Liquidating Trusts: A Discussion of SEC Reporting and Registration Requirements
There has been a high volume of bankruptcy filings over the last three years of the economic downturn and they do not show any signs of letting up. Whether it is Hostess Brands—with the future of Twinkies at risk, the prospect of iconic Kodak in the Bankruptcy Court or AMR Corp.’s flight into Chapter 11 reorganization. Notwithstanding the broad scope of the United States Bankruptcy Code and the power of the Bankruptcy Courts, there are still securities issues to be considered.
One possible component of a bankruptcy reorganization or liquidation is a liquidating trust. The beneficial interests in a liquidating trust may be considered to be securities, and a company considering a liquidating trust needs to determine whether it will, therefore, be required to comply with the registration and reporting requirements under the Securities Exchange Act of 1934. Under Section 12(g)(1) of the Exchange Act, a company with more than $10 million in assets must register each class of security that is held of record by 500 or more persons and comply with the reporting requirements under Sections 13 and 15(d) of the Exchange Act.
The Staff of the SEC’s Division of Corporation Finance has issued a number of no-action letters, including REMEC Liquidating Trust (Mar. 23, 2011), granting relief from the registration and reporting requirements for liquidating trusts. The Staff has generally noted the following characteristics with respect to liquidating trusts being granted no-action relief:
- the liquidating trust is established without any objective to engage in a trade or business and its sole purpose is to liquidate and distribute the assets transferred into it as part of the bankruptcy proceedings;
- the liquidating trust is to terminate on the complete distribution of the assets;
- the liquidating trust interests are to be non-transferable and non-assignable except by will, intestate succession or operation of law;
- prior to its dissolution, the company in bankruptcy proceedings was current in its reporting obligations (if any) under the Exchange Act;
- the liquidating trustee will provide each interest holder with periodic financial reports containing audited or unaudited financial statements and certain other financial information prepared in accordance with generally accepted accounting principles;
- the beneficial interests in the liquidating trust are not and will not be represented by certificates;
- neither the trustee nor other persons affiliated with the liquidating trust will take any actions to facilitate or encourage any trading in the beneficial interests in the liquidating trust or any instrument or interest tied to the value of the beneficial interests in the liquidating trust;
- any distribution to trust interest holders will be pro rata in the proportion of each interest holder’s ownership interest at the effective date of the plan; and
- the liquidating trust will terminate upon the earlier of the distribution of all of its assets in accordance with the terms of the liquidating trust agreement or three years from the date assets were first transferred into it.
While the Staff has granted no-action relief from Exchange Act requirements if the above requirements are met, it has also expressly denied relief in circumstances where the company requesting relief was not current with its required filings under the Exchange Act.
The Staff’s underlying rationale in granting relief to liquidating trusts appears to be two-fold: (1) that compliance with the reporting obligations (including the cost of auditing annual financial statements and preparing and filing quarterly reports) of the Exchange Act would place an unreasonable financial and administrative burden on a liquidating trust and significantly reduce the amount of distributions to be made in respect of the beneficial interests; and (2) as the beneficial interests are not and will not be traded on the open market and the holders of the beneficial interests will receive at least annual financial reports from the trustee of the liquidating trust, there is no need for the general public to receive the type of information regarding the liquidating trust required under Sections 13 and 15(d) of the Exchange Act.
OUR TAKE: In bankruptcy proceedings, there are still securities laws considerations. The structure of liquidating trusts is just one example. While no-action relief granted by the Staff to other parties and with respect to certain facts and circumstances form all or part of a persuasive argument for like treatment in similar fact situations, the grant of no-action relief by the Staff does not represent an official action by or on behalf of the SEC Commissioners. No-action relief granted by the Staff may only be relied upon by the party that submitted the request, based on the particular facts and circumstances, and otherwise may only viewed as setting forth views of the Staff (PDF). In order to establish certainty that the Staff will grant relief, a company contemplating creating a liquidating trust pursuant to a bankruptcy plan should submit its own letter to the Staff requesting no-action relief.