Case: HJB Doc #: 1049 Filed: 01/19/15 Desc: Main Document Page 1 of 22 UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW HAMPSHIRE : :

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1 Case: HJB Doc #: 1049 Filed: 01/19/15 Desc: Main Document Page 1 of 22 UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW HAMPSHIRE x : In re: : : GT ADVANCED TECHNOLOGIES INC., et al., : : Debtors. 1 : : x Chapter 11 Case No HJB Jointly Administered Re: Docket Nos. 843, 1028, 1030, 1031, 1032 DEBTORS OBJECTION TO MOTION FOR ORDER APPOINTING AN OFFICIAL COMMITTEE OF EQUITY SECURITY HOLDERS GT Advanced Technologies Inc. ( GT ) and its affiliated debtors as debtors in possession in the above-captioned cases (collectively, GTAT or the Debtors ) hereby object (the Objection ) to the Motion For an Order Appointing an Official Committee of Equity Security Holders [Docket No. 843] (the Motion ) filed by Mr. T. Richard Faloh. In support of this Objection, GTAT respectfully states as follows: 2 PRELIMINARY STATEMENT 1. The appointment of an equity committee is an extraordinary remedy that is rarely granted. This case is not the exception to that rule. Mr. Faloh s request for the appointment of an equity committee must be denied because he has not carried his burden to establish that there 1 2 The Debtors, along with the last four digits of each debtor s tax identification number, as applicable, are: GT Advanced Technologies Inc. (6749), GTAT Corporation (1760), GT Advanced Equipment Holding LLC (8329), GT Equipment Holdings, Inc. (0040), Lindbergh Acquisition Corp. (5073), GT Sapphire Systems Holding LLC (4417), GT Advanced Cz LLC (9815), GT Sapphire Systems Group LLC (5126), and GT Advanced Technologies Limited (1721). The Debtors corporate headquarters are located at 243 Daniel Webster Highway, Merrimack, NH The Court has ordered that the hearing on the Motion scheduled to take place on January 26, 2015 at 10:00 a.m. will be non-evidentiary. See Order of the Court [Docket No. 1014]. The Court s order also provides that an evidentiary hearing would be scheduled thereafter if it appears that there are material, relevant, and genuine issues of material fact in dispute. Id. To the extent the Court orders an evidentiary hearing on the Motion, the Debtors will provide appropriate evidence in support of the factual assertions made herein. The Debtors reserve all rights to conduct discovery and to supplement this Objection following such discovery if the Court determines that an evidentiary hearing is appropriate. 1

2 Case: HJB Doc #: 1049 Filed: 01/19/15 Desc: Main Document Page 2 of 22 is a substantial likelihood of a meaningful distribution to equity. All of the data that Mr. Faloh cites to support his view of the Debtors finances are outdated, inaccurate or speculative because of the recent dramatic change to GTAT s business. Thus, Mr. Faloh s evidence is not probative on the question of whether a substantial likelihood exists for an equity recovery. As the Court is aware, in light of the unwinding of GTAT s sapphire operations, GTAT s business is going through a fundamental change. This transition to a new GTAT will require the devoted attention of management. Moreover, during this transition, GTAT continues to experience significant operating losses while trying to right-size its business. At this point in time there is no basis to appoint an equity committee whose administrative and financial costs would be a burden on GTAT s estates and its efforts to exit chapter 11 as a strong and viable enterprise. 2. The Official Committee of Unsecured Creditors (the Creditors Committee ) has also been an active participant in these cases and in the development of GTAT s going-forward business plan, and is pursuing the interests of all stakeholders, consistent with the absolute priority rule. In addition, an ad hoc committee of shareholders (of which Mr. Faloh does not seem to be a part) and an ad hoc group of bondholders have also formed and are participating in these cases. Thus, there is no evidence that the interests of shareholders are inadequately represented. 3. Finally, no equity committee should be appointed because the capital structure of GTAT is not complex and the costs of such a committee would outweigh any marginal benefit. Mr. Faloh himself seeks a $2 million monthly stipend not to mention an equity bounty for himself and three cohorts from the Debtors estates for the equity committee s professionals. The costs of the equity committee s professionals are not justified when Mr. Faloh has 2

3 Case: HJB Doc #: 1049 Filed: 01/19/15 Desc: Main Document Page 3 of 22 demonstrated that he is capable of acting as a self-appointed voice for shareholders. For all these reasons, the Motion should be denied. BACKGROUND 4. On October 6, 2014 (the Petition Date ), GTAT commenced voluntary cases under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of New Hampshire (the Court ). GTAT continues to operate its business and manage its properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. No request for the appointment of a trustee or examiner has been made in these chapter 11 cases. 5. On October 14, 2014, the Office of the United States Trustee for the District of New Hampshire appointed the Creditors Committee in these chapter 11 cases. 6. These chapter 11 cases have been consolidated for procedural purposes only and are jointly administered pursuant to Bankruptcy Rule 1015(b). 7. Mr. Faloh, among other shareholders, made a request to the Office of the U. S Trustee for the District of New Hampshire (the U.S. Trustee ) for the appointment of an equity committee in these cases. The U.S. Trustee has declined all such requests. 8. Mr. Faloh, who is proceeding pro se on this Motion, has bombarded the Debtors, the U.S. Trustee and this Court with a number of pleadings in support of his allegations that an equity committee is warranted: i. Request for Extension for Filing Deadline [Docket No. 995]; ii. iii. Supporting Missive 0 Legal Premises & Inadequate Representation [Docket No. 1028] ( Missive 0 ); Supporting Missive 1 Business Success [Docket Nos. 996 &1030] ( Missive 1 ); 3

