SOLICITING AND TABULATING VOTES

on Chapter 11 Plans from Holdersof Publicly Traded Securities
BY CRAIG JOHNSON & TIFFANY ARCHBELL, KROLLToday, nearly all securities aroundthe world are held electronically at
various clearinghouses, including
The Depository Trust Company(DTC), Euroclear, and Clearstream
International SA. Electronic holding
facilitates efficient, immediate, costeffective, and anonymous trading
and contributes to the liquidity ofsecurities; however, such electronic
trading and holding of securities
present issues for a debtor soliciting
votes on its Chapter 11 plan in aU.S. bankruptcy proceeding.

The Role of Depositories
Traditionally, paper stock or bondcertificates (certificated securities)
were used to evidence ownershipof securities. Trades of certificatedsecurities generally required that they
be submitted to a third party, such as atransfer agent or an indenture trustee
or an agent thereof, who would executeand settle the trade and reflect thenew ownership of the securities on
its ledger. To avoid this cumbersome
paper process, following the adventof the computer, central securities
depositories such as DTC, Clearstream,and Euroclear were formed to provide
the electronic platforms upon whichthese securities (non-certificatedsecurities) could be held and to serve

as clearinghouses for electronic
trades thereof. This article focuses on
U.S. securities held through DTC.
To have its debt or equity securities
widely held and seamlessly tradedelectronically, a company causes
a “global” security (be it a stock
certificate, warrant, note, bond, etc.) to
be deposited at one of the depositories,
which credits the appropriate
number of shares, notes, or bonds
to the applicable participating bankor broker, often called a nominee.
Nominees, in turn, hold the electronic
securities “in street name” for theirclients, the persons or entities, known
as “beneficial holders,” with the true
economic interest in the applicablesecurities. The trading of electronic,
non-certificated securities among
participating nominees is tracked,cleared, settled, and recorded by
the depository, which credits ordebits the nominee’s account withthe depository accordingly.
Electronic trading of non-certificatedsecurities is much less cumbersome
than the manual and labor-intensive
process required for certificatedsecurities and is a tremendous
multiplier of liquidity and value insecurities markets. However, the near-complete lack of transparency as tothe identities of the beneficial holdersof such electronically traded, noncertificated securities creates issues,albeit not insurmountable issues,
for a debtor soliciting and tabulating
votes on a plan in bankruptcy.
Because, with rare exceptions, adebtor is not privy to the identitiesof the beneficial holders of its noncertificated securities, the debtor
cannot communicate or coordinate
with such holders directly. Rather,to communicate with holders ofsecurities issued in the U.S., a debtor
must first obtain from DTC a “securities
position report” (SPR), which lists
the nominees that are the holdersof record of the subject securities.
Then, the debtor will coordinate
outreach to beneficial holders of the
securities through those holders’nominees. This two-step process
is at the crux of soliciting holdersof publicly traded securities.

Voting in Chapter 11
Proceedings
Granting creditors or interest-holders
with impaired claims or interests thecontinued on page 26September
2022
Journal ofCorporate
Renewal25

continued from page 25

right to vote on a proposed plan and thetreatment of their claims thereunder is afoundational aspect of the Chapter 11process. For most claims or interests
not based on publicly traded securities,
soliciting votes and tabulating ballots isrelatively straightforward. Information
regarding such claims, including thecorresponding claimholder data, resides
on a regularly updated, detailed, andtransparent claims register that reflects
the current ownership of all suchclaims in the bankruptcy proceeding.
To accomplish the solicitation ofthese non-securities-based claims,
a debtor—with the court’s approval—
sets a record date and sends a copyof the plan and disclosure statement,a ballot, and/or voting instructions
directly to the holders that appear on
the claims register as of the record
date. A debtor can also contact nonsecurities holders directly with any
updates to the solicitation timetableand deadlines and any further
clarifications of the voting procedures.
Conversely, because the identities ofthe beneficial holders of the debtor’s
publicly traded securities cannot be
ascertained by the debtor, an effective
solicitation of that population requiresconsiderably more foresight andeffort than is standard in the nonsecurities solicitation model. To
serve the efficacy of solicitation andreliability of tabulation, the debtor
must (i) allot sufficient time for thelayers of coordination necessary fornominees to disseminate solicitationmaterials to their beneficial holder
clients and then collect, transcribe,and submit such votes from suchclients to the debtor’s solicitation
agent, (ii) make available a two-stepprocess, which reliably determines
whether a class of securities holders
has accepted or rejected the plan
while maintaining the anonymity ofparticipating beneficial holders, and(iii) provide clear instructions to allparties to the process, most especiallynominees and beneficial holders.

