Fifth Circuit Allows Shareholder-Creditor To Block Bankruptcy Filing

King & Spalding

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.


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.”

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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