Getting Public Information in Chapter 11

Companies in Chapter 11 must publicly report substantial financial information — indeed, more information should be reported or available publicly in Chapter 11 than outside of Chapter 11. This paper analyzes what information must be publicly reported or disclosed under the securities laws, the Bankruptcy Code and Bankruptcy Rules; what debtors do to minimize public reporting; and what creditors can do to get the public reporting they deserve.

Debtors May Stop Public Reports Under the Securities Laws.

The Securities Exchange Commission (SEC) and its staff have stated that the disclosure and reporting requirements of the Securities Exchange Act of 1934 (the “Exchange Act”) and the rules and regulations thereunder continue to apply to Chapter 11 debtors with publicly traded securities.^[1]Therefore public Chapter 11 debtors must continue to file annual reports under Form 10-K, quarterly reports on Form 10-Q and reports of material events on Form 8-K.

But this is not the whole story.

First, if the issuer meets certain criteria, the SEC will generally accept the debtor’s filing Form 8-Ks containing the monthly operating reports (MORs) required under Section 704 of the Bankruptcy Code and Bankruptcy Rule 2015 in lieu of annual and quarterly reports on Forms 10-K and 10-Q. To obtain this reporting relief, issuers must make application to the staff and obtain a so-called no-action letter in advance of any required filings and satisfy certain conditions, including that trading in its securities is limited.^[2]Although the decision to grant filing relief is at the discretion of the SEC staff, the relief is often granted.

Second, a debtor can generally opt to terminate its reporting obligations by de-registering its equity securities^[3]that have been registered under Section 12 of the Exchange Act. An issuer that has become subject to the reporting requirements of the Exchange Act can de-register its equity securities if (i) it is not listed on a securities exchange,^[4]and (ii) it has less than 300 holders of record of the registered securities.^[5]The issuer will then cease to be subject to the reporting requirements of the Exchange Act, provided (i) it has not, since the beginning of its most recent fiscal year, filed or amended a registration statement registering securities with the SEC under the Securities Act of 1933 (the “Securities Act”), and (ii) it continues to have less than 300 holders of record of the previously registered securities.^[6]

In a strictly corporate sense, holders of record are those holders of a security that are recorded as owners of the security on the books and records of the issuer or its transfer agent. The substantial majority of security holders of today’s public companies in the United States, however, do not hold their securities of record with the issuer. Instead they hold the securities through their banks, brokers or other securities nominees, who in turn, directly or indirectly, hold the securities in position listings at the Depository Trust Company (DTC). The banks, brokers or other nominees who have accounts at DTC are referred to as direct participants in DTC. Those who hold securities through direct participants are referred to as indirect participants.

According to the SEC staff,^[7]for securities held through DTC, “each of the depository’s accounts for which the securities are held is a single record holder.” Although there are over 1,000 direct participants in DTC, in almost all cases the securities of a publicly traded issuer are held in far fewer than 300 DTC participant accounts. To determine whether the issuer is eligible for de-registration, the number of the participant accounts in which its equity securities are held must be added to the number of holders of such securities that are recorded on the securities register maintained by the issuer or its transfer agent. With the exception of certain public companies whose existence long predates the advent of DTC, that combined number is also likely to be under 300.

The final step in determining whether an issuer that has de-registered can “go dark” is ascertaining whether it has filed or amended a Securities Act registration statement in the past year. For these purposes, registration statements include not just those used to offer securities to the public but also those on Form S-8 used for offering equity compensation to employees. An issuer may also have a shelf registration statement on file with the SEC. Each of these registration statements is deemed amended whenever the issuer files its annual 10-K report so that, in theory, a public issuer — almost all of whom have Form S-8 registration statements on file — would still be required to report after de-registering. The SEC staff, however, will generally not object to an issuer’s filing a form to suspend its reporting obligations^[8]if these automatic amendments are all that stand in the way of a reporting suspension.

In sum, the Exchange Act’s “requirement” of regular financial reporting is, in a sense, illusory for most public issuers. Issuers file financial reports because they want to, not because they have to, and investors counting on regular financial reports could in theory find their issuer “going dark” with little or no recourse.

