WILMINGTON, Del. — A bankruptcy judge on Wednesday cleared the way for Washington Mutual Inc. shareholders to take legal action to force the company to hold a long overdue annual meeting.
Ruling on a motion filed in Delaware by Washington Mutual’s official committee of equity security holders, Judge Mary Walrath said the automatic halt to litigation that applies to companies in bankruptcy cannot bar shareholders from exercising their corporate governance rights.
Rejecting the company’s arguments, Walrath said it is “well-settled law” that shareholders can hold meetings to elect new directors despite a company being in bankruptcy.
The shareholders want a judge in Washington state to order WMI to hold an annual meeting so that they can elect new board members. The company hasn’t held a shareholders meeting since April 2008, five months before it filed for bankruptcy protection after the largest bank failure in U.S. history.
The shareholders argue that the failure to hold a meeting violates both Washington law and the company’s bylaws. They complain that the same officials responsible for WaMu’s failure are still controlling the company and making decisions regarding its bankruptcy case.
“They simply want to exercise their corporate governance rights,” said Stephen Susman, an attorney for the equity holders committee.
The equity committee alleges that the current WMI board is resisting the election of new directors who would protect shareholder interests in the company’s reorganization plan and the related settlement of a $4 billion dispute with JPMorgan Chase & Co. and the Federal Deposit Insurance Corp.
Washington Mutual attorney Brian Rosen argued that the shareholders, who stand to get nothing under WMI’s Chapter 11 reorganization, were abusing the bankruptcy process and were trying to sabotage the reorganization plan filed last month, roughly a year and a half after WMI sought bankruptcy protection.
“It is clear that the equity committee has its own scuttling agenda,” Rosen said. “They want to dismantle the 19 months of work … and to rebuild the wheel.”
Walrath said the fact that shareholders are fighting for a better deal or more bargaining power doesn’t amount to abuse of the bankruptcy process.
“I think it’s clear from the case law that you need more than just the fact that the shareholders disagree with what the debtors have done,” the judge said, noting that the shareholders had taken action to force an annual meeting before WMI filed its reorganization plan.
“I just don’t find any basis for abuse here,” she concluded.
Susman said the shareholders would go to court in Washington on Thursday asking a judge there to order the convening of an annual meeting.
“It’s our hope that we can get this done as soon as possible,” said equity committee chairman Michael Willingham, who testified that he bought more than a million shares of WMI last year after its bankruptcy filing.
Susman said the proposed settlement with JPMorgan and the FDIC remains of great concern to equity holders, who plan to seek the appointment of an independent examiner in the bankruptcy case.
The FDIC seized Washington Mutual’s flagship bank in 2008 and sold its assets to JPMorgan for $1.9 billion. The sale resulted in the two banking companies and the government agency trading lawsuits over roughly $4 billion in disputed deposit accounts.
In a proposed settlement of the competing lawsuits, JPMorgan has agreed to turn over the $4 billion in disputed deposit accounts to Washington Mutual in return for 70 percent of the tax refunds expected from WaMu’s prior operating losses, which are valued at about $3 billion.
WaMu would get about 40 percent of the tax refunds resulting from a second round of operating losses, which are valued at about $2.6 billion. The remaining 60 percent would go to the FDIC.
“The legal claims of the debtors that would be released by the settlement are among the most valuable assets of the debtors,” Susman said. “This is not the time to shoo away the owners of the company.”
Rosen, the WMI attorney, said the equity holders don’t like the settlement because they believe “there is more money to be milked from JPMorgan Chase.”