Weil Summer Associate MJ Koo contributed to this post
In a recent decision, the Fifth Circuit narrowly held that federal law does not prevent a bona fide shareholder from exercising its voting right in the company’s charter to prevent the filing by the company of a bankruptcy petition merely because it is also an unsecured creditor.  In re Franchise Servs. of N. Am., Inc., 891 F.3d 198, 203 (5th Cir. 2018).  Although the Fifth Circuit did not make a broad ruling on the legality of provisions that give parties the ability to block a company’s filing of a voluntary bankruptcy petition (often called “golden shares” or “blocking provisions”), it touches on interesting issues of creditor and shareholder rights in that regard.

What happened in Franchise Services?

The Fifth Circuit Court of Appeals’ decision affirmed a bankruptcy court’s decision to uphold the validity of a blocking provision given to the equity holder of the debtor.
In this case, Macquarie, through a newly-created and fully-owned subsidiary, Boketo, made an investment of $15 million in Franchise Services of North America (the “Debtor”) in exchange for 100% of the Debtor’s preferred stock.  Separate from, but after, the $15 million equity investment, Macquarie billed the Debtor for consulting fees in the amount of $3 million.
As a condition for the equity investment, Macquarie had required the Debtor to amend its articles of incorporation to require consent from a majority of each class of the Debtors’ preferred and common shareholders before filing for bankruptcy (the “Shareholder Consent Provision”).  A few years later, the Debtor filed a bankruptcy petition without requesting or obtaining the consent of its shareholders, including Boketo.  The consulting fees of $3 million to Macquarie remained unpaid.
Macquarie and Boketo sought to dismiss the Debtor’s voluntary bankruptcy filing arguing that the Debtor failed to obtain the proper corporate authorization for a filing, as it did not get the consent of the required classes of shareholders as required by the Debtor’s certificate of incorporation.  The Debtor argued, among other things, that (i) the Shareholder Consent Provision was an invalid bankruptcy restriction contrary to federal bankruptcy policy, (ii) the Shareholder Consent Provision was unenforceable under Delaware law, and (iii) Boketo’s fiduciary obligations as a controlling minority shareholder prevented it from blocking the Debtor from filing for bankruptcy.

Fifth Circuit Opinion

The Fifth Circuit held that under federal bankruptcy law, simply being a creditor does not prevent a bona fide equity holder from exercising its right under a charter to block a bankruptcy filing, and under the facts of the case before it, Macquarie was a bona fide equity holder.  What is just as interesting, however, is what the Fifth Circuit did not decide.  For example:

  • The Fifth Circuit did not decide whether a contractual provision whereby a debtor waives its right to file bankruptcy is enforceable (although it noted that other Courts of Appeal, including the Seventh and Ninth Circuits, held such provisions to be unenforceable).
  • It similarly did not decide whether a provision in a charter that provides a creditor the right to veto a bankruptcy is enforceable (although it noted several cases that have held such provisions to be unenforceable).
  • It also explicitly did not decide whether a similar provision involving a nominal shareholder (where the equity interest is “just a ruse” to protect the party’s position as a creditor) would be enforceable.

The Fifth Circuit declined to rule on the question of the enforceability of the provision under Delaware law, due to, among other things, a lack of on-point Delaware cases.  It did suggest, however, that Delaware law would likely tolerate a provision in the certificate of incorporation that conditions the corporation’s right to file a bankruptcy petition on shareholder consent because Delaware law, being regarded as among the most flexible in the nation, provides parties “with great leeway to structure their relations, subject to relatively loose statutory constraints.”  Id. (citing Jones Apparel Grp., Inc. v. Maxwell Shoe Co., 883 A.2d 837, 845 (Del. Ch. 2004)).
In addition, the Fifth Circuit rejected the Debtor’s fiduciary duty argument and found that Boketo, which held 49.76% in equity interest, was not a minority-controlling shareholder because there was no evidence of actual control.  The Fifth Circuit held that Boketo’s sizeable equity stake was not dispositive and the power to veto the Debtor’s voluntary bankruptcy filing did not amount to actual control because Boketo never got a chance to exercise that right.  Rather, the Debtor’s board never put the bankruptcy matter to vote and filed for bankruptcy without the shareholders’ consent.  Even if Boketo had breached a fiduciary duty, the Fifth Circuit held that the bankruptcy court has “no power . . . to shift the management of a corporation from one group to another, to settle intracorporate disputes, and to adjust intracorporate claims. . . .”  Id. (citing Price v. Gurney, 324 U.S. 100, 106 (1945)).  The proper remedy for a breach of fiduciary duty would be a claim under state law.


Franchise Services touches on interesting questions faced by numerous courts regarding whether a creditor can block a bankruptcy filing pursuant to a corporate charter’s “golden share” provision or other contractual blocking provision.  There seems to be a general consensus that such rights that a creditor holds solely in respect of its debt claim are unenforceable, notwithstanding the Fifth Circuit’s reluctance to rule directly on that issue.  Conversely, as the Fifth Circuit held, those rights in the hands of an equity holder with a very small creditor position are enforceable.  But what about the gray area in between?  How much equity does a creditor have to hold to be the “bona fide” equity holder that the Fifth Circuit says is protected?  How important are the circumstances surrounding the creation of the debt and the equity interest?  Is it problematic if those two rights were created at the same time?  The Fifth Circuit leaves these questions for another day.