Posted on 08/29/2018 at 10:50 AM by William Reasoner
Earlier this week, the Ninth Circuit Court of Appeals affirmed the dismissal of a petition for Chapter 11 bankruptcy filed by a corporation on behalf of its former board members. The company, Sino Clean Energy, Inc. produces coal-water slurry in China. In May of 2012, the Securities and Exchange Commission deregistered Sino after it suddenly stopped filing required financial information. Sino was later suspended from the NASDAQ as well. Then, a group of shareholders stepped in and filed a petition in state court. Subsequently, upon the plaintiffs’ motion, the court appointed a receiver to take control of Sino.
The receiver eventually replaced Sino’s board of directors with a single person. Then, Sino’s CEO attempted to “reconstitute” the former board. The “reconstituted” board of directors then filed a voluntary petition for Chapter 11 bankruptcy on behalf of Sino. The bankruptcy court dismissed the petition, holding that it was filed without proper corporate authority since the receiver had lawfully replaced all the members of the board of directors and the CEO could not undo this action.
This series of maneuvers by the shareholders and the receiver have real and practical effects for Sino; this was not merely an academic exercise. When the management of Sino caused the SEC to deregister Sino and caused NASDAQ to suspend Sino, the shareholders were rightfully concerned about the direction of the company. In all likelihood, the shareholders saw the value of their stock tanking. The shareholders took appropriate action and succeeded in having a receiver take control of the corporation.
Had a receiver not been appointed, the board of directors probably would have succeeded in entering into bankruptcy. Bankruptcy would have potentially had drastic consequences for shareholders, the most obviously of which is the fact that shareholders are last in line when it comes to being paid out of bankruptcy. Depending on the state of Sino’s financial affairs, the company’s assets could have all been directed to creditors with nothing left for the shareholders, and it would not have been uncommon for many of the members of the board of directors to have been creditors.
What seems like an academic exercise that would only interest attorneys for the pure sake of curiosity actually had real-life consequences. In this case, the shareholders won and prevented the company from going through bankruptcy. The shareholders were able to successfully take control of the direction of the company and they probably salvaged some of the value of their investments. This case a great example for the reasons why a big-picture legal strategy is so beneficial.
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