Recent Publications
June 4, 2009
GM First Day Motions Reveal Framework of Restructuring
Douglas
L.
Lutz,
Robert
V.
Sartin
Several motions filed and orders granted on the first day of GM's bankruptcy reveal a restructuring in which GM will sell substantially all of its assets to a New GM that is owned by the U.S. Treasury, the Canadian government and a UAW retiree trust. The restructuring represents a "business as usual" approach in which customers and suppliers generally will be paid in full and lenders will bear the brunt of the restructuring. Continuing suppliers will have pre-bankruptcy claims either paid by GM currently if they are designated essential vendors or paid by New GM upon the sale, which is currently scheduled to be completed by August 15. GM has received authorization to honor all warranty and customer programs during the bankruptcy and New GM will assume these obligations upon the sale.
Following is a summary of certain provisions of the proposed sale and operations of GM prior to the sale:
- New GM will pay all pre-bankruptcy amounts owed to suppliers whose contracts are assumed by New GM. GM says that it is "likely" that "substantially all" Tier 1 supplier agreements will be assumed.
- Notwithstanding this expectation, suppliers should still consider filing "reclamation" notices, a procedure under bankruptcy law that allows suppliers to recover for goods supplied within 45 days of the bankruptcy filing that have not been incorporated into products.
- GM has received court authorization (but is not required) to pay suppliers that it classifies as essential vendors provided they agree to continue to supply on customary trade terms. Suppliers who are not paid as essential vendors will still have pre-bankruptcy receivables paid by New GM following the sale if it assumes their contract. GM also received court authorization (but is not required) to continue its troubled supplier support program and participation in the federal auto supplier support program.
- GM has received court authorization (but is not required) to honor all pre-bankruptcy warranty obligations and recall programs and all customer programs, including dealer support programs, customer rebates and allowances, fleet repurchase programs, sales incentive programs and credit card programs.
- As has been widely reported in the media, over 1,000 dealer franchise agreements will not be assumed by New GM. The affected dealers will be offered deferred termination agreements; the terms of these agreements have not been provided.
- New GM will assume pre-bankruptcy warranty obligations of GM, but not product liability claims. The proposed purchase and sale agreement does not specifically address assumption of customer programs by New GM.
- The UAW will receive, in settlement of all claims relating to retiree benefits: (i) 17.5% of New GM common stock, (ii) a $2.5B note from New GM; (iii) $6.5B of New GM preferred stock; (iv) warrants for 2.5% of New GM common stock; and (v) the assets in a retiree benefits trust of GM.
- New GM will acquire substantially all assets of GM except for 14 facilities listed on a schedule and contracts that are rejected.
- New GM will pay for the assets by forgiving pre-bankruptcy loans from the U.S. Treasury to GM and issuing 10% of New GM common stock (which could go to 12% if unsecured claims against GM exceed $35B) to GM which will be distributed to GM creditors. GM will also receive warrants for up to 13.8% of New GM common stock.
- GM is seeking a fast track for the sale. GM has proposed that either New GM or GM can terminate the transaction if the bankruptcy court has not approved it by July 15 or it has not closed by August 15.
Following the sale (but prior to any warrant exercises), New GM will be owned:
U.S. Treasury 60.8%
Canada (through an affiliated entity) 11.7%
UAW retiree trust 17.5%
GM Creditors 10.0%
If you have any questions, please contact
Douglas L. Lutz or
Robert V. Sartin or any other attorney in Frost Brown Todd's
Automotive Industry or
Bankruptcy and Restructuring Practice Groups.