September
2022
Journal ofCorporate
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Sufficient Time. Critically, solicitation
planning must allocate sufficient
time for holders of publicly tradedsecurities and their nominees tocomplete the process. Because
the debtor is not in direct contact
with beneficial holders of its noncertificated securities, the debtor must
rely on nominees (or such nominees’agent) to receive, process, and thenforward voting materials to theirbeneficial holder clients at the outsetof the solicitation period. Acting inthis representative capacity on behalfof its beneficial holder clients requiresthat a nominee (or such nominee’sagent) engage in various critical (andsometimes time-consuming) tasks,
including assembling, labeling, anddistributing solicitation packages;
summarizing the contents thereof;
and/or crafting voting instructions
that faithfully express the nature andspecific requirements of the event.
These labor- and time-intensive tasks
and corresponding time constraints
must be deliberately accommodated
in the debtor’s plans for solicitation.
The conclusion of the solicitation
process makes similar administrative
demands of nominees (or suchnominees’ agent) that must collect andcompile the votes of their beneficial
holder clients and transcribe the votes
onto a master ballot. For the vast
majority of solicitations, a master ballot
is the only means by which nominees
can communicate the individualplan votes they are responsible fortabulating and said master ballots must
be received by the debtor’s solicitation
agent before the voting deadline.1
For these reasons, it is customary tosee voting periods of roughly 28 to 35
days for securities-based solicitations,2
though a debtor’s particularly complex
capital structure or other practical caseconsiderations may demand a longerperiod,3 and exigent circumstances
may support a debtor’s request thatthe court authorize a shorter voting
period.4 Perhaps recognizing thecomplexity of a prepack case involving
publicly traded securities, the Southern
District of New York’s procedural
guidelines require debtors in suchcircumstances to provide beneficial
holders at least a “twenty (20) businessday voting period.” Suffice it to say that,as a general rule, a debtor is best served
by baking the longest voting period
possible into its solicitation scheme.
Two Forms of Ballots. Because
the solicitation process must
accommodate the solicitation of
votes from beneficial holders throughnominees (or such nominees’ agent),
debtors typically craft two forms ofballots—a beneficial holder ballot
and a master ballot. The beneficial
holder ballot is designed for use by thebeneficial holder to transmit its vote to

the nominee, which, in turn, includes
and certifies such vote along with votes
submitted by the nominee’s otherbeneficial holder clients on a masterballot sent to the solicitation agent.
Master ballots do not require nominees
to identify their beneficial holder
clients by name; rather, nominees
are instructed to identify their
participating clients by accountnumber or some other internal
identifier. Most often, nominees
create these identifiers expressly forthe plan vote so that individual votes
can be properly recorded and tracked
without revealing any confidential
beneficial holder name or accountinformation. The master ballot does,
however, require that nominees
present their DTC participant number,
the inclusion of which enables thedebtor’s solicitation agent to reconcile
the votes tabulated in the masterballot against the nominee’s securities
position as presented in the SPR toensure the aggregate of beneficial
holder votes does not exceed thenominee’s voting record date position
with DTC in the subject securities.
Clear Instructions. Because of
the layered ownership structure of
publicly traded securities, which
necessitates the debtor’s relianceon nominees as intermediaries
between the debtor and beneficial
holders in the solicitation process, adebtor must take particular care toensure that solicitation procedures
are communicated with great clarityand precision to nominees. Suchcare is especially important because
solicitation-related communications
are ultimately aimed at beneficial
holders with whom the debtor has
no direct contact and because retailbond holders, who are often a key
component of a successful solicitationand may lack the sophistication ofinstitutional beneficial holders, can findthe plan vote a daunting prospect.
As an essential matter, a debtor
must make certain that beneficial
holders understand their votes areto be transmitted according to theirnominee’s instructions and notdelivered to the debtor or the debtor’sadvisors. Moreover, debtors are best
served by allowing nominees toemploy their customary methods ofinteracting with beneficial holders
regarding all phases of the solicitation
process, from disseminating
information that beneficial holdersrely on to make an informed decision
whether to vote for or against theplan to the manner in which votes
are collected and tabulated. Suchcustomary practices may include theuse of email, telephone, or a dedicatedelectronic platform for conveying
information and providing access to
documents and/or collecting votes.

