Projects with Government Contracts

Publication April 6, 2017

The power to restructure a company through bankruptcy is sweeping, but there are two important limitations when regulators and other government entities are involved.

First, a restructuring, whether through an asset sale or a plan of reorganization, in most cases cannot interfere with or limit existing state or federal regulatory regimes. 

This has broad implications for restructurings in the heavily regulated energy sector. For example, if Federal Energy Regulatory Commission approval of a transaction is required outside of bankruptcy, then FERC approval may still be required in bankruptcy. While government entities are prohibited from discriminating against bankrupt companies or denying regulatory approval or permitting as a result of a bankruptcy filing, regulators may be able to deny, limit or condition approval of restructurings where they find fault with the merits of the underlying proposed transaction.

Second, asset sales that contemplate the assignment of government contracts to a new operator are often impossible without the consent of the government entity. To facilitate reorganizations, bankruptcy law generally invalidates “anti-assignment” provisions in contracts. However, the relevant law may bar the assignment. Many government entities, including the federal government, have moved to protect themselves by enacting laws or adopting regulations that broadly prohibit the assignment of government contracts without the consent of the government entity that is party to the contract. Government-issued permits often face similar restrictions on assignments or transfers. As a result, it may be impossible to complete an asset sale of regulated or permit-dependent energy businesses without the affirmative consent of the relevant regulatory authorities. 

Company managers, investors and lenders should bear these restrictions in mind when negotiating potential restructurings in the energy sector.


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