Pace Industries Victory Establishes New Law on Shareholder Consent Rights

May 7, 2020

Willkie represented Pace in the precedent-setting victory, marking the first time that a court has invalidated a shareholder’s right in a certificate of incorporation to consent to a company’s bankruptcy filing.

On May 5, Pace Industries obtained a precedent-setting victory when it defeated a shareholder’s motion to dismiss the company’s chapter 11 cases in the US Bankruptcy Court for the District of Delaware. The decision, issued by Judge Mary Walrath, marks the first time that a court has invalidated a shareholder’s right in a certificate of incorporation to consent to a company’s bankruptcy filing.

Pace is one of the largest suppliers of aluminum, zinc, and magnesium die cast and finished products in North America, with 13 manufacturing facilities across the United States supplying customers like Harley Davidson, Whirlpool, and Weber. Following poor sales and the closure of facilities as a result of the COVID-19 pandemic, Pace and its affiliates filed for bankruptcy protection on April 12, 2020.

Macquarie, a holder of the majority of preferred stock issued by one of the Pace debtors, moved to dismiss the bankruptcy cases as unauthorized on April 17, arguing the company’s certificate of incorporation required the consent of a majority of preferred stockholders to any voluntary bankruptcy filing, and that Macquarie did not consent to the April 12 filing. Willkie opposed the motion, arguing that Macquarie was withholding its consent to gain leverage in negotiations with the debtor’s lenders, which was contrary to Delaware law (a matter of first impression) and public policy.

Following oral argument on May 5, Judge Walrath adopted Willkie’s arguments and declared that she was “prepared to be the first court to” find that a shareholder’s blocking right was invalid under the facts of the case. The Court held that, “under Delaware state law, contrary to the Fifth Circuit, my interpretation of the law would and does find that blocking rights, such as exercised in the circumstances of this case, would create a fiduciary duty on the part of the shareholder.” The court further held that allowing a shareholder like Macquarie to block a bankruptcy filing to advance its own interests offends federal public policy and interferes with a company’s constitutional right to seek bankruptcy relief. The Court denied Macquarie’s motion on those grounds.

In addition to constituting a significant victory for Pace, this decision sets important limits on shareholder consent rights in the bankruptcy context and should help future debtors defeat efforts by self-interested stakeholders to prevent bankruptcy filings.

The multidisciplinary team includes partners Matthew Feldman, Rachel Strickland, and Alexander Cheney (who argued the motion), and associates Debra Sinclair and John Brennan.

Willkie continues to represent the Pace debtors in the ongoing bankruptcy proceedings.

Read: Del. Judge Rejects Stockholder Call To Dismiss Pace Ch. 11, Law360