Outside of bankruptcy, issuers choose to maintain Section 12 registration and to file 10‑Ks, 10‑Qs and 8‑Ks because such reporting gives the issuers access to the capital markets; provides them with attractive equity that can be used as currency in acquisitions; allows them to issue unrestricted equity incentive compensation to their management and employees; makes it possible for officers, directors and other insiders to monetize their equity in the public markets; and in general facilitates a liquid trading market for the issuers’ equity securities.

The Chapter 11 debtor, by contrast, has little or no access to the capital markets, the equity of its management is usually worthless and it does not enjoy the other benefits of a robust and transparent equity market. Therefore, a Chapter 11 debtor has much less incentive to maintain Section 12 registration and continue filing 10-Ks, 10-Qs and 8-Ks during the pendency of their cases. Many debtors choose to de-register to save time and money otherwise required to maintain reporting on 10-Ks, 10-Qs and 8-Ks.

The SEC’s failure to require public reporting is reinforced by its decades-long inaction under the Trust Indenture Act (TIA).

Section 314(a)(1) of the TIA requires issuers of debt securities under TIA-qualified indentures to file such reports as the SEC may require by its rules. However, the “rules” referred to are not the disclosure rules adopted under the Exchange Act. Section 314(a)(1) refers to rules adopted under the TIA — and the SEC has never adopted any disclosure rules under the TIA.^[9]

Although many, if not most, indentures require the issuer to provide to the trustee information analogous to SEC reports, the debtor’s cessation of such reporting is just one default among many and not subject to specific performance — although bondholders should consider the reporting covenant as a basis for forcing public disclosure under the Bankruptcy Code, as discussed below.

A debtor’s decision to de-register its securities under Section 12 and stop filing annual and quarterly reports — a decision debtors make without court approval (see below) — can not only affect the information available to debtor’s security holders during the bankruptcy case, but it can also have substantive consequences for the reorganized debtor.

Once a debtor is no longer required to file reports under the Exchange Act, it can stop complying with the requirements of the Sarbanes-Oxley Act, including in particular the obligation to maintain a rigorous internal control structure and procedures for its financial reporting and to have its accountants audit those controls. A debtor can emerge and issue securities without registration pursuant to Section 1145 of the Bankruptcy Code, without having to report under the Exchange Act. The securities of the reorganized debtor, however, cannot be listed on a securities exchange without such securities being registered under the Exchange Act and the reorganized company being fully compliant with reporting. Having shut down its reporting function and discontinued the audit of its internal controls, it will likely take time before the issuer can come into compliance with its reporting obligations. This will delay re-listing and materially affect liquidity in the securities of the reorganized debtor.^[10]

Debtors Must Make Public Reports Under the Bankruptcy Code and Rules.

A debtor who stops reporting under the securities laws is nevertheless required to publicly report substantial information under the Bankruptcy Code and Rules — information that is in some ways more detailed, more informative and more frequently provided than reports under the securities laws.

The First Day Affidavit

As an initial matter, at the start of a Chapter 11 case, the debtor will file a declaration in support of the Chapter 11 petition (or petitions) and first day motions (the First Day Affidavit, or FDA). Typically, a member of the debtor’s management team, or an outside restructuring consultant employed by the debtor, acts as the declarant. The FDA includes copious information about the debtor’s business, financial affairs, the events leading to the bankruptcy filing, the relief requested pursuant to the first day motions and the basis for such relief, and potentially the debtor’s intentions for the bankruptcy proceeding and beyond. Creditors wishing to learn more information about the debtor and first day relief may also attend the first day hearing, at which the debtor (and other parties in interest) will present similar information to the court.

In certain jurisdictions, the debtor is required to file an FDA as evidentiary support for the first day motions. However, debtors in jurisdictions that do not require an FDA will often still file one anyway.^[11]

The 341 Meeting

Another useful source of information at the start of the Chapter 11 case is the Section 341 meeting of creditors (the “341 Meeting”). The 341 Meeting is convened and presided over by the U.S. Trustee assigned to the Chapter 11 case and is not attended by the bankruptcy court. See 11 U.S.C. 341(a), (c). The U.S. Trustee may also convene a meeting of equity security holders. See 11 U.S.C. 341(b). Each bankruptcy court publishes a list of locations for 341 Meetings to be held within their district.