4 Case: HJB Doc #: 1049 Filed: 01/19/15 Desc: Main Document Page 4 of 22 iv. Supporting Missive 2: Declarations of Priorities [Docket No. 1031] ( Missive 2 ); v. Supporting Missive 3 Industry Expert Testimony [Docket No. 1032] ( Missive 3 ). In Missive 3, Mr. Faloh purports to offer the expert testimony of Mr. Nick Sarno and Mr. Mark Osborne as to the Debtors reputation and the quality of its products; vi. vii. Motion for an [sic] 30-Day Injunction on ASF Furnace Product Sales While Certain Accounting and Business Practice Criteria are Met [Docket No. 1033]; and Objection to Management s Incentivization [sic] Proposal ((A) Motion for Approval of Key Employee Incentive Plan and Key Employee Retention Plan in Redacted Form Publicly, and (B) Unredacted Version Under Seal [Docket No. 1034]. OBJECTION A. Mr. Faloh Has Not Carried His Burden Under Section 1102(a)(2) to Establish That Appointment of Equity Committee is Warranted 9. Courts have unanimously stated that the appointment of an equity committee is extraordinary relief that is rarely granted. See e.g., In re Public Serv. Co. of New Hampshire, 116 B.R. 344 (Bankr. D.N.H. 1990) (denying appointment of equity committee); see also In re Eastman Kodak Co., 2013 Bankr. LEXIS 3325, at *7 (Bankr. S.D.N.Y. Aug. 15, 2013) ( Kodak II ) (sustaining U.S. Trustee s decision declining to appoint equity committee); In re School Specialty, Inc., Case No (KJC) (Bankr. D. Del. May 23, 2013) [Docket No. 1153] (order denying appointment of equity committee); In re Spansion, Inc., 421 B.R. 151, 156 (Bankr. D. Del. 2009) (denying request to appoint equity committee); Exide Techs. v. Wis. Inv. Bd., 2002 U.S. Dist. LEXIS 27210, at *3 4 (D. Del. Dec. 23, 2002) (affirming decision to deny appointment of equity committee and stating that the appointment of an official equity committee should be the rare exception ). 3 3 Mr. Faloh indicates he was informed that the U.S. Trustee has only appointed an equity committee in approximately 5% of the chapter 11 cases administered by the U.S. Trustee. See Mot.,, at 5 n.4. 4

5 Case: HJB Doc #: 1049 Filed: 01/19/15 Desc: Main Document Page 5 of Under section 1102(a)(2) of the Bankruptcy Code, a committee may be appointed to represent equity holders, but only if such a committee is necessary for equity holders interests to be adequately represented. See 11 U.S.C. 1102(a)(2). The term necessary sets a high standard that is more difficult to satisfy than if the statute merely provided that a committee would be useful or appropriate. See Kodak II, at *7. With respect to the term adequate representation, which is not defined by the Bankruptcy Code, courts have looked to a number of factors, including, but not limited to: (a) whether there appears to be a substantial likelihood that equity will receive a meaningful distribution in the case; (b) whether equity is adequately represented by stakeholders already at the table; and (c) the financial complexity of the case. See Kodak II, at *7-8; see also In re Nat l R.V. Holdings, Inc., 2008 Bankr. LEXIS 3465 (Bankr. C.D. Cal. Apr. 25, 2008) (denying motion to reconsider order declining to appoint equity committee) Even where such factors are satisfied, the additional expense and burden of an equity committee must be weighed to determine if the benefits justify the costs. See e.g., Victor v. Edison Bros. Stores (In re Edison Bros. Stores), 1996 U.S. Dist. LEXIS 13768, at *8 (D. Del. Sept. 17, 1996) (affirming lower court decision denying appointment of equity committee); see also Spansion, 421 B.R. at 156 (stating that court may consider whether cost of additional committee outweighs concern for adequate protection); In re Nat l R.V. Holdings, Inc., 390 B.R. 690, (Bankr. C.D. Cal. 2008) ( Nat l R.V. I ) (noting that court must balance potential value of equity committee against cost, and denying request to appoint equity committee). 4 In determining whether shareholders are adequately represented, courts also examine the number of shares that are outstanding, but committees have been denied even where large numbers of shares were outstanding and widely held. See In re Eastman Kodak Co., 2012 Bankr. LEXIS 2944, at *2 (Bankr. S.D.N.Y. June 28, 2012) ( Kodak I ) (denying appointment of equity committee where there were 270 million outstanding shares). 5