Craig Johnson is a senior director in Kroll’s
Restructuring Administration and Issuer Services
practices with over 20 years of experience
specializing in the solicitation of bankruptcy
plans and the administration of corporate events,
including exchange offers and rights offerings.
He has led complex engagements, including thereorganizations of Puerto Rico, American Airlines,PG&E, Purdue Pharma, and Sears. Johnson started
his career at Weil, Gotshal & Manges LLP andreceived his law degree from New York University.

Finally, a debtor must ensure that thenominee and its beneficial holder
clients are made aware that the voting
deadline applies to the nominee’ssubmission of the master ballot to thedebtor’s solicitation agent, such thatthe nominee must inform its holders ofwhatever earlier internal voting deadline
will provide the nominee sufficient timeto prepare and timely return its masterballot. This internal voting deadline
set by the nominee is another criticalpiece of the solicitation process, like somany others involving the solicitationof votes from beneficial holders of
publicly traded securities, over which
the debtor can exercise little to nocontrol beyond crafting instructions
that are as clear and explicit as possible.

Tiffany Archbell is a director in Kroll’s Restructuring
Administration and Issuer Services practices. She
leverages over 15 years of management experience atDTCC, where she customized and introduced manyof that company’s current practices and procedures.
She is a results-oriented leader possessing a uniqueability to guide clients through complex corporate
events and reorganizations, including Puerto Rico,
iHeartMedia, Lehman Brothers, and Mallinckrodt.
Archbell holds a bachelor’s degree in finance andan MBA from the University of South Florida.

Conclusion
Non-certificated securities, which
promote liquidity and enhancevalue outside of bankruptcy, present
significant challenges to debtors
soliciting votes on a Chapter 11 plan—
mainly arising from the debtor’s lackof privity with the beneficial holders ofsuch securities. Since the solicitationof votes from beneficial holders of
publicly traded securities is often thecornerstone of a debtor’s efforts toconfirm its plan, it is important for
debtors to optimize the solicitation
process devoted to such holders.
Debtors can do so by (i) allotting
sufficient time for the layersof coordination necessary fordissemination of solicitation materials
through nominees to beneficial holders
and the collection and tabulation of
votes submitted by nominees on behalfof their beneficial holder clients; (ii)making available a two-step process,which reliably accomplishes plan voting
while maintaining the anonymityof participating beneficial holders;and (iii) providing clear instructions
to all parties to the process. J1

 olicitation procedures will also customarily
Saccommodate the alternative of a nominee“pre-validating” a ballot for its beneficial
holder clients, though such pre-validation
is not commonly used. To pre-validate aballot, a nominee is required to insert thevoting amount for its beneficial holder
client and certify such client’s holding on
the ballot before the nominee forwards theballot to the beneficial holder. The nomineethen instructs the beneficial holder tocomplete and submit the pre-validated ballot
directly to the debtor’s solicitation agent.
2See In re: EP Energy Corporation, et al., CaseNo. 19-35654 (MI) (Bankr. S.D. Tex) (28 days);
In re: Exide Holdings, Inc., et al., Case No. 2011157 (CSS) (Bankr. D. Del.) (29 days); In re: TheHertz Corporation, et al., Case No. 20-11218(MFW) (Bankr. D. Del.) (32 days); and In re:Claire’s Stores, Inc., et al., Case No. 18-10584(MFW) (Bankr. D. Del) (35 days). These statedvoting periods in endnotes 2, 3, and 4 were
the periods approved by the courts in eachof the applicable cases. In many instances,
the actual voting periods were ultimatelyextended at the discretion of the debtor.

3

See In re: The Financial Oversight andManagement Board for Puerto Rico as
representative of The Commonwealth ofPuerto Rico, et al., Case No. 17-BK-3283 (LTS)(D.P.R.) (35 days, extended by court orderto 49 days); In re: iHeartMedia, Inc., et al.,
Case No. 18-31274 (Bankr. S.D. Tex) (42 days,extended by court order to 49 days and atcounsel’s direction to 62 days); and In re:Nine West Holdings, Inc., et al., Case No.
18-10947 (SCC) (Bankr. S.D.N.Y.) (54 days).

4See In re: PHI, Inc., et al., Case No. 19-30923(Bankr. N.D. Tex.) (21 days); In re: 24 HourFitness Worldwide, Inc., et al., Case No.
20-11558 (KBO) (18 days) and In re: Sanchez
Energy Corporation, et al., Case No. 1934508 (MI) (Bankr. S.D. Tex) (14 days).

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