OBJECTION OF FIDUCIARY COUNSELORS INC. TO DEBTORS MOTION TO APPROVE DISCLOSURE STATEMENT

Transcription

1 Hearing Date: July 21, 2010, at 9:00 a.m. EDT Objection Deadline: July 16, 2010, at 4:00 p.m. EDT Michael St. Patrick Baxter Christopher R. Murray 1201 Pennsylvania Avenue, NW Washington, D.C (202) and - Charles Jeanfreau The New York Times Building 620 Eighth Avenue New York, N.Y (212) Counsel to Fiduciary Counselors Inc. UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK x : In re: : Chapter 11 Case No. : CHEMTURA CORPORATION, et al. 1, : (REG) : : (Jointly Administered) Debtors. : : x OBJECTION OF FIDUCIARY COUNSELORS INC. TO DEBTORS MOTION TO APPROVE DISCLOSURE STATEMENT 1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor s federal taxpayeridentification number, are: Chemtura Corporation (3153); A&M Cleaning Products, LLC (4712); Aqua Clear Industries, LLC (1394); ASCK, Inc. (4489); ASEPSIS, Inc. (6270); BioLab Company Store, LLC (0131); BioLab Franchise Company, LLC (6709); Bio-Lab, Inc. (8754); BioLab Textile Additives, LLC (4348); CNK Chemical Realty Corporation (5340); Crompton Colors Incorporated (3341); Crompton Holding Corporation (3342); Crompton Monochem, Inc. (3574); GLCC Laurel, LLC (5687); Great Lakes Chemical Corporation (5035); Great Lakes Chemical Global, Inc. (4486); GT Seed Treatment, Inc. (5292); HomeCare Labs, Inc. (5038); ISCI, Inc. (7696); Kem Manufacturing Corporation (0603); Laurel Industries Holdings, Inc. (3635); Monochem, Inc. (5612); Naugatuck Treatment Company (2035); Recreational Water Products, Inc. (8754); Uniroyal Chemical Company Limited (Delaware) (9910); Weber City Road LLC (4381); and WRL of Indiana, Inc. (9136).

2 Fiduciary Counselors Inc., the independent fiduciary for the Chemtura Corporation Employee Savings Plan with respect to the Company Stock Fund, one of the single largest holders of common shares of Chemtura Corporation and a member of the Official Committee of Equity Security Holders, hereby objects to Debtors Motion for Entry of an Order Approving (A) the Adequacy of the Disclosure Statement and (B) Notice of the Hearing to Approve the Disclosure Statement ( Motion ). PRELIMINARY STATEMENT 1. After insisting throughout virtually all of this proceeding that the Debtors were utterly insolvent and equity was worthless, the Debtors now offer a plan of reorganization ( Debtors Plan ) and a disclosure statement ( Disclosure Statement 2 ) that acknowledge that there is, in fact, substantial equity. 2. The Debtors Plan forces shareholders to choose between (a) accepting the plan and receiving a fixed share of New Common Stock; 3 or (b) rejecting the plan and receiving an uncertain, indeterminate share of the distributable value. 4 This creates a perverse incentive for the Debtors to obfuscate in the Disclosure Statement because the more uncertain the outcomes for shareholders appear, the more attractive the Debtors Plan will seem to be. 2 The terms Debtors Plan and Disclosure Statement refer to the first amended versions of those documents, filed by the Debtors on July 9, Terms not otherwise defined herein have the definition ascribed to them in either the Debtors Plan or the Disclosure Statement, as the case may be. 4 The uncapitalized term distributable value is used in the Disclosure Statement, but does not appear to be defined in the Disclosure Statement. See, e.g., Disclosure Statement, at 20. It is noted that the capitalized term Distributable Value is used in Exhibit F to the Disclosure Statement. But it is not clear whether the meaning of the uncapitalized term in the Disclosure Statement is the same as the capitalized term in Exhibit F. 2

3 3. The Disclosure Statement should not be approved because it lacks sufficient information to allow a shareholder to make an informed judgment whether to accept or reject the Debtors Plan. ARGUMENT 4. A disclosure statement will not be approved if it lacks adequate information, that is, information of a kind, and in sufficient detail... [to enable] a hypothetical investor of the relevant class to make an informed judgment about the plan. 11 U.S.C. 1125(a)(1). 5. A disclosure statement must contain simple and clear language delineating the consequences of the proposed plan... and the possible [Bankruptcy] Code alternatives so that [parties] can intelligently accept or reject the Plan. In re Copy Crafters Quickprint, Inc., 92 B.R. 973, 981 (Bankr. N.D.N.Y. 1988). 6. The precise requirements of a disclosure statement depend on the circumstances of each case, including the need for investor protection. E.g. Kirk v. Texaco, Inc., 82 B.R. 678, 683 (S.D.N.Y. 1988) (quoting H.R. Rep. No , at (1977), reprinted in 1978 U.S.C.C.A.N. 5787, 6365). 7. The Disclosure Statement fails to include critical information and analysis in at least four material respects; each of which makes it impossible for shareholders to make an informed judgment whether to accept or reject the Debtors Plan. 8. First, the Disclosure Statement fails to provide necessary information and analysis of the probable outcomes to shareholders in the event they reject the Debtors Plan. Under the Debtors Plan, shareholders face two options. If they accept the Debtors Plan, they will receive 5% of New Common Stock (subject to 3

