• Does it receive goods or services
from other likely nonviable parts
of the organization that cannot
be economically replaced?
• Are there significant contingent
liabilities or underutilized assets?
• How are key constituencies likely
to react to a parent’s Chapter 11
filing, including local management,
employees, customers, vendors,
and governmental agencies?
• Under what circumstances can
the parent retain control of the
operation? Is a local insolvency
proceeding workable, or is a local
filing likely to result in loss of control?
• If the operation is insolvent or likely
to become so, what additional
burden does that place on the
relevant officers and directors?
Because of intercompany relationships
among businesses, it’s critical to take
a wide view to ensure all of the pieces
are captured in the review; decisions
cannot be made on an operation-by-operation basis. It is essential to
identify relationships among operations
that would impact the analysis. For
example, are any subsidiary’s products
or personnel key to another’s supply
chain or integral in supporting domestic
sales efforts? In a multijurisdictional
restructuring, formal legal structures
become paramount and will override
typical global product group structures.
The “retain or release” decision is not
always straightforward, obvious, or
binary. Consideration must be given to
the fact that this decision might trigger
unintended consequences financially,
operationally, or legally. For example,
could an operation be impacted by
a local adversary proceeding, or is it
linked to a toxic asset? If the decision
is to release an operation, does it have
intercompany relationships with
other retained operations in another
jurisdiction, and will the release impact
control of the retained operations?
Jurisdiction. Foreign insolvency
laws, although evolving, particularly
in Europe, may still not be as favorable
to a debtor-controlled restructuring
process as those of the United States.
The European Union (EU), for all
practical purposes, is not unified in the
development of insolvency proceedings.
Administration turns over control to an
administrator, who looks to optimize the
assets of an operation through a sale or
liquidation for the benefit of creditors.
Recently the U.K. scheme of
arrangement has emerged as an
alternative to court-appointed
administration, leaving management
in place and providing greater
flexibility. However, outside the U.K.,
Germany, France, Spain, and Italy,
insolvency remains focused largely on
liquidation rather than restructuring.
Considering the inconsistencies
in addressing insolvencies beyond
the U.S. border, it is imperative to
understand and consider local laws
and practices that might restrict
repatriation of cash, movement of
assets, or impacts on employees.
What happens to local employees,
especially management, if an entity
becomes insolvent? Dire personal
consequences, including criminal
exposure, are possible. Senior
management in filed entities may
have to relinquish authority to court-appointed insolvency administrators.
There could be considerable risk they
might jump the gun and seek local
protection from exposure to personal risk
if a clear path to avoid, cure, or manage
a potentially insolvent situation is not
effectively planned and communicated.
A parent-subsidiary relationship,
with intercompany dependencies,
although viewed as independent
operationally, may be disrupted by the
U.S. restructuring, the result of which
could impact local solvency tests.
The often complex nature of these
arrangements may trigger local filings.
Preserving Value. A primary objective
in preparing for a bankruptcy is
management of the global sources
of cash—credit facilities outside the
U.S. might dry up when news of a
U.S. parent’s filing is disclosed. These
facilities must be protected or minimally
replaced. Preservation of value
might include moving debt among
various operating entities in different
jurisdictions. Planning should take into
account the procedures or processes
that need to be addressed when moving
debt between operating entities.
Tax authorities at all levels may need
to review the plan, debt load, etc., to
confirm that the operation can take
advantage of the increased interest
charge as a deduction. Formal solvency
reports may need to be developed,
submitted, and reviewed to prove the
point, which takes time and money.
Consideration should include potential
impacts of the U.S. parent filing as well
as the potential “release” of a foreign
affiliate. What is the plan to address
customers in general and key customers
specifically? Do key suppliers need
special consideration for one or several
operations across foreign borders? How
will employee concerns be addressed
and coordinated with unions and local
works councils? As with the U.S., are
there any regulatory considerations?
Continued funding of retained
operations must be addressed, and
U.S. debtor-in-possession financing
needs to cover foreign operations,
especially any that are funded through
parent operations or credit facilities
via intercompany transactions. The
local vendor community may need
reassurance that continued funding
is or will soon be available. Can
local operations provide the cash
flow to support and the assets to
leverage through local independent
credit relationships? Can foreign
operations provide funding to
each other, avoiding any impact or
connection with the U.S. filing?
Finally, although incentive programs for
key executives under U.S. bankruptcy
laws require specific incentives to
be closely tied to cause-and-effect
performance measurements, retention
programs or “stay bonuses” for key
management outside the U.S. are not
unusual and are considered to be a
good way to ensure operational focus.
Other Considerations. As part of
a well-prepared planning process
it is important to consider a range