6 Case: HJB Doc #: 1049 Filed: 01/19/15 Desc: Main Document Page 6 of Under section 1102(a)(2) of the Bankruptcy Code, Mr. Faloh bears the heavy burden to prove that an additional committee is warranted. See Spansion, 421 B.R. at 156 (denying committee request where moving party failed to meet burden of proving that additional committee was needed for adequate representation); see also Exide, 2002 U.S. Dist. LEXIS 27210, at *3-4) (stating that moving party bears burden of proof that additional committee is needed); In re Johns-Manville Corp., 68 B.R. 155,158 (S.D.N.Y.1986) (affirming bankruptcy court denial of request to appoint an equity committee and noting that the absence of a fully developed factual record in this case is detrimental to the appellants, because the burden of demonstrating the need for adequate representation... is borne, in the first instance, by the party seeking appointment. ). Mr. Faloh has failed to meet his burden. 5 B. Mr. Faloh Has Failed to Demonstrate Substantial Likelihood of Meaningful Recovery to Equity Holders 13. Mr. Faloh expends numerous pages in the Motion and the supporting Missives apparently attempting to prove that the Debtors are a viable company. In this effort, Mr. Faloh misses the mark because the only question is whether there is a substantial likelihood that shareholders will receive a meaningful recovery. Mr. Faloh fails to meet his burden because the information he cites is outdated, inaccurate or speculative. For example: On pages 12 to 14 of the Motion, Mr. Faloh describes the potential revenue that may be generated from the Debtors Hyperion Ion Implanter. See Mot., at 32. The estimate he cites to is data gathered from March 2014 and is outdated. Moreover, the Hyperion line will not be used in the solar industry in the near future; rather Hyperion will be used for medical purposes. To date, no Hyperion units have been sold. 5 Mr. Faloh makes an appeal to the Court s equitable powers and cites to Beaty v. Selinger (In re Beaty), 306 F.3d 914 (9th Cir. 2002); however, that case dealt with whether the doctrine of laches apply to nondischargeability complaints rather than a request for the appointment of an equity committee. Id. at

7 Case: HJB Doc #: 1049 Filed: 01/19/15 Desc: Main Document Page 7 of 22 Mr. Faloh points to product lines such as the HiCz (Solar) Furnaces as sources of potential future revenue. Mot., at 16, 24. However, GTAT has not sold any HiCz (Solar) Furnaces to date. The HVPE products described by Mr. Faloh, see Mot., at 39, have been discontinued. Mr. Faloh also describes GTAT s Merlin solar technology line as generating revenues in the first or second quarter of See Mot., at 16. Revenues from the Merlin line in that time frame, if any, will be de minimis. 14. Mr. Faloh s assumptions are also incorrect and outdated because on October 24, 2014, the Court authorized GTAT to wind down its operations in Mesa, Arizona and Salem, New Hampshire. 6 The wind down of those operations has drastically impacted the make-up of GTAT s business on a going-forward basis. The Court recently entered an order approving a settlement (the Apple Settlement ) 7 with Apple Inc. and its affiliates (collectively, Apple ) pursuant to which GTAT is unwinding its business relationship with Apple related to the sapphire growth and fabrication project in Mesa. GTAT will therefore be returning to its legacy business and other new products including the use of Hyperion technology for medical purposes. 8 In light of these developments, GTAT will be a substantially different enterprise than the one that sought chapter 11 relief on the Petition Date. This transition is currently underway See Order (I) Authorizing Debtors to Wind Down Operations at Sapphire Manufacturing Facilities and (II) Approving Wind Down Employee Incentive Plan in Connection with Wind Down of Such Operations [Docket No. 286]. See Order Pursuant to Bankruptcy Code Sections 105, 361, 363(b), 364, and 365 and Bankruptcy Rule 9019 Approving Terms of and Authorizing Debtors to Enter into Adequate Protection and Settlement Agreement with Apple [Docket No. 819]. Mr. Faloh states that GTAT averted a liquidity crisis because it is unwinding its business relationship with Apple. See Mot., at 8. To the contrary, GTAT averted a liquidity crisis because it received an approximately $30 million tax refund in November See Monthly Operating Report for GT Advanced Technologies Inc. for the Period November 2, 2014 to November 29, 2014 [Docket No. 906], at 13. Outside of that tax refund, GTAT s businesses continue to operate at a loss. For the month of November 2014, the Debtors incurred consolidated losses of approximately $30 million. Id. at 15. For the month of October 2014, the Debtors incurred consolidated losses of approximately $70 million. See Monthly Operating Report for GT Advanced Technologies Inc. for the Period October 6, 2014 to November 1, 2014 [Docket No. 694], at 15. 7

