Client Alert: Lenders’ Pledged Equity Vote Challenged in Bankruptcy

December 9, 2019

When a company provides an equity pledge, or a share pledge, it is simply using its equity (or rights appurtenant thereto) as collateral or security for an extension of credit. The borrower maintains ownership of the equity, but in the event of a default, the lenders (usually through the agent) can take legal action to foreclose on the shares, and possibly exercise certain elements of control, such as voting. Exercising rights over an equity pledge is not common, however, given some of the obligations and risks that run with ownership, and the timing and uncertainty related to the process. The MTE bankruptcy cases provide an example of this uncertainty.

In MTE, the lenders purportedly exercised certain rights prior to the petition date to vote pledged equity to install new management. MTE subsequently filed for bankruptcy protection, and the lenders now seek bankruptcy court validation of their actions, which have been vigorously challenged by MTE. The outcome of this dispute bears watching, as it may be instructive as to the rights and risks of lenders exercising an equity pledge or taking related remedial actions. We fully describe the dispute below, and will provide an update as the case progresses.

MTE Holdings Dispute

In September 2018, MTE Holdings (“MTE”), an oil and gas exploration company, pledged its equity interest (the “Pledged Equity”) in its subsidiary MDC Energy (“MDC”) as collateral to secure obligations under a credit agreement (the “MTE Loan”). Additionally, according to case filings, MTE granted a contractual proxy to vote the Pledged Equity. Since then, MTE has struggled, and according to the debtors, owes over $410 million on the MTE Loan. After approximately 30 alleged events of default, the agent on the MTE Loan (the “Agent”) sought to vote the Pledged Equity to appoint a chief restructuring officer and a new five-member board. On October 22, 2019, however, MTE sent a letter to the Agent arguing its actions were void ab initio, and subsequently filed for chapter 11 protection.

Very shortly after MTE’s filing, the Agent filed a motion for relief from the automatic stay and permission to obtain judicial enforcement of Agent’s Pledged Equity vote from the Delaware Chancery Court. The debtors objected to the stay relief, and argued that that the voting rights were not validly exercised. The debtors assert that the voting rights were not transferred, since only holders of membership interests can exercise the rights appurtenant to membership, including the right to vote (according to the Delaware LLC Act). In response, the Agent asserted that the Pledged Equity vote was proper in accordance with the credit and collateral agreements, as the Agent had been granted the contractual proxy to vote as part of its security agreement. The Agent later pivoted away from the motion for relief from stay, and commenced an adversary proceeding in the bankruptcy court seeking the same recognition of its purported prepetition vote. That request for declaratory relief is set to be considered by the bankruptcy court on December 13.


This is a situation for lenders and borrowers alike to monitor. A decision could provide guidance on the validity of a contractual proxy to vote membership interests in Delaware, and the attendant process of exercising that proxy. Notably, if it is determined that the Agent properly voted the Pledged Equity, the MDC bankruptcy filing itself could be invalidated, as the current filing was approved by a party without the authority to do so, which is an interesting result to say the least.

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