Chapter 11 is this lovely legal device which allows American companies that are dead to pretend that they are not. A Chapter 11 administrator for GM will – like the pet shop owner in the celebrated Monty Python sketch – be able to reassure customers that GM is not dead but has just been resting.
And he would be right. GM is resting and about to make a second coming with only a trail of feathers and unpaid liabilities to remind us how spectacular was its fall to earth.
There are, in London at the moment, sharp American lawyers who for no apparent reason are scooping harmless journalists off the street and offering to brief them within an inch of their lives on the benefits of Chapter 11-style restructurings.
Many US companies have been through the process – the last step before liquidation. North West Airlines and Delta Airlines are two of them. GM’s own supplier and former wholly-owned subsidiary, Delphi, is another (not out yet). Federal Mogul, another parts maker has been there. Polaroid and Texaco are alumni and special ones at that; Polaroid has managed to go into Chapter 11 twice which rather pleasingly changes the name of the process on the second occasion to Chapter 22.
Texaco was the biggest US company ever to go there….until Lehman Brothers which spectacularly started the banking crisis. If you want to measure the size of failure by employees rather than capitalisation, the biggest ever will be General Motors…if it happens. There are other options and combinations, and other lawyers offering other briefings. Full state ownership is one route; straight liquidation another.
As things stand, the US Government is prepared to cancel US$10bn of its loans in exchange for 50% of GM’s equity. The union, the UAW, is prepared to cancel half of the liabilities GM has through VEBA, the Voluntary Employee Beneficiary Association, in exchange for 39% of the equity in GM. The bondholders are likely to convert the bonds which GM can no longer support in exchange for 10% of the equity, while the ordinary shareholders get 1% of the equity in exchange for the 100% of the equity that they used to have. That’s what happens if you don’t exercise your right as a shareholder to go to the AGM and tell the board that they have got the whole job completely wrong.
The upshot of the restructuring is that total debt, and obligations to employees and retirees, falls by $44bn which is a lot of money. The US government will be able to carry any board vote with its 50% and could well put the company into Chapter 11 which allows protection from creditors while demand returns and the while the overdue strategy of canning some of the bankrupt brands (Pontiac next year; Saab, Saturn and Hummer this year) takes effect.
Pontiac is a bullet that has been hard for GM to bite. Though the majority of independent observers have always identified a family of too many disparate brands as one of the core inefficiencies of GM, the insiders always reckoned that the compensation costs to dealers, and the legal challenges from individual dealers, were too great a price to pay.
The restructuring of the share capital is a very painful process for the financial suppliers to GM. The same sort of thing would have occurred had the company gone straight to Chapter 11 rather than going through this period of self-correction under a deadline – as demanded by US central government in exchange for soft loans.
It is always shareholders and finance providers who do worst. The trade suppliers are always protected in order to keep the manufacturing process going. The US Chapter 11 court could basically do anything to GM in any order to keep the business going and improve the position of the creditors. That differs markedly from the UK bankruptcy system where there is a strict hierarchy of preferential creditors.
Chapter 11 is designed to provide a breathing space where the existing management stays in place to avoid the need for hiring of appropriate skills.
There is no automatic court supervision of overseas subsidiaries if GM does go to Chapter 11, according to the lawyers. As was the case with Delphi, the US parent managed to go on funding Delphi in Europe and indeed, created a healthy operation by demanding lean and mean thinking.
One of the disadvantages of Chapter 11 for GM would be the open kimono policy. Every twist and turn in the management of the business would be public property (except trade secrets) through the bespoke PACER website.
There can be long debates as to whether Chapter 11 is either fair or desirable. Certainly it contravenes the principal of survival of the fittest and constitutes unfair competition. At a time when auto industry leaders all over the world – and prominently, Sergio Marchionne of Fiat in Europe – are calling for controlled capacity cuts, a system that preserves capacity is out of line.
But for the Americans, even if the parrot is dead, Chapter 11 works. After all, a ‘dead man walking’ still has the use of his legs.
Rob Golding
– Goldie
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