The 341 Meeting provides an opportunity for the U.S. Trustee and creditors to question the debtor under oath regarding their assets, liabilities and other matters that pertain to its bankruptcy case. The U.S. Trustee will also ask a series of questions to confirm the accuracy of the documents the debtor filed with the court.

Bankruptcy Schedules

The SEC generally does not require parent companies to file deconsolidating financial statements — that is, there is no requirement for balance sheets, income statements or statements of cash flows on a subsidiary-by-subsidiary basis. See Press Release No. 2020-52 (Mar. 2, 2020). The Bankruptcy Code and Rules are different.

Federal Rule of Bankruptcy Procedure 1007 requires the debtor and each affiliate who is also a debtor to file, among other things, schedules of: (i) assets and liabilities; (ii) current income and expenditures; and (iii) executory contracts and unexpired leases. These schedules must be filed on a debtor-by-debtor basis and cannot be consolidated. Notably, while SEC filings contain high-level summaries and total amounts for the disclosures included in the bankruptcy schedules, the schedules include itemized lists.

A new Bankruptcy Rule 1017-2(D) adopted by the U.S. Bankruptcy Court for the District of Delaware has relaxed one debtor-by-debtor filing requirement. In a jointly consolidated case with a claims processing agent, the debtors may file a list of claims on a consolidated basis. The rule provides that a party in interest may obtain debtor-by-debtor claim schedules upon request; it remains to be seen how fast such a request will be honored, especially if debtors take the new rule as license to delay compiling debtor-by-debtor claim schedules.

The requirement of debtor-by-debtor schedules can produce material (sometimes case-determinative) information on inter-company claims. For example, Owens-Corning Corporation’s schedules contained the novel disclosure that a debtor subsidiary owned the fiberglass patent and Pink Panther trademark, subject to a rich license to the parent debtor — which had the effect of moving enormous value from unsecured bonds (with claims only against the parent) to unsecured banks (with claims against both parent and subsidiary).

The Monthly Operating Report

Pursuant to Bankruptcy Rule 2015 and Section 704 of the Bankruptcy Code, the debtor must also file MORs, including a statement of receipts and disbursements. Such MORs must be filed on a form recently approved by the U.S. Trustee Program. Like the schedules, the MORs must be filed on a debtor-by-debtor basis.

Prior to the adoption of the new MOR form, each U.S. Trustee’s Office had its own form, and the information disclosed varied from district to district. There was no uniform requirement of debtor-by-debtor disclosures. The new form’s debtor-by-debtor disclosures are material — potentially determinative — in connection with substantive consolidation fights.

Moreover, the MOR form requires disclosures that are not usually contained in SEC reports. As an initial matter, the MOR is filed on a monthly basis, whereas SEC reports are filed on a quarterly or annual basis, leading to more frequent and specific disclosures.

Although a significant event usually does not affect the application of generally accepted accounting principles (GAAP) in financial reporting, bankruptcy changes the needs of financial statement users, and thus modifications may be necessary in accounting practices. See Accounting Standards Codification (ASC) 852 (applying to financial reporting for periods after which an entity has filed for Chapter 11).

Thus, the MOR form often contains non-GAAP reporting and includes more detailed financial information than GAAP reporting would require. For example, the financial statements for periods including and after the petition date shall distinguish “reorganization items” (i.e., costs that are incremental and directly related to the entity’s bankruptcy) from the ongoing operations of the business.

Reorganization items may include expenses related to the restructuring, such as professional fees. These are not deductible as current expenses but rather capitalized, which can make the debtor’s taxable income in Chapter 11 materially higher than the debtor’s after-tax cash flow in Chapter 11.

