“Post-Petition Lock-Up Agreements and Designation Standards Clarified”
A lock-up agreement—sometimes referred to as a plan-support agreement or restructuring-support agreement—often serves as an integral component of the bankruptcy process by allowing a debtor and its key creditors to memorialize the resolution of their legal and economic disputes and permit that debtor to attempt to confirm its plan and exit bankruptcy as expeditiously as possible. Some courts, however, have cast doubt on the enforceability of a lock-up agreement executed post-petition, finding that it constitutes an improper solicitation of votes on a plan where the debtor had not first obtained a court-approved disclosure statement. In certain cases, courts have even disqualified the votes of the creditors that were parties to the post-petition lock-up agreement, thereby frustrating the debtor’s goal of a timely confirmation and depriving creditors of the sacred right to vote on a plan.
The question of whether the entry into a post-petition lock-up agreement is permissible and/or provides a basis for a court to designate the votes of parties to that lock-up agreement has been addressed in two well-known Delaware rulings: In re Stations Holding Co. Inc. and In re NII Holdings Inc. These cases are frequently cited by those objecting to post-petition lock-up agreements as having established a bright-line rule that parties’ entry into such agreements is patently impermissible and warrants designation.
However, on Jan. 31, 2013, Hon. Brendan L. Shannon of the U.S. Bankruptcy Court for the District of Delaware issued a written opinion in In re Indianapolis Downs LLC that challenges the precedential value of the Stations and NII decisions. The Indianapolis Downs court narrowly construed the concept of “solicitation” as that term is used in § 1125 of the Bankruptcy Code, eliminated the notion of a per se prohibition on post-petition lock-up agreements and articulated the circumstances in which such agreements may be enforceable.