The Restructuring Report

On October 26, 2021, Senator Elizabeth Warren reintroduced a bill in the Senate that would dramatically reshape the private equity industry and create new tools and protections for creditors when a private equity portfolio company files a Chapter 11 case. Along with more prosaic adjustments, such as increasing priority amounts and requiring disclosures, the bill would fundamentally reshape corporate law and the concept of shareholders’ limited liability. While the full text of the 113-page bill is available here, we have summarized the main provisions to provide just what you need to know.

The bill proposes:

• To make private equity firms and holders of “active interests” (but not limited partner investors in the private equity funds) liable for all the liabilities of their portfolio companies. The bill expressly calls out debt, civil penalties, liabilities under the WARN Act (relating to plant closures and mass layoffs), and liabilities under ERISA (including withdrawal liabilities and unfunded benefit liabilities).
• To prohibit equity distributions from a portfolio company for a period of two years after a private equity firm’s acquisition.
• To prohibit portfolio companies from closing a plant or laying off workers accompanied by the relocation of the business outside the United States.
• To expand and modify fraudulent transfer provisions of the Bankruptcy Code to (i) expand the statute of limitations from 2 to 8 years for actions to avoid a change in control transaction; and (ii) provide creditor committees the exclusive right to bring an action to avoid a change of control transaction.
• To impose a 100 percent tax on private equity firms’ fee income from portfolio companies.
• To prevent portfolio companies from deducting interest when their debt-to-equity ratio exceeds 1.
• To increase employee priority amounts and restrict executive compensation in bankruptcy cases.
• To require purchasers to represent to the bankruptcy court the effect of the proposed transaction on the debtor’s workforce and to direct bankruptcy courts to favor sale transactions that best preserve jobs.
• To tax fund managers’ carried interest at ordinary income rates instead of capital gain rates.
• To implement reporting and marketing requirements for private equity funds.

The bill is titled the Stop Wall Street Looting Act of 2021 and was cosponsored by Senators Tammy Baldwin (D-Wisc.), Sherrod Brown (D-Ohio), Bernie Sanders (I-Vt.) and Jeff Merkley (D.Ore.), along with Representatives Mark Pocan (D-Wisc.), Pramila Jayapal (D-Wash.), Eleanor Homes Norton (D-D.C.) and Jesus “Chuy” Garcia (D-Ill.). It is a revised version of a bill introduced by Senator Warren in 2019.