On June 1 2009, General Motors filed for bankruptcy protection under Chapter 11 of the US Bankruptcy Code. The filing followed the expiration of one of the largest debt-for-equity exchange offers ever undertaken. The offer was launched on April 27 and comprised offers to exchange GM common stock for $27 billion of senior indebtedness in 28 separate series of notes. Two were euro-denominated, issued by General Motors Corporation, and a further two were sterling-denominated and issued by a subsidiary, General Motors Nova Scotia Finance Company, and guaranteed by General Motors Corporation. These sterling and euro-denominated notes had initially been marketed on a retail basis in Europe, so were held by a large number of retail investors, principally in Italy, Germany and the UK. As tenders were required from holders of each series to consent to the offer, GM launched a retail exchange offer in Europe using an EU compliant prospectus. The offer also included consent solicitations directed at holders of each series of notes, and because the sterling- and euro-denominated notes, although New York law governed, incorporated English law-style noteholder voting provisions, their consent was required in the form of submission of votes in favour of resolutions passed at the relevant noteholder meeting.
Background
A condition of the US Treasury's loan agreements with GM, entered into in December 2008 and January 2009, was that the corporation launch an exchange offer for its outstanding senior unsecured indebtedness. One of the series of GM notes (a $1 billion convertible debenture) was scheduled to mature on June 1 2009, and as a result the initial exchange offer period was targeted to complete prior to this effective long-stop date.
The consummation of the exchange offer was also dependent on the completion of negotiations between GM and the relevant unions, and its voluntary employee benefit association. Due to these timing challenges, the exchange offer was launched prior to the registration statement being declared effective by the SEC. However, because the exchange offer had to be made in Europe using an EU-compliant prospectus, the UKLA, GM's EU home country regulator, had to approve the exchange offer prospectus before the exchange offer could be launched.
Documentation
The GM common stock was publicly offered to European noteholders in the exchange offer using an EU prospectus. But it also required registration with the SEC. In order to minimise differences in format between the US exchange offer document to be filed with the SEC under Form S-4 and the EU exchange offer prospectus, it was proposed that the EU exchange offer prospectus took the form of a wrapped Form S-4 and the UKLA accepted this.
Updating documents incorporated by reference
The Form S-4 incorporated by reference GM's Form 10-K for the year ending December 31 2008 and subsequent current reports on Form 8-K and quarterly reports on Form 10-Q filed by the General Motors Corporation under the US Securities Exchange Act of 1934.
While the US continuous disclosure regime provided for the Form S-4 to benefit from automatic incorporation by reference of subsequent filings during the offer period, this was not possible for the EU prospectus. As a result, it had to be updated by the approval and publication of a prospectus supplement for subsequent SEC filings that, among other things, updated the status of other elements of the restructuring process and responses to SEC comments on the Form S-4. The practical implications of the approval and publication of supplements in Europe were significant. Due to large numbers of retail holders being identified in a variety of European jurisdictions and secondary equity listings being maintained for GM common stock in France and Belgium, the EU prospectus was passported into France, Italy, Belgium, Germany, Austria, Luxembourg, the Netherlands and Spain. As a result, each time a supplemental prospectus was published that, in each case, required the summary to be amended, not only did it need to be approved by the UKLA on an expedited basis, but also passported to each of these jurisdictions, with a revised translation of the local language summary where required.
Consob approval
In Italy, bond restructuring transactions (such as exchange offers, consent solicitations and tender offers) are heavily regulated. Subject to very few exceptions, the issuer must register a disclosure document with Consob (the Italian securities regulator) and abide by certain offering restrictions. This applies whenever the offer is directed at bondholders in Italy, even where the issuer is a foreign entity, the bonds are not listed in Italy and the vast majority of the bondholders are located abroad.
Under Italian law, exchange offers and consent solicitations do not fall within the scope of the EU Prospectus Directive and, as a consequence, relevant rules and disclosure requirements are not harmonised with the regime applicable in other EU jurisdictions. Registering an exchange offer document with Consob is not a box-ticking exercise. Consob's approach to disclosure is different in many respects from the approach of other EU regulators and of the SEC, and the formats prescribed by the relevant Consob regulations are relatively rigid. Maintaining consistency of disclosure and minimising delays has often proved daunting, as was the case in one of the last bond restructurings to be registered in Italy, the Telecom Argentina transaction from 2004.
The compliance and disclosure issues that arise when Consob approval is required meant that almost all issuers in prior transactions excluded Italian investors. The proportion of Italian retail investors in the GM euro-denominated notes meant that they would have to be solicited in order to give the consent solicitation, and thereby the exchange offer for these notes to have any chance of success. However, the tight timetable and complexity of the exchange offer and related consent solicitations meant that registration with Consob of a disclosure document drafted in accordance with Italian standards would be challenging.
After some negotiation, Consob was persuaded for the first time ever to waive its disclosure requirements and authorise the publication of the UKLA-approved prospectus in Italy, wrapped with some additional Italian disclosure information, including information on the exchange and settlement procedures in Italy, Italian tax disclosure and certain key risk factors and warnings for Italian investors. Further, Consob only required the prospectus wrapper and the summary to be translated into Italian, with the remainder of the prospectus and the documents incorporated by reference remaining in English.
These concessions were not only important for the GM exchange offer, but were also a major relaxation of the Italian regulatory framework applicable to debt exchange offers where an EU prospectus was used. Consob's consequent review of the document was a relatively smooth process, focusing on key disclosure elements and the Italian approval procedure had no negative impact on the overall timetable. The Italian regulator's approach was formalised in a ruling of general application dated April 16 2009, and subsequently resulted in an amendment to the relevant Consob regulations (Article 37.1 and 40 of Regulation 11971/1999, as amended on May 14 2009).
Following extensive discussions various parties have held with Consob and particularly in the context of the GM exchange offer, the Italian regulator has agreed to relax its disclosure requirements in order to prevent exclusion of Italian investors from similar offers. As a result, a draft Government bill before Parliament contemplates, among other things, wider powers for Consob to derogate from the relevant disclosure regime in future bond exchange offers, including those where an EU prospectus is not used.
A precedent set
Despite the GM offer failing to complete, it set a precedent as the first exchange offer to be approved by the UKLA under the EU prospectus regime. It also resulted in a significant relaxation of highly burdensome Italian regulations governing bond restructuring transactions by harmonising Italian treatment of such offers when made using an EU prospectus. Furthermore, it set the stage for the eagerly anticipated relaxation of Italian regulation of such transactions in the absence of an EU prospectus.
More importantly for GM, these achievements allowed it to make its exchange offer available to European retail investors, thereby fully satisfying the US Treasury's requirement that the exchange offer be made to all noteholders. On July 10 2009, GM consummated a sale of substantially all of its assets under s363 of the US Bankruptcy Code to General Motors Company, a new company majority owned by the US Treasury. It remains to be seen whether other issuers facing European bond restructuring will benefit from the precedents set by the GM transaction.
By James Cole, Weil Gotshal & Manges and Marco Zaccagnini, Gianni Origoni Grippo & Partners. Both firms advised GM on the exchange offer