The MOR also distinguishes obligations that were incurred prior to the filing of the bankruptcy petition (i.e., “pre-petition liabilities”) and those incurred after the filing (i.e., “post-petition liabilities”). See ASC 852-10. Pre-petition liabilities are further segregated into those that are “subject to compromise” (such as general unsecured claims that may be settled for lesser amounts) from those that are not subject to compromise (such as claims for goods sold within 20 days of the petition entitled to priority under Section 503(b)(9)) and must be paid in full. Id.

Notably, during the public comment period, there were competing comments regarding whether the new MOR form should contain information similar to that required by SEC filings. See 85 Fed. Reg. 82905 (Dec. 21, 2020). For example, one commenter proposed that debtors should be required to include projections, risk factors, potential conflicts of interest, and other material financial information, including management discussions and analysis, insider transactions, and material company events. Id. at 82907. Another commenter suggested that debtors with assets exceeding $100 million should be required to include an extensive list of supporting documentation. Id. The same commenter further asserted that parties in interest should have the right to seek supplemental documentation from debtors with assets less than $100 million by petitioning the U.S. Trustee or the court. Id.

The Office of the U.S. Trustee’s response was that requiring information disclosures akin to SEC filings “is impractical, expensive, and burdensome.” Id. Thus, the goal of the new MOR form was to strike a balance between enough disclosure to provide the public with the information it needs to accurately assess the case, while not placing an undue burden on the debtor. Id. The Office of the U.S. Trustee took the position that the more extensive reporting requirements suggested by the two commenters shifted that balance by proposing to make far more information mandatory for a significant segment of Chapter 11 debtors. Id. Accordingly, the new MOR form does not require the projections, risk factors, potential conflicts of interest and other material financial information but does require three common financial statements as supporting documentation — (i) statement of cash receipts and disbursements, (ii) balance sheet, and (iii) profit and loss statement. Id. The Office of the U.S. Trustee added that parties in interest retain the right to seek additional information through informal inquiry or in accordance with the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure. Id.

Non-Debtor Reporting

In addition to the new U.S. Trustee requirements of debtor-by-debtor disclosures, Federal Rule of Bankruptcy Procedure 2015.3 requires the debtor to file periodic financial reports of each non-debtor entity that is not a publicly traded corporation and in which the estate holds at least a 20% interest (a “controlled non-debtor entity”). These reports also cannot be consolidated and must be filed on a non-debtor by non-debtor basis.

The controlled non-debtor entity reports must comply with Official Form 426, which requires, for each controlled non-debtor entity:

1. The most recent available balance sheet, statement of income, statement of cash flows and statement of changes in shareholders’ or partners’ equity
2. A description of the controlled non-debtor entity’s business operations
3. A description of claims between the controlled non-debtor entity and any other controlled non-debtor entity
4. A description of how federal, state and local taxes and tax attributes have been allocated between or among the controlled non-debtor entity and the debtor or any other controlled non-debtor entity, including a copy of any tax sharing agreement
5. A description of the controlled non-debtor entity’s payment of any claims, administrative expenses or professional fees that could have been asserted against any debtor or the incurrence of any obligation to make any of the foregoing
6. Domestic corporations often try to minimize their taxable U.S. income by transferring title to property (often, intellectual property) to an offshore corporation, which licenses the property back to the U.S. corporation at substantial cost (creating tax deductions). The offshore corporation is unlikely to become a Chapter 11 debtor. The offshore corporation’s ownership of material property, and its license to the domestic corporation, may not be disclosed in the corporation’s pre-bankruptcy financial reports but must be disclosed on Official Form 426.

Official Form 426 requires some disclosures from controlled non-debtors (such as disclosure of tax sharing agreements) that the new MORs do not require of debtors. This can cut two ways.

First, Rule 2015.3(d) allows the bankruptcy court to vary controlled non-debtor reporting requirements “for cause, including that the trustee or debtor in possession is not able, after a good faith effort, to comply with those reporting requirements ... .” Thus, a debtor could argue that the U.S. Trustee Program’s MOR does not require debtors to disclose, for example, allocation of tax attributes among debtors, and therefore controlled non-debtors should not be required to report such allocation. (There is no requirement in the securities laws to report such allocations.)

