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the debtor is without the benefit of the automatic stay and other protections offered by Chapter 11 during
crucial stages of the reorganization. Consequently, to the extent that parties other than noteholders or
lenders become aware of the debtor’s restructuring efforts, the business may be adversely affected. Spe-
cifically, suppliers and trade creditors may limit payment terms, customers may refuse to make deposits
or installment payments, and other stakeholders may take similar self-help measures that, in a traditional
Chapter 11 case, might violate the automatic stay. Second, a prepackaged plan is often unsuitable for
debtors with highly complex capital structures, large numbers of impaired classes, or substantial num-
bers of trade creditors or tort claimants, where impairment of creditor claims may be necessary to
achieve a successful plan. As the complexity of the capital structure and the number of stakeholders in-
creases, so too do the transaction costs of negotiating a reorganization without court supervision. The
presence of numerous less-sophisticated parties, such as trade creditors and tort claimants, may also
stymie negotiations. Consequently, prepackaged plans are most feasible when negotiations can be lim-
ited to a relatively small number of classes of financial creditors and other stakeholders can be left un-
impaired. Third, compliance with securities regulations may be more burdensome in a prepackaged case
than in a traditional Chapter 11 case. In a traditional Chapter 11 case, the debtor typically benefits from
the securities law exemption codified in Section 1145 of the Bankruptcy Code. But because Section
1145 may not apply to prepetition solicitations, it is often necessary to restrict prepetition solicitations to
accredited investors or qualified institutional buyers in order to qualify for the 1933 Act’s private
placement exemption.

Pre-negotiated Cases

The pre-negotiated plan is a hybrid of the prepackaged plan and a traditional Chapter 11 plan wherein
the debtor reaches a consensus with key creditors before filing. Pre-negotiated plans are advantageous in
the following circumstances: where securities laws would not permit a vote on the plan prepetition;
where one or more of the classes to be solicited consists not of financial creditors, but of trade creditors,
tort claimants, or contractual creditors who cannot be solicited easily prepetition; or where the disclosure
that the company is soliciting a vote on a prepackaged plan of reorganization might cause a withholding
of trade credit.

In a pre-negotiated reorganization, the debtor and its key creditors negotiate and document the terms of
the restructuring before the debtor enters bankruptcy. As part of these negotiations, the debtor typically
obtains lock-up agreements from key creditors. A lock-up agreement represents a creditor’s commitment
to vote in favor of, or otherwise support, the plan of reorganization the debtor will propose once it files
for bankruptcy.

Because substantive negotiations primarily occur before the debtor files, the debtor typically spends only
90 to 120 days in Chapter 11. Approval of the disclosure statement, solicitation of votes, and confirma-
tion of the plan all occur once the debtor has entered bankruptcy.

A pre-negotiated Chapter 11 plan affords the debtor several advantages. First, the debtor enters Chapter
11 with the support of its key creditors, thereby shortening the time and reducing the uncertainty associ-
ated with a Chapter 11 case. Second, a pre-negotiated plan offers considerable advantages compared to a
prepackaged plan when debt is involved. In a prepackaged case, the debtor solicits approval of its plan
before it files its Chapter 11 petition. Therefore, the debtor is subject to the same securities regulations
that generally prevail outside of the bankruptcy. In contrast, the debtor in a pre-negotiated case does not
solicit approval of its plan until after it has entered Chapter 11 and therefore may avail itself of the secu-
rities regulation safe harbors provided by the Bankruptcy Code (see 11 USC 1145(a)). Third, the tax
treatment of a pre-negotiated plan is typically more favorable than an out-of-court workout. If the debtor

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