8 Case: HJB Doc #: 1049 Filed: 01/19/15 Desc: Main Document Page 8 of 22 but is not yet complete in light of the myriad challenges that the Debtors face. Indeed, since the Petition Date, GTAT has incurred millions in operating losses Mr. Faloh nonetheless asserts that GTAT is not hopelessly insolvent because GTAT (i) has backlogged revenue of approximately $461 million, (ii) is owed approximately $43 million on account of insurance, accounts receivables and recallable deposits, and (iii) has a bank account balance of approximately $63 million. As explained below, each of Mr. Faloh s sources of value are based on data that is outdated, inaccurate or speculative. i. GTAT s Backlogged Revenue Is Conditioned on Customer Performance 16. Mr. Faloh points to GTAT s public filings from June 2014 which indicated that GTAT has sales backlogs in excess of $461 million from customers who had committed to buying certain products from GTAT. See Missive 0, at 2; Missive 1 at 3-4. These figures are outdated as the current value is at least $100 million less. Moreover, Mr. Faloh recognizes that GTAT s receipt of any revenue from backlogged sales is conditional because [b]acklogged Sales may require the customer to finish building their factory or to attain financing, before GTAT fulfills them. See Mot., at n For exactly that reason, in its public securities filings, GTAT clearly states that backlogged revenue are not accurate indicators of future sources of revenue. In GTAT s Form 10-Q for the quarterly period ended June 28, 2014 (the June Q ), for example, GTAT explicitly stated that backlog is difficult to determine with certainty and requires estimates and judgments to be made by management and it should not be relied upon as an indication of future performance. 10 A customer s breach of a contractual obligation ordinarily results in 9 10 See n.8 supra. See GT Advanced Technologies Inc., Quarterly Report (Form 10-Q), at 31 (August 7, 2014). 8

9 Case: HJB Doc #: 1049 Filed: 01/19/15 Desc: Main Document Page 9 of 22 GTAT s readjustment of its order backlog figures. For example, in the June Q, GTAT stated: During the six months ended June 28, 2014, we have identified certain contracts in our order backlog that have not been terminated or modified, however, we expect that the customers associated with these contracts will not fulfill their obligations under these respective contracts.... During the fiscal year ended December 31, 2013, we terminated, modified or removed contracts resulting in a $415.6 million reduction in our order backlog (96% of the reduction was attributable to four contracts, of which $33.1 million related to contracts that have not been legally terminated or modified). During the fiscal year ended December 31, 2013, we recorded revenues of $19.3 million from terminated contracts Accordingly, any amounts attributable to sales backlogs is theoretical and not proof of value available to prepetition equity holders. ii. Mr. Faloh Inaccurately Values GTAT s Inventory and Furnaces 19. Mr. Faloh alleges that GTAT has $900 million of inventory in the form of sapphire furnaces and may have millions of dollars in Sapphire Material inventory available to be liquidated for cash. Mot., at 54. Mr. Faloh assertions are incorrect. As the Court is aware, under the terms of the Apple Settlement, Apple has a $439 million claim secured by the 2,036 sapphire furnaces located in Mesa, Arizona (the ASF Furnaces ). To the extent GTAT sells any of the Mesa ASF Furnaces, Apple will receive a portion of those sale proceeds as provided for in the Apple Settlement. 20. In Missive 0, Mr. Faloh attributes a $200,000 per ASF Furnace sale price and arrives at a $15.5 million revenue stream from the sale of the ASF Furnace even after taking into account GTAT s obligations under the Apple Settlement. 12 In support of the $200, Id. In support of the $200,000 estimated sale price per ASF Furnace, Mr. Faloh cites to a web article which reported on the continued section 341 meeting of creditors which occurred on January 8, See 9

10 Case: HJB Doc #: 1049 Filed: 01/19/15 Desc: Main Document Page 10 of 22 estimation, Mr. Faloh cites to a web article which reported on the continued section 341 meeting of creditors which occurred on January 8, The web article in turn cited to out-of-court statement made by Mr. Kevin Starke of CRT Capital that a $200,000 price tag is more realistic for each ASF Furnace. This was not a statement made by GTAT or any of its representatives or professionals. The $200,000 figure is not reflective of the actual price at which the ASF Furnaces will sell. In any event, the statements relied upon by Mr. Faloh are inadmissible hearsay. 21. If management is successful in selling a significant number of ASF Furnaces at a substantial price in a short period of time, the Debtors submit that the appointment of an equity committee can be revisited. iii. Amounts of Recallable Deposits and Insurance Claims are Subject to Adjustment 22. Mr. Faloh erroneously points to approximately $15 million in recallable deposits that GTAT has with entities such as Manz AG and Guandong Sapphire Tech. Mot., at 54. However, as GTAT noted in the Schedules of Assets and Liabilities for GTAT Corporation [Docket No. 592], the deposits listed as held by vendors are gross amounts that do not reflect any charges that have been made against the deposit: [D]eposits listed for vendor prepayments identify the gross amount of the deposit paid and may not reflect the amount of the deposit remaining after the application of charges. None of these deposits are held in segregated accounts for the benefit of the Debtors and parties in interest should assume that holders of such deposits would assert material setoff claims before turning over such deposits to the Debtors estates The web article cited to a comment made by Mr. Kevin Starke of CRT Capital that a $200,000 price tag is more realistic for each ASF Furnace. Id. No analysis or valuation is supplied to support that figure and it is not reflective on the actual price which the ASF Furnaces may sell for. 13 See Schedules of Assets and Liabilities for GTAT Corporation [Docket No. 592], at 9 (emphasis added). 10

