Transcript Controlling Shareholders and Corporate Governance

The Parmalat case and the
recent bankruptcy reform
Lorenzo Stanghellini
Facoltà di Giurisprudenza
dell’Università di Firenze (*)
Colloquium IEEI, Rome, 19 maggio 2006
(*) [email protected]
1
Part 1
The Collapse of Parmalat
2
Parmalat’s position in 2003
Leading Italian food group
Parent company listed

51% owned by the Tanzi family
Truly international business

32 countries, 36 operating companies, 132
locations
Fifth Italian bond issuer (€ 7.0 bn,
a part of which publicly rated)
3
2003: the first cracks
Balance-sheet 2002: € 3.5 bn liquidity
February: a new bond issuance (300 ml) is
turned down for lack of sufficient information

CFO resigns but remains on board
November: Supervising authorities ask
clarifications about liquidity
Deloitte casts doubts over financial
statements
4
December 2003: The collapse
9th: Enrico Bondi, a turnaround specialist, is hired by
Tanzi and the board
12th: Parmalat shares plunge; a € 150 ml bond is
reimbursed
15th: Tanzi resigns, Bondi takes on as Parmalat’s
President
19th: BOA denies Parmalat’s account with BOA
holding substantial liquidity
23rd: Italian Government enacts an emergency
bankruptcy law for very large firms (>1,000 empl.)
On the same day, Parmalat files for bankr. protection;
Bondi is appointed commissioner
5
Parmalat’s collapse:
Why? How?
Why the people did it?

At least for the “core” actors (Tanzi), it is not
easy to tell
How could they do it?


Bad corporate governance
Ineffective external checks
 Stock market
 Auditors
 Incremental lenders
6
Part 2
The Rescue of Parmalat
7
A good candidate for rescue
32,000 employees
More people and firms dependent on
Parmalat’s continuing operations
Business in equilibrium (decision on
rescue based on assets, not liab.)
Liquidation was simply not an option
8
Italian insolvency law (before)
Allowed continuation of business under
court supervision and protection from
creditors
Allowed industrial restructuring and
“super-priority” financing
Did not allow for financial restructuring
Only real option under existing law: sale
of Parmalat as a going concern
9
Italian insolvency law (after):
d.l. 347/2003 and Law 39/2004
But:
Selling large businesses is difficult
Often yields fire-sale prices
Law amended to allow financial restructuring,
including debt-equity swap (Law No. 392004)
Debt-equity swap proposed to creditors:
Parmalat would be “sold” to its
creditors
10
Parmalat insolvency:
The restructuring plan
The plan encompasses 16 companies of
the Parmalat group


Combined assets valued € 1.5 bn
(“enterprise value”)
Total liabilities € 25.5 bn (with duplications
for intra-group guarantees and loans: net
liab. around € 14 bn)
11
Parmalat insolvency:
The restructuring plan (2)
Following a majority vote of the creditors
(August-September 2005):
Creditors’ claims have been reduced

According to the asset/liability ratio of each of the
16 companies: some 100%, some almost zero
A Newco has been set up
Liabilities (reduced to € 1.5 bn to equal
enterprise value) have been transferred to
Newco together with assets, at no cost
12
Parmalat insolvency:
The restructuring plan (3)
Unsecured credits. of 16 comp. have received
Newco’s shares in settlement of claims

Forced debt-equity swap (creditors will receive
shares, plus 1 warrant per sh. up to the first 650)
Secured creditors (plus administr. expenses) have
been fully paid in cash by Newco (€ 204 ml)
Newco has emerged with an almost all-equity
financial structure
Newco has finally been listed (Oct. 2005)

New Parmalat’s corporate governance according to
international best practices
13
Parmalat insolvency:
sheer technical complexity
Hundreds of companies in different
jurisdictions


Hard test for EU Reg. 1346/2000 (Eurofood
plc): ECJ decision on 2nd May 2006
Coordination of non-EU procedures (Brazil,
US)
No “consolidation” of the group


The intra-group distribution of assets and
liabilities is taken as a “snapshot”
No subordination of large intra-group
claims
14
Parmalat insolvency:
sheer technical complexity (2)
Liability suits against Parmalat in US

claimants bound by the plan?
Liability suits (and avoidance actions)
by Parmalat against directors, auditors,
and banks

Potentially, a big source of recovery
15
Part 3
Italian Law after Parmalat
16
Parmalat:
Any lessons to be learnt?
Availability of procedures that allow
efficient financial restructuring is crucial
Distribution of value is difficult


Valuation of an insolvent firm is difficult
Multiple valuations are even more so
Keeping management of distressed
firms is important ex-ante, but less so
ex-post in large companies
“Rehabilitation”: What does it means?
17
Parmalat:
Any lessons to be learnt? (2)
Creditors’ committee necessary to achieve
consensus

Unfavourable international press (see,
e.g.,“Global Turnaround” March 2004)
A Newco necessary to get around the
necessary shareholder’s vote

ECJ Pafitis v. Banca Trapeza (1993)
18
Parmalat case:
What it does NOT tell
Parmalat needed “pruning” and turnaround
Business was profitable (albeit much less
than told)
Therefore: no “tragic choice” (creditors vs.
employees/suppliers) has been necessary

Alitalia (more than 20.000 employees and
significant operating losses) would be a much
more problematic case…
19
… however, Parmalat was an “easy”
case: The business was profitable
Financial statements 2002-2003 revised by PWC
(press release 26 January 2004):
20
The new composition
procedures: (a) The “Concordato
preventivo”
Decree-Law 14 March 2005, n. 35: New
“concordato preventivo”




Plan by the debtor to avoid the bankruptcy procedure
(“Fallimento”) through a composition with the creditors
High degree of flexibility, classes of creditors
No constraints on financial restructuring proposals by
the debtor
Debt for equity swap possible pursuant to a majority
vote
New Art. 160 of bankruptcy is taken almost
literally from Art. 4-bis l. 39/2004 (Parmalat law)
21
The new composition procedures:
(b) The “Concordato fallimentare”
D.lgs. 9 January 2006, n. 5: the new
“concordato fallimentare”



Plan by the debtor, any creditor or third party,
to close the bankruptcy procedure
(“Fallimento”)
Same potential for restructuring of the new
“concordato preventivo”
New concept of “concordato”
22
The legacy of Parmalat
A “giant leap forward”. Now let us
consolidate

Reform of general bankruptcy law by d.lgs. 9
January 2006, n. 5: an important work in
progress
Generalize Parmalat: NO, thanks

Creditors have been kept out of the door
 Called upon at the end for a vote on a plan “take it or
leave it”

The success of Parmalat turnaround is due to
the business and the people who worked on
23
it. Now it’s enough…