An ‘Affiliate’ of a Public Company Is Barred from Reorganizing Under the Bankruptcy Code’s New Subchapter V

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The Small Business Reorganization Act of 2019 (SBRA) aims to simplify and shorten the Bankruptcy Code’s reorganization process for small-business debtors, making Chapter 11 more accessible. Effective as of February 2020, SBRA—also known as Subchapter V—eligibility requires, in part, that (i) the total small-business debt must not exceed $7.5 million; and (ii) debtors not be affiliates of “issuers,” as defined by the Securities Exchange Act of 1934. A recent memorandum opinion in In re Serendipity Labs, Inc. provides an early interpretation of what constitutes an “affiliate” for Subchapter V eligibility purposes. The Serendipity court was asked to consider whether the percentage of “voting shares” should be measured by the total voting shares controlled by an entity, or only the shares “with the power to vote on the matter before the [Bankruptcy] Court.” Based on the plain meaning of the statute and implications of interpreting it otherwise, the court found that “voting shares” are measured by percentage of total voting shares and revoked the Debtor’s Subchapter V election.

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