11 Case: HJB Doc #: 1049 Filed: 01/19/15 Desc: Main Document Page 11 of 22 Accordingly, the actual amount of any deposits which GTAT may recover may be well below the amounts listed in GTAT s schedules. 23. In another attempt to conjure value from GTAT s schedules, Mr. Faloh points to approximately $10 million in pending insurance claims related to sapphire boule losses resulting from power supply interruptions at the Mesa Facility. See Mot., at 55. The Statement of Financial Affairs for GTAT Corporation [Docket No. 601] clearly indicates that those insurance claims are under review and any payment on account of such insurance claims are speculative at best. In fact, GTAT has determined that the best possibility of recovery on account of any of these losses is to sue third parties who caused the conditions resulting in damages to the sapphire boules. Any recovery from these future lawsuits is unknown. 24. The only quantifiable sources of value that Mr. Faloh can identify are GTAT s accounts receivable and the cash in GTAT s bank accounts. As set forth in the most recent monthly operating report filed by GTAT for the period November 2, 2014 to November 29, 2014, the Debtors had approximately $93 million in their bank accounts and total accounts receivable of approximately $5.3 million as of November 29, However, as described below, these amounts pale in comparison to the more than $1 billion in asserted claims against the Debtors, and do not show any likelihood that equity will receive any meaningful recovery. In sum, none of the figures put forth by Mr. Faloh are accurate, and therefore do not prove that equity is in the money Mr. Faloh filed Missive 3, which purports to offer the expert testimony of Nick Sarno, an engineer, and Mark Osborne, the editor-in-chief of a solar industry trade magazine to support Mr. Faloh s valuation. See Missive 3, at 1-2. This expert testimony is inadmissible and irrelevant for a variety of reasons. First, Mr. Sarno and Mr. Osborne have not been qualified as experts. Second, Mr. Faloh is reporting on what Mr. Sarno and Mr. Osborne told him over the phone to establish that GTAT has a good reputation and quality products. Missive 3, at 3. Neither Mr. Sarno nor Mr. Osborne is the declarant in Missive 3. This is inadmissible hearsay-within-hearsay. See Sabel v. Mead Johnson & Co., 737 F. Supp. 135, 146 (D. Mass. 11

12 Case: HJB Doc #: 1049 Filed: 01/19/15 Desc: Main Document Page 12 of 22 iv. Debt Obligations Asserted Against GTAT Exceed $1 Billion 25. Even if Mr. Faloh s valuation assertions are correct which they are not Mr. Faloh ignores the outstanding amount of claims asserted against GTAT that must be satisfied under the absolute priority rule prior to equity receiving any recovery. When the asserted debt obligations against GTAT are taken into account, Mr. Faloh s argument that GTAT is not hopelessly insolvent is unsupportable and does not justify the appointment of an equity committee. 26. Although the January 26, 2015 general claims bar date (the Claims Bar Date ) has not yet passed as of the date of this Objection, GTAT has (based on the best information currently available) debt obligations asserted in an amount upwards of $1.018 billion comprised of: 15 $439 million secured claim of Apple under the Apple Settlement; 16 $434 million on account of the (a) $220 million aggregate principal amount of 3.00% Convertible Senior Notes due 2017 and (b) $214 million aggregate principal amount of 3.00% Convertible Senior Notes due 2020 (together, the GT 1990) (finding that notes of statements made during a telephone conversation were hearsay-withinhearsay. ); see also FED. R. EVID. 801 (c)(defining hearsay ). Moreover, Mr. Sarno and Mr. Osborne s testimony is irrelevant and not probative of (a) whether there appears to be a substantial likelihood that equity will receive a meaningful distribution in the case; (b) whether equity is adequately represented by stakeholders already at the table; and (c) the financial complexity of the case. See Kodak II, at *7-8. Thus, the expert testimony is also irrelevant On October 20, 2014, the Court entered the Order, Pursuant to Bankruptcy Code Sections 105(A), 501, 502(B)(9), and 503, Bankruptcy Rules 2002(L) and 3003(C)(3), and LBR (B), (A) Establishing Bar Date for Filing of Proofs of Claim, (B) Designating Form and Manner of Notice Thereof, and (C) Granting Related Relief pursuant to which, among other things, January 26, 2015 was established as the general claims bar date. Governmental units have until April 6, 2015 to file a proof of claim. The $439 million secured claim of Apple is non-recourse and can only be satisfied from the proceeds of the sale of the ASF Furnaces. See Order Pursuant to Bankruptcy Code Sections 105, 361, 363(b), 364, and 365 and Bankruptcy Rule 9019 Approving Terms of and Authorizing Debtors to Enter into Adequate Protection and Settlement Agreement with Apple [Docket No. 819], at 4.a ( [T]he Apple Claim shall be a non-recourse claim recoverable solely from the Mesa ASF Furnaces. ). 12