On the other hand, Section 704(a)(7) provides that the trustee shall, “unless the court orders otherwise, furnish such information concerning the estate and the estate’s administration as is requested by a party in interest.” Section 704(a)(7) applies in Chapter 11 under Section 1106(a)(1). An inquiring bondholder could argue that it is entitled to obtain from debtors at least the information that Official Form 426 requires of non-debtors — and that such information must be made public, as Official Form 426 is filed publicly.

A final observation: While Section 704(a)(7) requires the debtor to provide information “unless the court orders otherwise,” Section 704(a)(8) provides that the trustee (and a Chapter 11 debtor, per Section 1106(a)(1)) shall file publicly periodic reports containing such information “as the United States trustee or the court requires.” Thus the U.S. Trustee makes the decision to require filing MORs, and the statute does not empower the court to “order otherwise.”

Systemic Weaknesses of the Disclosure Statement Hearing.

Section 1125(b) provides that an acceptance or rejection of a plan may not be solicited from creditors (or shareholders) after the commencement of a Chapter 11 case unless the creditor or shareholder has received “a written disclosure statement approved, after notice and a hearing, by the court as containing adequate information.”

Especially where a debtor plans to reorganize by issuing new and publicly tradable securities, a disclosure statement is supposed to serve as a combination proxy statement and registration statement.

Section 1145(a)(1) and (4) permits distributions of securities issued under a plan into the public markets through stockbrokers, without a registration statement under Section 5 of the Securities Act, so long as stockbrokers provide their customers with the court-approved disclosure statement.

Finally, Section 1125(e) provides that any person who in good faith participates in the issuance, purchase or sale of securities under a court-approved disclosure statement (and otherwise in accordance with the applicable provisions of the Bankruptcy Code) is not liable for violation of any applicable law, rule or regulation governing issuance, sale or purchase of securities.

In sum, a court-approved disclosure statement is supposed to be a serious document with serious benefits.

In reality, court approval of a disclosure statement is often a cross between an empty formality and a Kabuki drama aimed at setting up objections for confirmation.

The court approves a disclosure statement “after notice and a hearing.” Section 102(1)(B) provides that “after notice and a hearing” authorizes an act without an actual hearing if notice is given properly and if a hearing is not requested by a party in interest.

So it is possible for a debtor to file a disclosure statement that the court never reviews because no one objects.

An objector can seek inclusion in the disclosure statement of information the objector does not know — but that is rare, as a party prepared to hire counsel and file an objection is usually a party already involved in the case who has obtained information under a protective order or nondisclosure agreement. The well-resourced party usually objects on the ground that the disclosure statement fails to include information the party already knows.

Other than objections by the Official Committee of Unsecured Creditors (discussed below), objections requiring inclusion of information known to the objector serve a purpose under the Bankruptcy Code only if the objector seeks to solicit a class vote against the plan — disclosure is not necessary for that purpose if the objector already holds claims sufficient to control the class. These objections are usually premature confirmation objections.

However, an objection requiring inclusion of information known to the objector may serve a purpose under the securities laws by forcing disclosure that allows the objector to trade securities. Thus, whether a private party objects to a disclosure statement may depend on whether that party holds or expects to receive securities.

An Official Committee of Unsecured Creditors (the “Committee”) has a somewhat different and potentially difficult calculus.

Under Section 1102(b)(3)(A), the Committee has a duty to “provide access to information” to creditors holding claims of the kind represented by the Committee. The Committee is also authorized to “advise those represented by such committee of such committee’s determinations as to any plan formulated” and to “perform such other services as are in the interest of those represented.” Section 1103(b)(3) and (5).

One would therefore conclude that the Committee would always take steps to ensure that a disclosure statement does, in fact, contain “adequate information.” One would often be wrong.

The Committee often has negative information about the debtor that the debtor is reluctant to include in the disclosure statement. The Committee has its own problems in deciding whether to force disclosure of negative information. Forcing the debtor to include such information in the disclosure statement may depress the price of the securities to be issued under the plan to the detriment of the creditors receiving such securities; failure to include such information may restrict Committee members from selling securities they receive under the plan.

