On May 22, 2018, the U.S. Court of Appeals for the Fifth Circuit (the “Court”) upheld a bankruptcy court’s ruling that a shareholder could exercise the right granted to it in the debtor’s organizational documents to block a bankruptcy filing even though the shareholder was also a creditor of the debtor. The holding is important because the fact that an investor also holds a claim against the company will not, in and of itself, invalidate a bankruptcy-consent provision found in a debtor’s organizational documents.

BACKGROUND AND THE BANKRUPTCY COURT DECISION -

Franchise Services of North America (“FSNA”) was once one of the biggest North American car rental companies. In 2012, FSNA purchased a subsidiary of Hertz Corporation—Advantage Rent-A-Car (“Advantage”). To finance the transaction, FSNA issued $15 million of preferred stock to Boketo, LLC (the “Investor”). The Investor’s stake in FSNA would amount to a 49.76% equity interest if converted to common stock, making it the single largest investor in FSNA and the sole preferred shareholder. As a condition of the investment, FSNA reincorporated in Delaware and adopted a new certificate of incorporation—providing that FSNA could not file for bankruptcy without the approval of a majority of holders of each class of stock. Such

arrangements are commonly referred to as “blocking provisions” or “golden shares.”