In re Board of Directors of Multicanal S.A.

• Decision Date: 29 March 2006
• Docket Number: No. 04-10280 (ALG).,04-10280 (ALG).
• Citation: 340 B.R. 154
• Parties: In re: BOARD OF DIRECTORS OF MULTICANAL S.A., Debtor in Foreign Proceeding.
• Court: U.S. Bankruptcy Court — Southern District of New York

340 B.R. 154

In re: BOARD OF DIRECTORS OF MULTICANAL S.A., Debtor in Foreign Proceeding.

No. 04-10280 (ALG).

United States Bankruptcy Court, S.D. New York.

March 29, 2006.

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Cleary Gottlieb Steen & Hamilton LLP, By Lindsee P. Granfield, Esq., Evan A. Davis, Esq., Leslie N. Silverman, Esq., Timothy S. Mehok, Esq., New York, NY, for Board of Directors of Multicanal S.A., Petitioner.

Proskauer Rose LLP, By Louis M. Solomon, Esq., Jennifer R. Scullion, Esq., Adam T. Berkowitz, Esq., New York, NY, for the ARC-Related Parties.

MEMORANDUM OF OPINION

ALLAN L. GROPPER, Bankruptcy Judge.

This is a further chapter in a dispute between an Argentine cable company and holders of notes that the company issued in the United States. So far, the dispute has engendered multiple decisions and appeals in the Republic of Argentina, two decisions from this Court, one decision from the United States District Court for the Southern District of New York, and prospective appeals, currently held in abeyance, to the Court of Appeals.

This Court held, in its first decision, that the noteholders' rights under the Trust Indenture Act did not preclude a grant of relief to the petitioner, Board of Directors of Multicanal S.A. ("Multicanal"), under § 304 of the Bankruptcy Code. See In re Bd. of Dirs. of Multicanal S.A., 307 B.R. 384 (Bankr.S.D.N.Y.2004) ("Multicanal I"). In its second decision, familiarity with which is assumed, this Court held that Multicanal was entitled, under § 304, to recognition of its acuerdo preventivo extrajudicial ("APE") in Argentina, subject to a cure of discrimination against U.S. retail holders. See In re Bd. of Dirs. of Multicanal S.A., 314 B.R. 486 (Bankr. S.D.N.Y.2004) ("Multicanal II").¹ Multicanal had concluded it would be unable to offer small U.S. noteholders the same choice of cash, securities or a combination of the two that it had offered to large holders because of the apparent effect of the U.S. securities laws; while the offer of securities to certain institutional holders in the U.S. would be exempt as a private resale to qualified institutional buyers ("QIBs") under SEC rule 144A, 17 C.F.R. § 230.144A, there was no apparent exemption for the offer of securities to U.S. non-QIB or "retail" holders.² The Court held that while Multicanal had justified its decision to offer U.S. retail holders only cash — in order to avoid a U.S. securities law problem — it had not justified the disparity in the amount of cash offered as compared to the value of the packages offered to large holders (as well as holders outside the United States). The Court rejected the relief recommended by the objecting noteholders, which was to deny recognition of the APE altogether.³ It found that there were or appeared to be at least two possible remedies: to give the U.S. retail holders the same choice among securities and cash that all other holders had, or to increase the value of the cash option. The first option was dependent on compliance with the U.S. securities laws; the latter did not implicate the securities laws.

To cure the discrimination, Multicanal proposed that the U.S. retail holders elect among all of the options under the APE, including the securities options, and for purposes of reallocation, have those elections treated in the same manner as the elections made by all other holders who had consented to the APE and/or had tendered their existing debt on or before December 12, 2003. For an exemption under the U.S. securities laws, Multicanal relied on a § 3(a)(9) of the Securities Act.⁴ Although Multicanal took the position that it might not have been able to offer securities to U.S. retail holders at the outset of its offering, it believed it could offer them securities later because of the passage of time. The Argentine Court later approved this proposed cure in its May 16, 2005 decision.⁵

In an opinion dated September 28, 2005, the District Court affirmed this Court's decisions with respect to the Trust Indenture Act and recognition of the APE under the standards of § 304. However, the District Court held that Multicanal could not, in offering a cure to the U.S. retail holders, rely on a § 3(a)(9) exemption from the registration requirements of Section 5 of the Securities Act of 1933, 15 U.S.C. § 77e ("Section 5"), because "the exchange of securities under the proposed cure is integrated with an exchange where a `commission or other remuneration [was] paid or given directly or indirectly for soliciting such exchange.'" Argentinian Recovery Co. LLC v. Bd. of Dirs. of Multicanal S.A., 331 B.R. 537, 548 (S.D.N.Y.2005) ("Multicanal III"). Finding § 3(a)(9) unavailable, the District Court remanded for a determination whether the exemption under § 3(a)(10) of the Securities Act of 1933 would apply and obviate the need to register the securities under Section 5.