Therefore, the adequacy of a disclosure statement may depend on the makeup of the Committee. If the Committee includes creditors receiving securities under a plan, it is more likely to insist on including information in the disclosure statement. If the Committee is comprised entirely of creditors who are not receiving securities, the Committee is less likely to insist on including information in the disclosure statement.

If the Committee (or a private party) seeks inclusion of information in a disclosure statement, one would assume such objection would normally prevail (or not be contested): It puts the debtor in the difficult if not impossible position of arguing that disclosure is detrimental to the debtor but not material to creditors.

That assumption would not necessarily prevail. Several courts have degraded application of Section 1125(b) by granting “conditional approval” of disclosure statements. See, e.g., Tiger Axles, Inc., No. 14-10896, 2014 Bankr. LEXIS 4943 (Bankr. W.D. La. Dec. 5, 2014); In re B-NGAE1, LLC, No. 12-17954-MKN, 2014 Bankr. LEXIS 5457 (Bankr. D. Nev. Dec. 23, 2014); In re LW Acquisition Co. LLC, No. 22-40256-elm11, 2022 Bankr. LEXIS 1101 (Bankr. N.D. Tex. Apr. 21, 2022); In re MW Corp. LLC, No. 11-32674, 2014 Bankr. LEXIS 5492 (Bankr. W.D.N.C. May 30, 2014); see also Local Rule 3016-2(i) (Bankr. S.D. Tex.).

The justification for “conditional approval” is that the disclosure statement remains subject to “final approval” at confirmation, but this justification has no basis in the Bankruptcy Code and largely defeats the purpose of a disclosure statement. See In re Amster Yard Assocs., 214 B.R. 122, 124 (Bankr. S.D.N.Y. 1997).

Creditors are supposed to vote based on adequate information. If the court “conditionally approves” a disclosure statement over an objection on the ground that the objection can be reviewed at confirmation and the objector later settles and withdraws its objection (as is common), a universe of creditors will have voted based on an inadequate disclosure statement. There will be no hearing on final approval of the disclosure statement, and the votes will stand.

Worse, the objector settles based on knowledge only it has and that other creditors do not. This problem is compounded if the objector is receiving cash (in which case it does not care about securities law restrictions) or securities requiring registration (in which case the disclosure of adequate information is not meaningful to its ability to trade).

A lower standard for “conditional approval” allows a plan proponent to file a disclosure statement with inadequate information, which is not consistent with the goals of Section 1125(b) or the use of disclosure statements to maintain the integrity of public disclosure in the securities markets.

What Creditors Can Do.

It is up to creditors — preferably acting through the Committee — to enforce their rights to disclosure of information.

• With respect to 10-Ks, 10-Qs and 8-Ks, nothing can be done if an issuer de-registers under Section 12 prior to bankruptcy. But if the debtor has not done so, creditors should seek an order — preferably through the Committee — requiring court approval of de-registration. The right to de-register is, after all, property of the estate — and a good argument can be made that the exercise of that right is not “in the ordinary course of business” and should therefore be subject to court approval under Section 363(b)(1) of the Bankruptcy Code.
• Filing schedules on a consolidated basis requires an order from the court pursuant to Section 105(a) of the Bankruptcy Code, to which the Committee, or indeed any creditor, may object.
• Filing MORs on a consolidated basis requires consent by the U.S. Trustee. Forestalling such consent requires reaching out to the U.S. Trustee — or a motion to obtain an order under Section 704(a)(7) and (8) of the Bankruptcy Code.
• Modification of reports for controlled non-debtor entities requires a court order under Bankruptcy Rule 2015.3(d), to which the Committee or any creditor may object.

In sum, the Bankruptcy Code, the Bankruptcy Rules, the Official Forms and the U.S. Trustee’s new MOR form all require Chapter 11 debtors to disclose publicly substantial amounts of information that can be material to investors seeking to invest in, or divest from, claims against or interests in the debtor, including information not usually disclosed in reports under the securities laws.

