Has the Texas Two-Step Become the Thames Two-Step?

Executive Summary

In the first of its kind, a US company with no prior connection to the United Kingdom, has financially restructured via a Part 26A Companies Act (UK) Restructuring Plan (the RP), in respect of which it also achieved Chapter 15 recognition. 

Whilst the English restructuring market understandably applauds the outcome, the case raises some probing questions from the perspective of US jurisprudence, including the limits of legitimate forum shopping, due process and circumvention of the Ch.11 principle against third-party releases. A more complex but equally important question is whether certain aspects of the case might properly be construed as a work around the controversial ‘Texas Two-Step’. 

Has the era of the ‘Thames Two-Step’ begun? 

That the RP received overwhelming creditor support is likely partly responsible for the English and US courts’ pragmatic approach in respectively sanctioning the RP and granting recognition. Had creditor support been lukewarm, and a dissenting creditor mounted a thoughtful and serious challenge, the outcome may well have been different. In the event, the sole dissenting creditor mounted what appears to be a skirmish of a challenge for negotiating leverage.

In this alert, we examine the issues through the lens of a dissenting creditor and offer some arguments that may be relevant in future cases. But first, we will briefly examine the background to why Fossil Group, Inc. (US Co) availed itself of an RP in the first place, then we will look at the terms of the RP itself and finally, the English and US courts’ reasoning. 

Background: Why Did US Co Use an RP to Restructure?

By utilising an RP to restructure just one slice of its capital structure and raise new money (New Money), US Co avoided a possible ‘363 sale’ of its business and winding up under Chapter 11 US Bankruptcy Code, which it claimed was the most likely option if the RP failed (the Relevant Alternative). The RP achieved what US Co had endeavoured - and was unable (due to failure to reach the requisite 90% consent) - to achieve via a New York law private exchange and SEC-registered exchange offering under the US Securities Act 1933 (together the Exchange Transactions).

Road to the RP? Exchange Transactions and ‘Stapled’ RP

US Co had committed to its ABL lenders to raise New Money and restructure its US$150m 7% senior unsecured notes due 2026 (the Notes). In compliance with this commitment, US Co therefore launched the Exchange Transactions in respect of the Notes and took the unprecedented precaution of ‘stapling’ an RP process (which only requires 75% consent), to be launched if the requisite consent on the Exchange Transactions was not achieved. The terms provided for the release of the Notes in exchange for new notes (either on a 1st out or 2nd out basis, depending on participation in the New Money) and warrants.

US Co took the following steps in parallel with the Exchange Transactions for the specific purpose of establishing a basis for jurisdiction to apply for the RP (Forum Shopping):

• It launched a consent solicitation to amend the indenture governing the Notes from NY law to English law and submit to the exclusive jurisdiction of the courts of England. (The indenture permitted these amendments on a simple majority basis); 
• It incorporated a UK subsidiary to guarantee its obligations under the indenture as a ‘contributory’ and to act as the ‘Plan Company’ proposing the RP; and
• The UK subsidiary entered into a deed of contribution to reimburse US Co for any amounts that US Co might pay on the Notes (the Deed of Contribution), thus requiring any restructuring of the Notes to also include a third-party release of US Co to prevent its contribution or subrogation claims against the UK subsidiary from remaining on its balance sheet.

Its precaution proved prescient: the Exchange Transactions failed to obtain the requisite 90% consents, and so the Plan Company launched the RP. 

RP: Same but Different… to US Exchange Transactions and Chapter 11

RPs combine features of both Exchange Transactions and Chapter 11. In particular:

• Like an Exchange Transaction (but unlike a Chapter 11), it is ‘surgical’ in approach. The plan company may pick and choose which part(s) of its capital structure to include
• Like Ch.11, dissenting classes can be crammed down
• Like Ch.11 there is a point of reference for slicing the benefits of the restructuring, but unlike Chapter 11’s ‘absolute priority’ rule (whereby creditors must be paid in full prior to equityholders retaining any value), the RP employs the concept of ‘relevant alternative’, which may facilitate a fluid division of the pie, including that equityholders may, in certain cases, retain value even where dissenting creditors are compromised.

English Court’s Pragmatic Approach

In sanctioning the RP, the English court emphasised the overwhelming creditor support. Nevertheless, the court scrutinised the plan in a detailed judgment, and the following aspects evidence the English court’s pragmatism and flexibility in approach:

Single Voting Class and Fair Representation

Noteholders were permitted to vote as a single class even though different terms applied to those who opted to take up and/or backstop the New Money. This was because all noteholders were offered the same opportunity to participate in the New Money and the backstop was necessary in view of sizeable retail holdings. The court derived comfort from the fact that a fair representation of each constituent within the class approved the RP. In addition, overall, 99.9% of noteholders voted in favour–with just one noteholder dissenting. 

Jurisdiction

The court decided that the Forum Shopping (which it accepted was done for the sole purpose of establishing a basis for UK jurisdiction) was legitimate as a type of ‘good forum shopping’. In the context of European companies seeking an RP, this is a well-established path to establishing jurisdiction.

