter 11 History reveals that a very many Companies have wiped out Shareholders (public investors like you and I, incl. big investors in the common stock), reissued new stock (which happened to be bought and awarded to those who held Bonds), and emerged to be very successful.
Of course, all of that "successful" came at the price of wiping out all of the public shareholders. Like all of the folks who are down in paper (or real, if they sold) losses of $2k - $12 million (just talking about investors I know of in one particular Chapter 11 situation). So the shareholders get wiped out while Management stays on board and gets stock options in the "new shares" of the Company. Its pretty sick, if you think about it.
Well, I'm involved in one of these Chapter 11 situations because I saw the opportunity for some old-fashioned by-the-book street justice. And now the lawyers for this (what was) a $1.4 billion dollar company are after me. Its an unprecedented situation.
See you next time.