13 Case: HJB Doc #: 1049 Filed: 01/19/15 Desc: Main Document Page 13 of 22 Notes ) (plus accrued interest, which would have to be paid in full before equity interests could receive a recovery); 17 and approximately $145 million in trade debt, which does not include rejection damage claims that are likely to be substantial The amount of trade debt asserted against GTAT may grow larger once the Claims Bar Date passes and GTAT can accurately assess the amount of such claims against the Debtors. GTAT s debt obligations are even more substantial if one takes into account (i) the impact of any potential debtor-in-possession financing that GTAT may raise during the chapter 11 cases, which could exceed $100 million, and (ii) the potential need for new equity capital which might be required to emerge from chapter 11. All of these asserted claims must be resolved and satisfied in their allowed amount in full (with post petition interest) before any equity holders are entitled to receive distributions. v. Market Indicators Reflect No Likelihood of Recovery of Shareholders 28. The best information currently available (and before a valuation is complete) indicating the enterprise value of GTAT is the market value of its debt and equity securities. 19 As of January 6, 2015, the GT Notes were trading at 49.6% of their principal amount. The market has clearly reacted to the news of GTAT s bankruptcy filing, its wind down of operations in Mesa and Salem, MA and the termination of its relationship with Apple. The trading price reflects all those developments, and the market s conclusion is that GTAT s enterprise value is likely to be far less than the face amount of its liabilities. In other words, the market s See Declaration of Daniel W. Squiller in Support of Chapter 11 Petitions and First-Day Motions [Docket No. 14], at 3. The figures cited above for the amount of the GT Notes should not be interpreted as an indication that the full face amount of the GT Notes is allowable as a claim in these chapter 11 cases. Among other things, to the extent that the GT Notes include original issue discount, that portion may be disallowed under the Bankruptcy Code as unmatured interest. See, e.g., 11 U.S.C. 502(b)(2). See id. See Bank of Am. Nat l Trust & Sav. Ass n v. 203 N. Lasalle St. P ship, 526 U.S. 434 (1999) (stating that the best way to determine value is exposure to a market ). 13

14 Case: HJB Doc #: 1049 Filed: 01/19/15 Desc: Main Document Page 14 of 22 assessment is that GTAT s enterprise value is less than the amount of its debts because such bonds are trading at less than half of their face amount. Further, bondholders would be entitled to accrued interest before equity holders would receive any recovery. Based on the market s perception, then, there is no likelihood of a significant recovery for shareholders. 29. Instead of addressing the trading prices of the GT Notes, Mr. Faloh points to the active trading of GT stock as indication of value. See Mot., at 11. On Friday, January 16, 2015, the stock of GT closed at $0.40 per share. The fact that the stock of a company in bankruptcy continues to trade at low prices for a period of time is hardly unique to GTAT or probative of value. Courts have found that minimal equity trading prices do not warrant the appointment of an equity committee. See In re Kasper A.S.L. Ltd., Case No (ALG), Tr. Hr g at 51:25, 71:13 (Bankr. S.D.N.Y. July 15, 2003) (refusing to appoint equity committee as unnecessary even though stock was trading at approximately $2.00 per share and debt was trading above par). 30. Moreover, positive market capitalization does not warrant appointment of an equity committee. The typical continuation of equity trading after the filing of a chapter 11 case does not indicate that equity is in the money. Stock prices of public companies operating in chapter 11 are not necessarily representative of such companies underlying intrinsic value. Rather, such prices are susceptible to fluctuations through, for example, covering short positions and reacting to market rumors. Indeed, it is not uncommon to see stocks of public companies in chapter 11 rise in value after a plan of reorganization has been confirmed and the stock has been cancelled as investors with a short position must purchase stock to close out the short. That is a clear example of a debtor s stock price reflecting market machinations, and not any intrinsic enterprise value. 14

15 Case: HJB Doc #: 1049 Filed: 01/19/15 Desc: Main Document Page 15 of Further, in the following well-known cases, equity holders were not entitled to any recovery even though the debtors had positive market capitalization shortly after the chapter 11 filing. Company Filing Date Market Capitalization 30 Days After Filing ($MM) Equity Recovery Patriot Coal 7/9/2012 $15.7 0% MF Global 10/31/2011 $21.8 0% CIT Group Inc. 11/1/2009 $31.9 0% Lehman Brothers Holdings Inc. General Motors / Motors Liquidation Co. Circuit City Stores Inc. 9/15/2009 $ % 6/1/2009 $ % 11/10/2008 $31.9 0% 32. The preceding cases are just some of the numerous examples of a chapter 11 debtor s stock continuing to trade for de minimis amount after the chapter 11 filing even though it was clear that equity holders ultimately would not receive a recovery. 33. In light of the drastic changes in the nature of GTAT s business, the determination of enterprise value is currently in process but market data strongly indicates that the Debtors ability to provide a meaningful recovery to shareholders is uncertain at best, and that Mr. Faloh is unable to prove a substantial likelihood of such a recovery at this time. C. Shareholder Interests Are Otherwise Adequately Represented 34. Setting aside questions of recovery, the appointment of an equity committee is not appropriate when the interests of equity holders already are adequately represented. See Spansion, 421 B.R. at 163 (noting applicable question is not whether the equity holders are exclusively represented, but whether they are adequately represented ); see also Leap 15

