US Bankruptcy Court defines the limits of shareholder safe harbour in failed leveraged buyouts

An opinion issued in connection with the bankruptcy cases of Lyondell Chemical Company and its affiliates may have significant implications for shareholders who receive payments in connection with a leveraged buyout (LBO) when the underlying company subsequently files for bankruptcy.

Earlier this month, Judge Robert Gerber of the US Bankruptcy Court for the Southern District of New York narrowly interpreted the safe harbour of section 546(e) of the Bankruptcy Code to neither bar nor pre-empt state law constructive fraudulent conveyance claims asserted by or on behalf of individual creditors against shareholders receiving payments in connection with an LBO, even though that safe harbour protects those shareholders from analogous causes of action asserted under federal bankruptcy law.

In December 2007, Basell AF SCA acquired Lyondell by means of a leveraged buyout with a newly formed company, LyondellBasell Industries AF SCA (LBI), emerging as Lyondell’s parent. To finance the LBO, Lyondell took on $21bn (£13bn) in secured indebtedness, while its shareholders received distributions totalling $12.5bn in connection with the transaction. Just more than a year later, in January 2009, Lyondell and 78 of its affiliates filed for protection under chapter 11 of the Bankruptcy Code. LBI and various other Lyondell affiliates became additional debtors shortly thereafter…

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