One of the hallmarks of the chapter 11 process is that management generally retains control of the debtor entity, and thus the bankruptcy case. In limited circumstances, however, other case constituents can attempt to take that control away. This occurs on occasion when a debtor declines to prosecute estate causes of action and a creditor seeks standing to bring that litigation. It would be highly unusual for this to occur in the context of a sale process, although this is the situation that seems to be unfolding in the Seadrill bankruptcy.
Seadrill Ltd. and its affiliates (the “Debtors”) filed for Chapter 11 relief earlier this year in the Southern District of Texas, Houston Division, with approximately $5.7 billion in oil rig-secured debt spanning 12 different credit facilities.1 The Debtors have proposed reorganizing as one overarching entity under their plan of reorganization (the “Plan”). On June 29, a group of funds led by Strategic Value Partners Global, LLC (the “SVP Parties”) pushed back on that proposal and sought derivative standing, pursuant to Section 1109(b) of the Bankruptcy Code, to conduct a marketing process for the assets of one of the debt silos, North Atlantic Drilling Ltd. and its affiliates (the “NADL Debtors”).
The SVP Parties assert that the NADL Debtors’ assets are “uniquely separate and valuable”2 compared to other Debtors because the NADL Debtors hold operating rigs that, according to the SVP Parties, “have very valuable long-term contracts, generating substantial cash flow with a high degree of predictability and lower relative volatility.”3 For these reasons, the SVP Parties have previously implored the NADL Debtors, as well as their independent directors appointed on April 15, 2021 (the “Independent Directors”), to explore a dual-track process that tests the marketplace value of the NADL assets alongside the Plan.4
The SVP Parties specifically allege that the Debtors have discouraged bidding for the NADL assets and refused to provide basic access to due diligence, while also taking aim at the Independent Directors for not doing enough to foster bidder competition or creditor optionality. The SVP Parties also allege that the Independent Directors have delayed the hiring of professionals and have not sufficiently engaged with creditors on a marketing process.5 Based on these allegations, the SVP Parties are requesting the rare remedy of derivative standing allowing them to conduct a marketing process on behalf of the Debtors.6 The SVP Parties emphasize that they are not seeking exclusive control over the marketing process, but “only want to see a qualified person conduct the Marketing Process of soliciting bids and overseeing due diligence so that the highest and best bid can be identified and presented to th[e] Court.”7
It is unclear how the bankruptcy court will view this novel request, particularly in light of the statements of the Independent Directors. Courts are often reluctant to wrest control from a debtor in favor of another case constituent. The situation bears watching however, as it could set interesting precedent. If you have questions related to this situation, or asset sales or bidding procedures in bankruptcy generally, please don’t hesitate to reach out to your primary contact at S&K.