LEASING LAW By Robert Downey Tarnishing the Golden Share Bankruptcy decisions limit the ability of lenders to acquire LLC membership interests in order to prohibit a voluntary bankruptcy filing. What Is a Golden Share? As part of a post-default forbearance agreement with a corporate or limited liability company obligor, a lender may require that the obligor grant the lender an eq-uity interest in the obligor by admitting the lender as a shareholder or member, as the case may be, and amending its organizational documents to provide that unanimous consent of the obligor’s shareholders or members is required to approve the obligor’s voluntary bankruptcy filing. Es-sentially, going forward the lender gets a veto over the obligor’s decision to file bankruptcy as a bankruptcy court is required to decline to hear a bankruptcy petition if the petitioner failed to adhere to its own organizational doc-uments in reaching its decision to file bank-ruptcy. The lender’s equity interest is sometimes referred to as a “golden share.” Are There Limits to a Golden Share? A pair of 2016 bankruptcy cases make clear that there are limits to a golden share. Although these cases concern limited liability companies, the rulings are equally applica-ble to corporations. In each case, the court voided the lend-er’s ability to vote its golden share in its best interest. Prior to discussing these cases, we should note that an agreement between a lender and an obligor that the obligor will not file bankruptcy without the consent of the lender has long been held to be unenforceable. As was stated by the bankruptcy court in the 1996 decision of In re Pease , “It has long been settled that contractual provisions prohibiting the filing of a bankruptcy case are not enforceable.” What distinguishes the cases discussed below from this rule is that in these cas-es there is no contract with another entity. Rather, it is the obligor’s own organizational documents that give rise to the issue. For the courts that decided the cases discussed below, this is a distinction without a difference. In In re Lake Michigan Beach Pottawattamie Resort LLC , the obligor defaulted to its lender and in exchange for the lender’s waiver of the default the obligor’s operating agree-ment was amended to add the lender as a “Special Member” of the LLC. As the Special Member, the lender had no other rights or duties than to vote on whether the obligor could merge with another entity, sell substantially all of its assets, commence litigation or file for bankruptcy. In deciding 40 MARCH/APRIL 2017 EQUIPMENT LEASING & FINANCE MAGAZINE The lender’s equity interest is sometimes referred to as a “golden share. ” whether to approve any of those actions the amended op-erating agreement stated the lender would not be “obligated to consider any interests or desires other than its own and [had] ‘no duty or obligation to give any consideration to any interest of or factors affecting the [obligor] or [its Members].’” The obligor subsequently filed bankruptcy without obtaining the consent of the Special Member. The court looked to state law to answer the question of whether the obligor’s bankruptcy filing was effective without the lender’s consent. Here the obligor was a Michigan limited liability company so the court looked to the Michigan LLC statute. The court stated that lender’s “argument is grounded in the well-established commercial practice of using ‘block-ing directors.’ A blocking director is the lynchpin that holds together a bankruptcy remote special purpose entity, formed to ring fence assets from creditors other than a secured cred-itor … for whom the structure is made.” The court further HUNT THOMAS/ SHUUTERSTOCK