Editorial: General Motors Death Watch 221: Why GM Should Stop Worrying And Learn to Love C11
Speculation is rife that GM plans on shutting down or selling Saab, Pontiac and/or another brand as a prelude to a federal bailout. Common sense and recent history suggest that any such move will create a raft of breach of contract claims by jilted dealers and suppliers. As Oldsmobile’s demise proves, there’s only one possible resolution to the resulting feeding frenzy: cash termination payments. If, however, GM filed for Chapter 11 bankruptcy, these breach of contract claims would become nothing more than unsecured claims– which are resolved within the debtor’s C11 reorganization. The claimants would be legally barred from costly state court litigation. In a stroke, GM would be transformed. How great is that? But wait, there’s more!
Suppose Saab’s potential new owners want to make the moribund brand profitable by using different suppliers. Outside of C11, fuhgeddaboutit. The resulting lawsuits would daunt even the most dauntless would-be rescuer. Inside Chapter 11, GM can terminate Saab’s supplier agreements without legal blowback. Creditors asserting liens and security interests on GM’s assets are prevented from delaying their sale; litigation over the validity of disputed claims is prohibited. Since the suppliers’ termination claims become unsecured claims, the affected manufacturers would receive no cash payments. None. In fact, GM can use the money “saved” to aid the profitable operations it intends to keep. And the savior gets to do it their way.
As regular readers know, GM’s renaissance is hamstrung by its bloated dealer network– which is protected by 50 state franchise laws. If GM is to match tri-branded Toyota’s slim-line 1200 dealer network, The General’s existing dealer agreements need to be terminated or modified. Outside C11, Oldsmobile. Under the terms of federal loans (or loan guarantees) for GM, the resulting legislation could amend the Federal Bankruptcy Code to create a “GM exemption.” A U.S. District Court could receive exclusive jurisdiction over any and all auto dealer termination claim. No fuss, no muss, no “ongoing situation” a la Oldsmobile.
A disadvantage (apparently) to GM in Chapter 11: the rules of reorganization require full and complete disclosure of the automaker’s financial status and future profit (you remember profit?) projections. Truth be told, “limited disclosure” to taxpayers is nothing more than contrived non-disclosure– which is insulting, misleading and dangerous. By “encouraging” GM to file, the feds would be forcing GM to open its books to full public scrutiny.
This would help end GM’s stifling corporate culture. It would encourage a new broom, and the introduction of a key concept long missing from Renaissance Center: accountability. In fact, prior to December 8, 2008, GM should be required to make a written SEC filing disclosing the identity of:
a. its 100 largest bondholders;
b. its 50 largest trade creditors/suppliers; and
c. its 20 largest common shareholders.
Knowing how much debt is concentrated with which bondholders helps us gauge the prospects for conversion of debt into equity. Knowing the amounts owed to the largest trade creditors helps us understand how quickly creditors/suppliers can be organized and the terms of a Chapter 11 prepack negotiated. [Much of this information is readily available from paid providers of financial data– but not to the public.] This information will also disclose who benefits most from a taxpayer-funded automaker bailout/rescue.
Sorry for the digression. But in corporate restructurings, whether in or out of bankruptcy, there are obvious concerns about management’s competency. It’s rare for creditors or potential lenders to blindly swallow/follow management’s restructuring recommendations. Captains of sinking ships should not get the chance to prove that they were right and the iceberg was wrong. Congress needs its own independent restructuring experts to decide if sinking automakers can be salvaged. Again, Chapter 11 helps bring the automaker out of the shadows and into the light, where it belongs, for its own good.
By the same token, a Chapter 11 filing would eliminate the uncertainty now surrounding GM and its brands. While there’s no doubt that GM’s sales would crater, an “everything must go” sale would create a new buzz for the company’s vehciles. With a compelling public spokesperson at the helm (shades of Lee Iaccoca), GM could ask for– and receive– public sympathy and support for a fresh start. With the right brands, PR guidance and corporate policies (e.g. U.S.-built products or a new committment to green machines ), GM would have a genuinely compelling– and credible– story to tell.
In short, GM’s fear of chapter 11 is entirely misplaced. After the hearings next week, I will propose a 100-day plan for a GM restructuring in a prepackaged Chapter 11. Meanwhile, there are question that need asking. And ask them I will.
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