The PG&E Bankruptcy: A Non-Standard Case Study
PG&E’s reorganization has raised client interest in recovery efforts in bankruptcy court. It’s an example of a ‘non-standard’ matter, a third category of recovery efforts that’s grown in recent years. This blog explains the term and the need for customized strategies to pursue them. For PG&E claimants, the debtors are expected to start making settlement offers and mediation requests after the New Year. So, now is the time to get prepared.
Shareholder recovery efforts fall into three groups.
- Passive participation (opt-out) cases where investors DO NOT need to be parties to litigation. Lead or representative plaintiffs prosecute claims on their behalf. Participation is low risk and paperwork based following successful outcomes (typically settlements).
- Active participation (opt-in) cases where investors DO need to be litigants, bearing the associated risks and burdens.
- Non-standard cases, which includes everything else. These are hybrid situations with aspects of both passive and active matters. Examples include bankruptcy claims, Cayman Islands and Bermuda appraisals, and other types of proceedings.
Most sophisticated investors automate their claim submission for passive matters. They file claims if eligible, regardless of loss size. For active matters, they decide whether to join on a case by case basis, limiting the number of matters considered using minimum loss thresholds. Non-standard cases require joining decisions but more important, require customized support strategies that involve more than paperwork submission, but less than full-blown litigation.
PG&E is a good example of this type of ‘in-between’ situation. Below we detail where the matter stands and what claimants can expect going forward so they can take steps now to get ready.
The PG&E Proceedings
In June 2020, the bankruptcy court approved PG&E’s reorganization plan, leaving for future resolution more than 7,000 securities fraud claims previously submitted. Remaining issues include which claims the debtors will accept and their value.
At the end of January 2021, the court ordered a resolution process. Under it, the debtors are approaching claims three ways: by omnibus objections to as many as 250 at a time; by individual settlement offers; and if negotiations fail, with abbreviated or full mediation sessions.
Last spring, PG&E started objecting to claims. First, they sent deficiency letters to claimants requesting trade details and other information. This deficiency process is ongoing. After deficiency periods, the debtors have filed rounds of motions objecting to uncured claims and asking the court to expunge them. There have been 17 rounds so far, and in the end, this process will eliminate hundreds of claims.
The debtors recently informed the court that at the end of this year they expect to start making settlement offers and requesting mediations. They will send notices to claimants at least 42 days before proposed mediation dates. Sessions will be conducted by Zoom call, and the parties can submit in advance written position statements up to 15 pages.
Claimants should implement customized strategies now. Among other things, they should estimate their securities losses and potential Plan payouts so they understand how much is potentially at stake. They should also decide how to resource mediations, including potentially engaging securities counsel.
Estimating securities losses and potential distribution amounts
We expect mediations to focus heavily on how losses get measured. While the method is established by federal securities laws, the two sides will disagree on inputs, particularly the dates on which PG&E partially disclosed the alleged fraud; and the portion of share price drops on those dates related to the fraud, as opposed to other market forces. Presumably, the debtors will advance inputs and make assumptions that most minimize claim values. Among other things, they will likely try to narrow the claim period, winnow down the number of disclosure dates, and reduce the price drop amounts attributable to the alleged fraud. They may also raise objections to claim elements including loss causation, reliance, and materiality. They could challenge specific claims for data sufficiency, as time-barred, or on other grounds.
Responding to settlement offers and resourcing mediations
Claimants should be prepared to respond. We see some claimants involving in-house or outside counsel. Others have engaged securities counsel. The firms also expect mediations to focus heavily on claim valuation, their area of expertise; and, if the sessions fail, will present a capable threat of claim prosecution in bankruptcy court.
If negotiations or mediations succeed
It’s difficult to predict how mediation efforts will play out. The debtors may prove inflexible, adopting a take-it-or-leave-it attitude knowing they can disallow claims and there will be only marginal cost to contesting them later with others. However, there may be an offsetting desire to significantly reduce the volume of claims to avoid sending back to the court a large number unresolved, particularly where they previously argued their proposed process would be more efficient than class certification.
In bankruptcy, the debtors decide the extent to which claims are accepted. Unhappy claimants must argue to the court for different treatment. To the extent negotiations or mediations resolve things and set claim value, distributions flow mathematically under the approved Plan.
For claims based on past trades in common stock, compensation will be partially paid in cash from each claimant’s share of a $50M insurance policy recovery, but predominantly in shares in the reorganized company. Those shares have a current trading price (NYSE: PCG). The Plan divides the full claim period – April 29, 2015, through November 15, 2018 – into the four sub-periods. For each, the distribution formula first subtracts the claimant’s share of the $50M, and then applies to the remaining net amount one of four conversion factors to determine the number of shares they receive. The conversion factors get smaller with each quadrant, which means the same amount of losses in later periods receives more shares than in earlier periods.
For claims based on debt trades, the Plan pays accepted claims fully in cash. So, a claimant’s total Plan payout will equal the sum of their cash payment on the debt-based claims, a small payment in cash from the insurance, and shares in the reorganized company that are freely tradeable upon receipt.
Unlike typical securities class action settlements, there will be no pro-rata discounts. If claim value is accepted by the debtors, it should get paid in full and without the significant delays in payments associated with settlement administrations.
If resolution efforts fail
It’s not clear how the bankruptcy court will handle claims not resolved by negotiation or mediation. The debtors may assert common objections, which lend themselves to coordinated responses by claimants. Some claims may need to be tried, but given the likely large volume of unresolved claims, it’s hard to see how they can all be fully tried on the merits. Given factual and legal issues common to all claimants, the court may revisit class certification or consolidate claim objection hearings in some way. Things may get resolved some other way. In short, the process is unclear.
PG&E showcases the challenges of non-standard matters, which do not fit the typical patterns for recovery efforts and require customized support strategies. This matter is admittedly more complex than most. The process is fluid and in many respects unknown, requiring flexibility and adaptability. But it re-enforces the need for investors to choose a claim submissions firm with the expertise, creativity, and capabilities necessary to provide ongoing support in an evolving environment.
For our clients, FRT crafted a support model customized for the matter, bringing to bear leading resources for bankruptcy, data, and securities laws. Investor need for this kind of expertise will become even more important in the future as the number of non-standard situations increases and their associated recoveries become a greater part of the overall settlement pie. We’re happy to share the details with those seeking further discussion.
To learn more about how FRT can help your firm maximize recoveries in shareholder class action settlements for passive participation (opt-in), active participation (opt-out) and non-standard cases, contact us at email@example.com.
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Founded in 2008, Financial Recovery Technologies (FRT) is the leading technology-based services firm that helps the investment community identify eligibility, file claims and collect funds made available in securities and other class action settlements. Offering the most comprehensive range of claim filing and monitoring services available, we provide best-in-class eligibility analysis, disbursement auditing and client reporting, and deliver the highest level of accuracy, accountability, and transparency available. For more information, go to www.frtservices.com.
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