4 dilution) and the right to participate in the Rights Offering. If they reject the Debtors Plan, they will receive an uncertain, indeterminate share of the so-called distributable value. 5 Importantly, if shareholders reject the Debtors Plan, they might receive more value than if they accepted it. 6 In these circumstances, the requirement for adequate information is especially critical to protect shareholders. 9. The Disclosure Statement fails to provide essential information regarding the expected outcome if shareholders vote to reject the plan. While the Disclosure Statement provides a range of potential shares of distributable value that would be available to shareholders, it fails to provide any information or analysis about the relative likelihood of those outcomes. There also is no information or analysis about whether the distributable value would be paid in cash or stock. 10. The Disclosure Statement also fails to include any comparison of distributable value to New Common Stock. In the absence of such information, shareholders comparing the New Common Stock that they would receive if they accept the plan, to the distributable value that they would receive if they reject the plan, may be comparing apples to oranges. The potential for confusion is profound. In an exhibit to the Disclosure Statement, the defined term Distributable Value is used. 7 The Debtors 5 As discussed below, it is unclear how to compare distributable value, which shareholders would receive if they reject the plan, to New Common Stock, which they would receive if they accept the plan. The Disclosure Statement indicates that, if shareholders reject the plan, they would receive between 0.5% and 9.0% of the distributable value. 6 This might be the case if, for example, 9% of the distributable value were worth more than 5% of the New Common Stock. To what extent and under what circumstances that might be the case is unclear from the Disclosure Statement. 7 See Disclosure Statement, Exhibit F -- Valuation Analysis, at 1. 4

5 estimated mid-point value of Distributable Value in Exhibit F is $2.269 billion. 8 If, for example, shareholders voted to reject the Debtors Plan, and later recovered 9% of that amount (as the Disclosure Statement suggests they might), shareholders would receive $204.2 million. In contrast, if shareholders voted to accept the Debtors Plan, the 5% of New Common Stock that they would receive would have a value of only $67.7 million 9 -- far less than what shareholders might receive if they rejected the plan Second, the Disclosure Statement is devoid of information necessary to determine why the Debtors Plan calls for the early repayment of belowmarket bonds. The market interest rate on new debt of the reorganized Debtors is estimated at 8%. 11 But the existing rate on the 2016 Notes and 2026 Notes is a low 6.875%. Without further explanation, it is impossible for shareholders to make an informed judgment whether to accept the Debtors proposal to replace cheaper, existing debt with new, more expensive debt. An adequate explanation is necessary. 12. Third, the Disclosure Statement lacks any explanation for the Debtors selection of $750 million as the amount of post-reorganization long-term debt. The Debtors selection of this amount is vitally important to shareholders, and has profound consequences. If the amount of post-reorganization debt were increased, less new equity would be needed to pay creditors in the reorganization, leaving more New Common Stock for the shareholders. The Disclosure Statement is devoid of any analysis 8 Id. 9 This is based on the Debtors mid-point implied valuation of New Common Stock of $1.354 billion. See Disclosure Statement, Exhibit F, at It is worth noting that, as of July 15, 2010, the common stock of Chemtura was trading at $0.61 per share, with a market capitalization of approximately $148 million. 11 See Financial Projections, Exhibit E to the Disclosure Statement, at 6. 5

6 of the post-reorganization debt levels that would maximize value for all stakeholders. Without any such analysis, shareholders do not have the necessary information to make an informed judgment as to the appropriateness of the post-reorganization debt level in the Debtors Plan. The Debtors have the ability and resources to provide this essential information, and should do so. 13. Fourth, the Disclosure Statement is ambiguous on the treatment of Class 13a (equity interests) in the event that class accepts or rejects the Debtors Plan. 12 It is unclear whether a shareholder who votes in favor of the Debtors Plan is entitled to receive its pro rata share of 5% of the New Common Stock if Class 13a rejected the plan. It is also unclear whether, if less than all of the shareholders vote to accept the plan, the amount of New Common Stock allocated to the class will be 5%, or some lesser amount adjusted downward to account for the extent to which the class rejected the Debtors Plan. 12 The Disclosure Statement provides: [T]o the extent that Class 13a for Chemtura votes to accept the Plan, on the Rights Offering Record Date, each holder of a share of prepetition common stock or equivalent Interest in Chemtura shall receive its Pro Rata share (determined with respect to all holders of Interests in Class 13a) of 5% of the New Common Stock, subject to dilution for the New Incentive Plan, and its Pro Rata share of the Rights to participate in the Rights Offering.... Disclosure Statement, at 15. 6

7 Dated: New York, New York July 16, 2010 CONCLUSION For foregoing reasons, the Motion should be denied. Respectfully submitted, Michael St. Patrick Baxter Christopher R. Murray 1201 Pennsylvania Avenue, NW Washington, D.C (202) and - By: /s/ Charles Jeanfreau Charles Jeanfreau The New York Times Building 620 Eighth Avenue New York, N.Y (212) Counsel to Fiduciary Counselors Inc. 7