For example, in the case of Chapter 11 of Dana Corp. the debtor entered into agreements with its unions and a financial sponsor for exit financing. Under these agreements, the financial sponsor would refuse an offer of rights to new preferred shares, which would include, among other things, approval rights for certain transactions. To make its corporate governance more manageable, Dana had to limit the final number of new preferred shareholders. In addition, in order to achieve the desired result and to ensure that the offer of preferred shares is not materially signed, the financial sponsor also acted by limiting participation in the offer of demanding parties, which would offer a greater guarantee of participation. In order to implement this plan, Dana has developed certain objective criteria for rights holders, including the requirement to hold rights aggregating a certain minimum amount. Ineligible creditors and the creditors` committee challenged the value of the right to participate and the granting of the claims of eligible creditors, resulting in unequal treatment between unsecured creditors. In particular, Dana submitted that creditors who purchased the preferred shares would not obtain this right because of their claims and that the smaller ineligible creditors would benefit in all cases because larger holders would likely attempt to purchase minor debts at a premium if they wished to participate. The issue was eventually resolved by the provision of an additional resolution fund in which ineligible creditors would have the right to participate in certain circumstances, and Dana opened up new capital through an offer without creating an unenforceable governance structure for the reorganized entity. An issuer may consider a standby offer and a backstop buyer if it needs to raise a certain amount of capital. However, when calculating the number of share sales required to obtain the necessary capital, an issuer should include backstop fees in the amount of the offer: backstopping can cost companies a high fee, as the backstop buyer assumes the risk of issuing new securities and receives a premium. For example, in 2006, Warren Buffets Berkshire Hathaway, as a backstop buyer for USG Corporation, earned a non-refundable tax of $67 million for the service.
Backstop compensation is usually a flat-rate standby tax, plus an amount per share. The most common use of a backstop s. is the execution of share issues or IPOs (IPOs) Initial Public Offering (IPO) An Initial Public Offering (IPO) is the first sale of shares issued by a company to the public. Before the IPO, a company is considered a private company, usually with a small number of investors (founders, friends, family and commercial investors such as venture capitalists or angelic investors). Find out what an IPO is. In an IPO, a company that wants to raise equity donates its shares to the public. Issues are underwritten by an investment bank or group of investment banks. Backstop buyers may face restrictions if they are related parties: directors, directors, 5% shareholders or individuals or companies related to these positions. There is no broker-dealer licensing requirement for backstop buyers, but most of them have such a license, as they are usually investment banks or unions subject to insurance. In the event that one or more key investors agree to act as backstop buyers, they are not allowed to engage in activities to reduce the risk of signing and do not receive a standby fee.