The rights to public disclosure of such information are there to be exercised, and investors should seriously consider doing so, either in their own names or through any official Committee that, in the words of Section 1102(b)(3) of the Bankruptcy Code, “shall provide access to information” for creditors it represents and who are not on the Committee (emphasis added).

^[1] _{See Exchange Act Release No. 9660 (June 30, 1972); Staff Legal Bulletin No. 2 (Apr. 15, 1997) (SLB 2).}

^[2] _{SLB 2. See also SEC Division of Corporation Finance Compliance & Disclosure Interpretation (Exchange Act Sections) No. 130.01.}

_{Question: How does an issuer in bankruptcy demonstrate that the nature and extent of the trading in its securities is sufficiently limited to warrant no-action relief to file modified Exchange Act reports?}

_{Answer: The Division is regularly asked to express a “no-action” position regarding an issuer in bankruptcy’s ability to file modified Exchange Act reports. In reviewing these no-action requests, the Division applies the general criteria in Exchange Act Release No. 9660 (June 30, 1972) and the specific factors outlined in Staff Legal Bulletin No. 2 (April 15, 1997). With respect to the nature and extent of trading in the issuer’s securities, the Division has indicated that it will not issue a favorable response to a request for modified reporting if there is an active market for the issuer’s securities. Specifically, the Division has required issuers to demonstrate that their securities are not traded on a national securities exchange and that there is otherwise minimal trading in the securities. The staff believes that the nature and extent of trading of the issuer’s securities as described in the Evolve Software, Inc. no-action letter (July 16, 2003) is representative of “minimal” trading for the purposes of determining whether modified Exchange Act reporting is consistent with the protection of investors. [Sept. 30, 2008]}

^[3] _{For simplicity, this discussion assumes that the issuer has only one class of equity securities registered with the SEC, and it is that class to which the discussion refers.}

^[4]_{An issuer with securities listed on a national securities exchange in the United States must be registered under Section 12(b) of the Exchange Act. That registration cannot be terminated so long as the issuer continues to be listed. Removal from listing and registration must be accomplished by the securities exchange. See Rule 12d2-2 under the Exchange Act. In almost all cases, a U.S. securities exchange will move to delist an issuer that has filed for bankruptcy. Following the delisting, the issuer continues to be registered under Section 12(g) of the Exchange Act and must de-register under that section to terminate (or more accurately, suspend; see below) its reporting obligations.}

_{[5] See Rule 12g-4 under the Exchange Act.}

^[6] _{See Section 15(d) of the Exchange Act. Section 15(d) applies irrespective of whether equity securities of an issuer are registered under the Exchange Act and applies to the registration under the Securities Act of debt as well as equity securities.}

^[7]_{SEC Division of Corporation Finance Compliance & Disclosure Interpretation (Exchange Act Rules) No. 152.01, interpreting Exchange Act Rule 12g5-1.}

^[8] _{The reference here is to suspension rather than termination, as under Section 15(d) of the Exchange Act, the reporting obligation would resume if the issuer were to have 300 or more holders of record at the beginning of any fiscal year in the future. See Rule 12h-3 under the Exchange Act.}

^[9]_{In addition, many debt securities are issued pursuant to the exemption from registration provided by Rule 144A under the Securities Act, thus not TIA-qualified; any SEC rules relating to disclosure under the TIA would not apply.}

^[10] _{It should be noted that there may be other reasons why a reorganized debtor may choose to defer listing, even if it has continued to report to the SEC throughout the bankruptcy. Also, some debtors may prefer to emerge as “dark” companies and avoid the effort and expense of SEC reporting following emergence.}

^[11]_{The U.S. Bankruptcy Court for the Southern District of New York and the U.S. Bankruptcy Court for the Eastern District of New York each have local rules requiring that debtors submit an affidavit accompanying the petition. See Local Rule 1007-2 (Bankr. S.D.N.Y.); Local Rule 1007-4 (Bankr. E.D.N.Y.). However, the U.S. Bankruptcy Courts for the District of Delaware and the Southern District of Texas do not.}

A condensed version of this article was featured in the December 2023 issue of the Journal of Corporate Renewal, published by Turnaround Management Association.