Tel Aviv District Court Judge Eitan Orenstein, whose court will convene Thursday to come up with a recovery settlement as bondholders try to wrest control of the IDB group, has himself become the greatest obstacle to creditors trying to get their money back.
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Orenstein has repeatedly expressed the view that a settlement based on Article 350 of the Companies Law isn’t the appropriate way to go about taking control of a company. The problem is that this is precisely the way bondholders are trying to go about it − and in his court.
The first time the issue came before the judge was in 2010 when the publicly traded Aspen Group tried to gain control over the real estate investment fund Sella Capital. Nobody at the time claimed that Sella was insolvent. It was, however, suffering from low trading volumes and a low share price. The judge was asked to impose a settlement on all its shareholders based on Article 350.
Article 350 applies to all agreements between companies, their shareholders and their creditors. Orenstein pointed out in the Sella case that there was no precedent in Israel for taking over a company based on the article. The application of Article 350, he said, isn’t limited to debt restructurings but can also be cited in the case of solvent companies. In the end Orenstein blocked the takeover attempt, ruling that a debt settlement can’t be imposed over the company’s objections.
Two weeks ago Orenstein presided over litigation in another motion by creditors based on Article 350, this time concerning Kamor, a business structured as a pyramid. Kamor hadn’t met its obligations to bondholders and encountered a stay of proceedings. The judge was asked to rule on whether there was any justification for extending the stay of proceedings to further a debt settlement for the company, or whether he believed such a settlement stood no chance and a receiver for the company should be appointed.
The judge decided not to approve the debt settlement, pointing out, among other things, that Kamor itself opposed a settlement. “It is doubtful that a settlement under Article 350 of the Companies Law should be approved when the company isn’t party to it, let alone opposes it,” Orenstein wrote in his ruling.
If Orenstein sticks to this approach, it could well be the death knell for the attempt by bondholders to take control of IDB Development Corporation from Nochi Dankner. IDB Development claims it is solvent, and its managers, in loyalty to Dankner, won’t cooperate with a settlement initiated by creditors. Orenstein, however, could in any case choose one of two routes allowing creditors to gain control over IDB.
The first way would require the judge to distinguish between the Kamor and Sella cases and IDB’s. There are quite of number of differences that could justify taking a different approach on the issue of IDB Development.
First of all, Sella Capital was a case of outside shareholders trying to gain control, not creditors demanding the reins of the company based on the accepted principle that a controlling shareholder whose company doesn’t pay his debts must surrender control to his creditors.
Also, in IDB Development’s case, the creditors claim that its controlling shareholder, IDB Holding Corporation, is insolvent. Therefore, they can argue that IDB Holding’s creditors are entitled to take it over and appoint new management for IDB Development, which in turn will agree to a recovery program.
Incidentally, Kamor had a “going concern” warning attached to its reports, and Orenstein took this as an indication that the company is insolvent. Over the weekend it turned out that IDB Development was also slapped with a going concern note, strengthening the judge’s ability to deem the company insolvent.
In Kamor’s case, the company was given a stay of proceedings in an attempt to come up with a recovery accord to cover part of the debt. One of the reasons Orenstein didn’t approve a debt settlement was because he believed the trustees hadn’t presented a plan to him that ensured the company’s recovery. The lessons from Kamor are well known to all involved with the IDB case, since one of the company trustees was attorney Hagai Olman, the monitor appointed by Orenstein to babysit IDB Development.
Therefore the judge can differentiate between the IDB case and Kamor’s if he concludes that a concrete debt settlement which stands a good chance of implementation has been formulated.
Orenstein can choose a more set path if he decides a settlement can be imposed on a company even if it means transferring control to creditors over its objections.
If this is how Orenstein rules, it won’t just be IDB that undergoes recovery: The decision will have far-reaching and immediate consequences. Why? Because the business concentration legislation approved last week by the Knesset Finance Committee allows a controlling shareholder of a pyramid to more easily buy out the public’s shares in a company that needs to be folded into its parent company in order to meet the terms of the new law.
Under the bill, if a 51% majority of non-controlling shareholders accepts the offer, that is enough to compel the remainder to sell their stock at the same price. This may allow the controlling shareholder to buy the public’s stake in the pyramid, but what about another bidder who wants to buy control at a higher price?
Orenstein’s ruling in the Sella case would block such an offer, because, according to him, a company mustn’t be taken over under Article 350 of the Companies Law, certainly not if the company doesn’t approve. If Judge Orenstein changes his mind, tycoons will already be able to start buying up companies at the bottom of the pyramid, since this specific clause of the Concentration Bill takes effect immediately.
The bottom line is that the IDB Development case is Orenstein’s chance to open up competition for control of companies, thereby maximizing the value of stock owned by the public.