Stripping PDVSA's Assets
This is a joint post by Mark Weidemaier and Mitu Gulati
In a previous post, we talked about how ordinary corporate-law principles, and especially the rules concerning piercing the corporate veil, might play an important role in any debt restructuring conducted by Venezuela or PDVSA, the state oil company. As an example, we cited the fact that PDVSA doesn't own the oil reserves it exploits and the possibility that Venezuela might transfer the right to exploit these reserves to a new entity. Readers who have been following the Venezuelan crisis will recognize that we were not-too-subtly referring to a proposal floated back in October 2016 by Ricardo Hausmann and Mark Walker, writing on Project Syndicate. (Registration required.) In a nutshell, their proposal with regard to PDVSA is that Venezuela can induce PDVSA creditors to participate in a restructuring--conducted either in bankruptcy or through the use of exit consents--by withdrawing or modifying PDVSA's right to exploit hydrocarbon reserves. Essentially, that is, Venezuela can strip the company of its primary productive asset.
The proposal may seem a touch lawless, and it certainly has its critics, though Hausmann and Walker point out that the sales documents accompanying PDVSA's bonds (like this one, p. 9) disclose the risk. For present purposes, we highlight the proposal only as a fairly obvious illustration of the ways in which liabilities of one of the country's two primary debtors (the government and PDVSA) might wind up being imposed on another entity. In this case, of course, any new entity formed to exploit hydrocarbon reserves would have to consider potential liability under fraudulent transfer or other theories. Moreover, Venezuela should expect PDVSA creditors to try to pierce the corporate veil, thus holding the government liable for PDVSA's debts. The government already exercises substantial control over PDVSA. If it were to withdraw the right to exploit the country's oil reserves, the case for veil piercing would become compelling. And as we noted in our last post, the government would find it difficult (though perhaps not impossible) to restructure these claims.
It is not obvious that PDVSA's bond disclosures would prevent its creditors from going after Venezuela. Legally, the question isn't about the adequacy of PDVSA's disclosures. Instead, the question is something like this: Does the fact that investors knew Venezuela might withdraw PDVSA's exploitation rights mean they (implicitly) agreed not to pursue the government if this in fact happened? It seems plausible--more than plausible, really--that a court would answer "no" to this question. After all, investors dealing with close corporations always have at least some reason to fear asset stripping; yet the law protects them anyway. One reason is that, when a shareholder removes corporate assets from an insolvent company, it inverts the normal priority scheme in which owners come last in line. That seems a fair description for what Hausmann and Walker propose.
On the other hand, the "disclosure" argument has enough merit that it gives Venezuela another weapon against holdouts. Remember that the primary goal of Hausmann and Walker's proposal is to create leverage to induce PDVSA creditors to participate in a restructuring. With enough participation, holdouts might present a manageable problem.