16 Case: HJB Doc #: 1049 Filed: 01/19/15 Desc: Main Document Page 16 of 22 Wireless, 295 B.R. at 139 ( The test is not merely whether there is representation of a constituency, such as the holders of public debt, which ought to be represented. The statutory concern is adequate representation. ). Absent facts to the contrary, the Court should presume that GTAT is adequately representing the interests of shareholders. See Kodak I, at *6-7 (denying appointment of equity committee and noting that the usual presumption [is] that the Board will pay due (perhaps special) regard to the interests of shareholders in bankruptcy). 35. Here, GTAT s board of directors (the Board ) already adequately represents the interests of shareholders. The Board maintains its fiduciary responsibility to maximize the value of the estate for all parties in interest. See In re Pinnacle Brands, Inc., 259 B.R. 46, 54 (Bankr. D. Del. 2001); In re Centennial Textiles, Inc., 227 B.R. 606, 612 (Bankr. S.D.N.Y. 1998). In addition, GTAT appointed two new independent directors on November 21, 2014: Richard E. Newsted and John J. Ray III (the Independent Directors ). Mr. Newsted and Mr. Ray, along with Mr. Matt Massengill (the Chairman of the Board), are members of the Restructuring Committee of the Board, whose primary role is to lead GTAT s efforts in seeking and implementing a value-maximizing path to emergence from chapter 11. Mr. Faloh s accusations that the Board s interests are not aligned with those of shareholders are unfounded. See In re Public Serv. Co., 116 B.R. at 345 (stating that conflicts between stakeholders are expectable and do not per se warrant authorizing an extra committee especially considering the added cost and complexity that appointing a committee would bring to the proceedings. ). 36. Mr. Faloh s reliance on Credit Lyonnais Bank Nederland, N.V. v. Pathe Communs. Corp., 1991 Del. Ch. LEXIS 215 (Del. Ch. Dec. 30, 1991) to support his criticism of the Board is misplaced. In Credit Lyonnais, the Delaware Chancery Court noted in a footnote that once a corporation enters a zone of insolvency, the board of directors owes a fiduciary duties to all 16

17 Case: HJB Doc #: 1049 Filed: 01/19/15 Desc: Main Document Page 17 of 22 creditors, not just shareholders. Id. at *108 n. 55. It does not necessarily follow, however, that shareholder interests are not adequately represented by the board simply because a board has a fiduciary responsibility to all constituents of the corporation. 37. Mr. Faloh also points to pending securities litigation against the Board as an indication that the Board s interests are not aligned with shareholders. However, no explanation has been provided as to why the pendency of such litigation would somehow incentivize the Board to provide shareholders with a lower recovery. Securities litigation against a board often occurs outside of chapter 11 and boards can still act in the best interest of shareholders while that litigation is pending. In any event, the Independent Directors are not targets of the securities litigation. 38. The Board s interests are aligned with shareholders, as demonstrated by the fact that the directors and officers of GTAT collectively own more than one million shares of GT stock. Mr. Faloh asserts that members of GTAT s Board sold large amounts of shares during the 2014 year up until the filing. See Mot., at 64. To be clear, three members of GTAT s management sold stock in early September 2014 as part of a pre-established Rule10b5-1 stock trading plan. However, those trading plans were put in place months before the Petition Date. 39. One of the reason Mr. Faloh allegedly seeks the appointment of an equity committee is to ensure the debtor is obtaining optimal value by maximum profitability. See Missive 0, at 16. Realization of the highest value in these cases, however, turns largely on the implementation of the Debtors business plan and a successful transition to the new GTAT. Here, GTAT s management and Board are working to maximize the value of the estates for the benefit of all stakeholders. As in the Kodak case, GTAT and its shareholders are sufficiently aligned to ensure that shareholder interests are adequately represented without the complication 17

18 Case: HJB Doc #: 1049 Filed: 01/19/15 Desc: Main Document Page 18 of 22 of an additional official committee. See Kodak I, 2012 Bankr. LEXIS 2944, at *6-7; Spansion, 421 B.R. at 163 (noting that management normally represents interests of equity security holders); Nat l R.V. I, at 699 (declining to appoint equity committee where, among other things, there were no facts to suggest that management was not aligned with equity holders). D. Equity Committee is Not Required Because GTAT s Capital Structure Is Not Complex 40. In determining whether equity holders are adequately represented, the Court should also examine the complexity of the financial structure of a debtor. See Kodak II, at *7-8. GTAT has an extremely straightforward debt structure, which has become even more simplified with the approval of the Apple Settlement. The only significant secured creditors are likely to be the eventual DIP lender and Apple, whose secured claims will be satisfied solely from the sale of the ASF Furnaces. The remaining creditors are the unsecured bond holders and other unsecured creditors. In such circumstances, courts have denied or disbanded an equity committee. See e.g., Edison Bros., 1996 U.S. Dist. LEXIS 13768, *15-16 (affirming bankruptcy court order denying motion to appoint and stating that there was less need to appoint an equity committee in this case because there were not any different levels of debt or different classes of equity. ). 41. In addition to a straightforward debt structure, GTAT is merely reverting to its pre-apple business, selling furnaces, or using prepetition technology (i.e., Hyperion) in new ways. GTAT does not anticipate pursuing a complex merger or acquisition. As in Edison Brothers, then, an equity committee is not warranted under the facts and circumstances of these cases. E. Costs and Delay of Equity Committee Are Not Justified Under Circumstances 42. The Court should also not appoint an equity committee because the costs of its appointment, in terms of delay and administrative burdens, will outweigh any marginal increase 18

