Bankruptcy News

Synergy Pharmaceuticals – Creditors Committee Objects to Appointment of Independent Director and Retention of Kirkland as “Last Ditch” Effort to Protect Directors and Officers

March 5, 2019 – The Debtors’ Official Committee of Unsecured Creditors (the “Creditors Committee”) objected to the Debtors’ motion for (i) the appointment of an independent director (the “Investigation Motion”) and (ii) the retention of Kirkland & Ellis as counsel to the independent director [Docket No. 498]. The Debtors’ Official Committee of Equity Security Holders (the “Equity Committee”) subsequently joined the Creditors Committee objection [Docket No. 499]. This is the second time in two days that the Creditors Committee and Equity Committee have teamed up to challenge the Debtors' Plan and its alleged protection of directors and officers at the expense of stakeholders. On March 4, 2019,  the Creditors Committee objected to the approval of the Debtors’ Disclosure Statement [Docket No. 489 which we cover separately], arguing that it is patently unconfirmable given opposition from what the Creditors Committee believes is the only impaired class. That opposition stems "solely on account of the preferential treatment the Plan affords the Debtors’ directors and officers." As with the Investigation Motion, the Equity Committee submitted a joinder to the Creditors Committee objection [Docket No. 490].

In respect of the Investigation Motion, the Creditors Committee objection states, “The Investigation Motion is a last-ditch attempt, authorized by the Debtors’ officers and directors but funded by the creditors without their consent, to obtain releases for the Debtors’ officers and directors. The Committee represents, and owes a fiduciary duty to, the fulcrum class of creditors in these chapter 11 cases. Those unsecured creditors will recover 100% of the amounts recovered on account of causes of action against the Debtors’ current and former directors and officers (the ‘D&O Actions’), and the costs of such litigation will similarly be borne by the unsecured creditors.

Since its formation, the Committee has been evaluating and assessing the D&O Actions and has undertaken extensive diligence in connection therewith. These D&O Actions in part focus on the value-destructive actions and decision-making process of the Debtors’ current and former directors and officers that caused the Debtors to repeatedly reject out-of-court offers that would have paid creditors in full and netted hundreds of millions of dollars for their public shareholders, some received only weeks before the commencement of these Chapter 11 Cases, and instead to pursue a rushed bankruptcy sale process to the extreme detriment of all of the Debtors’ stakeholders – an ill-conceived strategy that, as is now apparent from the Debtors’ proposed plan of liquidation, was motivated by the desire to secure broad releases (the ‘D&O Releases’) and exculpation for the Debtors’ officers and directors no matter what the cost to the Debtors’ creditors and shareholders.

These D&O Actions have very substantial value, and could easily enable unsecured creditors to obtain full payment of their claims. Indeed, the value of the D&O Actions was a key component weighed by the Committee in deciding to settle with the Debtors’ prepetition secured lenders (the ‘CRG Settlement’)….These Motions have nothing to do with maximizing the value of the estates or serving the interests of any of the Debtors’ creditor or equity stakeholders – they solely relate to protecting the officers and directors.”

In its objection, the Equity Committee added, “Based on its investigation to date, the Equity Committee believes the D&O Actions have potentially significant value to the Debtors’ stakeholders, including equity holders, and should be pursued. Instead, in their proposed chapter 11 plan, the Debtors are seeking, without justification, to release the D&O Actions in an effort to protect their directors and officers from litigation and liability. Incredibly, the Debtors are seeking to use estate funds to build a case to support these inappropriate releases in an effort to cut off potential recovery to the Debtors’ stakeholders, including equity holders. This is a needless waste of estate assets that is duplicative of the efforts being undertaken by the statutory committees appointed in the Chapter 11 Cases.”

The Court scheduled a hearing for March 12, 2019 to consider the objection.

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