Exclusion of Pari Passu Operating Creditors From the RP

The court accepted that these creditors were essential to ensure business continuity, and so their exclusion was acceptable.

Were the Noteholders Better Off Than in the ‘Relevant Alternative’

Although not strictly necessary to consider (because there was no question of cramming-down a dissenting class), the court considered (and accepted) the evidence (presented in the context of class composition) that, in the Relevant Alternative, the Noteholders’ return would be between 40-74%. In contrast, under the RP, their return would exceed 100%. 

Release of Third-Party Debt

The court released claims under the Notes against US Co itself given the ‘ricochet’ issues that otherwise would have burdened the Plan Company, based on the Deed of Contribution. 

International Recognition

The court relied on an expert witness statement from a former US Bankruptcy Judge that the RP would have a ‘reasonable prospect of recognition’ in the US under Chapter 15 of the US Bankruptcy Code.

The Chapter 15 Case

Two days after the English court sanction, the Bankruptcy Court for the Southern District of Texas (the US Bankruptcy Court) entered an order recognizing and giving effect to the RP (including the third-party release of US Co) under Chapter 15, enabling enforcement of the RP in the United States. The sole dissenting creditor mounted a challenge but soon withdrew (on the basis of having sold its Notes).

Arguments That Dissenting Creditors Might Consider in Future Cases

What might a dissenting creditor have argued? The following issues could be used as possible to challenge a future case:

'Bad' Forum Shopping

COMI manipulation. The sole objector asserted manipulation of the basis for the US Bankruptcy Court’s Chapter 15 jurisdiction over the UK Subsidiary–that its “center of main interests” (or COMI) was the UK–based on the US Co being headquartered in Texas and having no prior connection to the UK, and its creation of the UK subsidiary solely for the purpose of effecting the restructuring plan under UK law. But the objector withdrew his objection on the basis that he subsequently sold his Notes. A recent US Chapter 15 case in the New York bankruptcy court (In re Mega Newco Limited) warned of COMI abuse on similar facts–‘because of the risk that creditors’ rights and expectations might be thwarted …. If there were an actual contention or evidence that the structure at issue here had been used in an unfair way and had thwarted third-party expectations, there would be serious questions in my mind as to whether it ought to be approved’, 2025 WL 601463 at *4 (Bankr. S.D.N.Y. Feb. 24, 2025)–but signed off only because of overwhelming creditor support and no objections.

Due Process and Public Policy

Since Chapter 11 cases affect the entire capital structure–and in view of the “absolute priority” rule requiring creditors be paid in full before equityholders may retain any value–it would be worth considering a due process argument that notice of the RP should have been given to all classes of creditors, with an opportunity to object. All creditors of a legal entity are potentially affected by any restructuring of any debt issued by that entity (in this case, US Co), since that debt’s adjustment affects the entity’s financial condition generally. In the Fossil Group case, both the UK and US courts focused on the RP’s beneficial impacts on the Noteholders (as mentioned above, an estimated recovery of over 100% under the RP, compared to an estimated 40-74% recovery under the Relevant Alternative under Chapter 11), but appear to have not addressed–or given other creditors the opportunity to address–the broader impact of the RP on other creditors. Chapter 15 allows the denial of recognition and plan enforcement on public policy grounds and the denial of related relief if creditors and other stakeholders (including the debtor) are not sufficiently protected, so due process and similar issues could be raised if the ‘surgical’ approach under Part 26A fails to give procedural protections to other creditor classes (for example, broad notice of the RP proceeding itself). Similarly, the Fossil Group use of an RP under Part 26A was admittedly used only as a ‘backup’ plan when the Exchange Transactions under US law failed, potentially raising another public policy argument if a US company pursues a Part 26A restructuring only as a way around more rigorous debt restructuring requirements of US securities laws. 

The Thames Two-Step?

From a US perspective, the RP process of restructuring also raises the issue of whether bad faith arguments might be posed as objections by dissenting creditors. A now infamous tactic in US bankruptcies tried a similar model by utilising a unique Texas reverse merger technique to separate a company from its liabilities by parking them into a new subsidiary, then putting that subsidiary into bankruptcy with a third-party release of the operating company that originally held the liabilities–known as the “Texas two-step”. This technique has been controversial in the US, arousing the ire even of US Congress members. Johnson & Johnson famously tried it three times in an effort to rid itself of mass tort liabilities, and all three efforts were dismissed by US federal courts on discretionary bad faith grounds. This raises the prospect that if a US company tries a “Thames Two-Step” under Part 26A to rid itself of liabilities by forming a UK subsidiary solely for that purpose, then seeks a third-party release of the US company under UK law (which would be subject to a more deferential standard of review by a US bankruptcy court under Chapter 15 than are third-party releases in US Chapter 11 cases), dissenting creditors could well object on public policy and similar grounds under Chapter 15. 

Our firm has a diverse international restructuring and insolvency practice serving a broad range of clients and providing creative solutions to transactional and adversarial difficulties resulting from financially distressed circumstances across the Americas, Europe, the Middle East and Africa, and Asia Pacific. Whichever side of the restructuring plan you might find yourself on, be sure to call on one of our trusted lawyers.