In the meantime, in September 2005, Multicanal had filed a proposed registration statement with the Securities and Exchange Commission (the "Registration Statement"), in which it proposed to register the shares to be issued to the U.S. retail holders. Multicanal did not propose to register the shares to be issued to the QIBs, who had voted in favor of the APE, as this would have required a new vote on the plan — a vote that it is assumed Multicanal would lose.⁶ Multicanal did propose to register the shares to be made available to holders who had previously voted "no" or who had abstained. Under rulings of the Argentine courts, Multicanal was required to provide, these holders with the same choices made available to other creditors as to the package of consideration they would receive. In any event, the District Court further instructed this Court to consider on remand whether the securities could be distributed to holders in the United States pursuant to an effective Registration Statement.

The District Court also directed this Court to consider two other issues, namely (i) whether fairness requires that the registration statements be made available to all noteholders, and whether in light of the passage of time and changed economic circumstances, a re-vote of all noteholder creditors should be required; and (ii) Huff's standing to continue voicing the possibly conflicting interests it purports to represent.

On remand, Multicanal argues that an exemption under § 3(a)(10) is available and that the record is sufficient to include the fairness finding required by that provision. Multicanal also contends that since the securities to be issued to the U.S. retail holders will be covered by the Registration Statement and the securities issued to the "yes" voting noteholders will be covered by Section 4(2) of the Securities Act of 1933, 15 U.S.C. § 77d(2), there will be no discrimination, and all of the issued securities will be fungible and freely tradable. Multicanal also argues that the District Court's integration analysis is only applicable to the § 3(a)(9) exemption and that it can use the safe-harbor of Rule 152 under the Securities Act, 17 C.F.R. § 230.152, to prevent integration of the issuance of securities to the QIBs and the U.S. retail holders. Huff, on the other hand, argues that a § 3(a)(10) fairness hearing has not been held and that Multicanal must register the entire offering under Section 5. Huff's position is that the proposed cure and the issuance of shares to the QIBs under the APE are part of a single, integrated transaction, and that partial registration of the shares issued under the cure would be in violation of Section 5. It also asserts that fairness and equity require a re-vote.

This Court observed in its prior opinion, quoting § 304(c), that the "overriding purpose of § 304 is to `best assure an economical and expeditious administration' of a foreign estate...." Multicanal II, 314 B.R. at 501. In that opinion, the Court assumed that the cure of the discrimination against the U.S. retail holders would be relatively straightforward and that the APE could be rapidly closed. Multicanal appeared confident of its § 3(a)(9) exemption. If that exemption were not available, it appeared that a modest increase in the cash offered to the U.S. retail holders would not implicate any issues under the U.S. securities laws, or there might be other cures available. Multicanal II, 314 B.R. at 519-20. More than a year has passed. The District Court has ruled out the availability of a § 3(a)(9) exemption. Multicanal has apparently decided against increasing the cash offered to the U.S. retail holders, which would make their distribution equivalent in value to the distribution available to all other holders.⁷ Multicanal has instead chosen to rely on two possible exemptions under the Securities laws: § 3(a)(10), which it asserts has already been satisfied, and an alternative alleged safe harbor under the securities laws, Rule 152, a rule that has never been the subject of substantive judicial construction and that would create its own reverse discrimination against the U.S. QIBs.

For the reasons stated below, the issues remanded are determined as follows. In principle, the securities to be exchanged for the notes in the Multicanal APE could be exempt from registration under § 3(a)(10) of the Securities Act upon the finding of "fairness" required under that section, but contrary to Multicanal's position, a "fairness hearing" has not taken place. A fairness hearing could be held if Multicanal so elects, but the hearing would have to take place on an expedited basis. Such a hearing could also determine another issue remanded, whether there has been such a long passage of time since the APE solicitation that it would be fundamentally unfair to enforce the vote at this date in the United States.

As for the second principal issue remanded, the Court finds that Rule 152 does not provide a safe harbor under the U.S. securities laws that would permit the APE to close at long last and "best assure an...