Law on Rice

Since General Motors is expected to file for bankruptcy on Monday, I thought I should try to understand the nature of the pre-filing plans (especially since I missed the Chrysler filing). General Motors will restructure using a Section 363 sale, and the following is my understanding of how new and old General Motors will look after the bankruptcy.

In case you’ve been vacationing on the South Pole this weekend, it looks like a deal fnally got approved between General Motors’ bondholders and the Treasury. Thus, General Motors is expected to file for bankruptcy tomorrow, June 1, 2009. A historic moment–not only for General Motors, but for American capitalism.

Anyway, General Motor’s bankruptcy restructing will take the formof a Section 363 sale. I tried to find a Securities and Exchange Commission (“SEC”) filing this weekend to explain the precise events, but the most recent I could find was an 8-K from earlier this week. Fortunately, however, that filing gave me quite a bit of insight into the 363 sale–at least as it was intended before the weekend started.

These transactions can be a little complicated, so I made these sides to help myself understand:

Basically, a “New GM” entity (i.e., a new corporate entity) will be formed and capitalized by the Treasury, primarily.  Substantially all of the assets from “Old GM” will be transferred to New GM, and in return (the consideration) Old GM will get 10% of the equity of New GM (plus some warrants to buy more). Indeed, the 10% holding will be the only real asset held by Old GM, and the current debt stays put (to be sorted out in bankruptcy court, I presume).

In the 8-K, the bondholders were warned that if they declined the 10%, they would likely get nothing. Faced with a take it or leave it option, it appears the the bondholders took it.