19 Case: HJB Doc #: 1049 Filed: 01/19/15 Desc: Main Document Page 19 of 22 in the level of representation of shareholders interests. In Missive 2, Mr. Faloh requests a budget for the equity committee as follows: $2 million to be paid within four days of the appointment of an equity committee; $2 million to be paid each month beginning on February 1, 2015 for the duration of these chapter 11 cases; and An equity bounty consisting of stock warrants lasting for five years (which would vest upon the Debtors emergence from chapter 11) for an aggregate 7% of the outstanding shares of GT a strike price of $1.00. The warrant to purchase the 7% of shares would be divided as follows among the members of the Equity Committee Volunteers : o Chad Cooper 1.5% o Nathan Cottrell 1.5% o T. Richard Faloh 2.5% o Douglas K. Southard 1.5% While Mr. Faloh purports to be acting in the interest of shareholders, his proposed budget makes clear that he filed the Motion to enrich himself. The so-called equity bounty would be paid directly to Mr. Faloh and his three cohorts if there was some distribution of value to equity holders, regardless of whether an equity committee established that shareholders were actually in the money or whether an equity committee merely succeeded in extracting hold-up value for shareholders from other stakeholders in the form of a gifting chapter 11 plan. 44. Even if Mr. Faloh s proposal met the standards set forth under the Bankruptcy Code for the retention and compensation of professionals, his pleadings make clear the significant administrative cost that would result from an equity committee. If formed, the equity committee would hire a law firm and financial advisor at GTAT s expense, which would ultimately dilute recoveries for all parties. Moreover, the requested equity bounty would come 20 See Missive 2, at

20 Case: HJB Doc #: 1049 Filed: 01/19/15 Desc: Main Document Page 20 of 22 at the expense of parties in interest that should be ahead of equity under the absolute priority rule. 45. The insertion of an equity committee will serve only to delay the transition to new GTAT in the form of burdens on administration and increased costs all for the benefit of a tiny number of small shareholders whose interests could well prove to be out of the money and who are already adequately represented. See In re Williams Communs. Group Inc., 281 B.R. 216, 220 (Bankr. S.D.N.Y. 2002) (courts considering whether to appoint an equity committee must consider whether the cost of the additional committee outweighs the concern for adequate representation ). 46. Moreover, any shareholder has standing to be heard even without an official committee pursuant to section 1109(b) of the Bankruptcy Code, which allows any party in interest, including equity holders, to be heard on any issue in a bankruptcy case. Mr. Faloh s multiple filings demonstrate that he is fully capable of participating in these cases as a selfappointed representative of shareholders, and that he has access to all documents filed on the docket. In addition, an ad hoc committee of shareholders has already formed and is interacting with GTAT. The fact that those shareholders are represented by sophisticated counsel weighs against appointment of an official committee. See Notice of Appearance and Request for Documents [Docket No. 329] (filed by Brown Rudnick LLP on behalf of certain equity security holders of GT Advanced Technologies, Inc.). Such participation undercuts the need for an equity committee here. See In re Ampex, 2008 Bankr. LEXIS 1536, at *2 (Bankr. S.D.N.Y. May 14, 2008) (finding that sophistication of parties and their representation by counsel are factors weighting against appoint of official committee); Spansion, 421 B.R. at 164 (noting that ad hoc 20

21 Case: HJB Doc #: 1049 Filed: 01/19/15 Desc: Main Document Page 21 of 22 equity committee is well represented by counsel, and adequate to the take on representing its interests without official status ). 47. To the extent that Mr. Faloh makes a substantial contribution to these cases, he can seek reimbursement of any costs incurred in connection with GTAT s bankruptcy cases pursuant to section 503(b)(3)(D) of the Bankruptcy Code. See In re Public Serv. Co., 116 B.R. at 346; Spansion, 421 B.R. at 164 (stating that equity holders can seek reimbursement of costs under section 503(b)(3)(D) if they make substantial contribution to case); Leap Wireless, 295 B.R. at 140 (same). The ability of shareholders to be heard under section 1109(b) and to seek reimbursement under section 503(b)(3)(D) are sufficient to provide Mr. Faloh with a method to voice his concerns and to participate in the cases. He does not need to be incentivized with a $2 million per month budget and an equity bonus. CONCLUSION 48. Under the circumstances of these chapter 11 cases, where there is no credible indication of a substantial likelihood of a meaningful distribution to equity, where equity is otherwise adequately represented without the need for a separate committee, where the debtor s capital structure is not complex, and where in any event the costs (financial and administrative) associated with the appointment of an equity committee far outweigh any benefits, GTAT submits that no equity committee should be appointed by the Court at this point in time. Accordingly, GTAT respectfully submits that the Court deny the Motion. 21

22 Case: HJB Doc #: 1049 Filed: 01/19/15 Desc: Main Document Page 22 of 22 WHEREFORE, GTAT respectfully request that the Court enter an order denying the Motion, and granting such other relief as the Court may deem just and proper. Dated: January 19, 2015 /s/ James T. Grogan Luc A. Despins, Esq. Andrew V. Tenzer, Esq. James T. Grogan, Esq. (BNH07394) PAUL HASTINGS LLP Park Avenue Tower 75 East 55th Street, First Floor New York, New York Telephone: (212) Facsimile: (212) and- Daniel W. Sklar, Esq. Holly J. Barcroft, Esq. NIXON PEABODY LLP 900 Elm Street Manchester, NH Telephone: (603) Facsimile: (603) Co-Counsel for the Debtors and Debtors in Possession 22