Takata: the Unfortunate Recall
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US COLUmN Takata: The unfortunate recall David Conaway reports on the global effects of a major product recall, and the subsequent innovative application of the Section 363 auction The tragedy concerned about the risks of airbag for Takata will impact its working explosions in older Honda vehicles capital requirements and pressure Takata Corporation is a Japanese- made from 2001 to 2003. The U.S. its lenders and investors to cover based company that manufactures Government will emerge as a this additional cost. The scope and safety products, primarily airbags material stakeholder, with Takata ultimate loss for the class action and seat belts, as a tier one supplier currently operating under a five- lawsuits will not be known for some to the global auto industry. year, $200 million consent decree time. As with mass tort lawsuits Unfortunately, due to alleged with the NHTSA. generally, the number of plaintiffs is defective airbags produced, Takata In addition to the $12 billion of increasing as losses continue to has recalled reportedly 122 million airbag replacement liabilities, occur and there will be future airbags globally, with a projected Takata reported it has sustained a plaintiffs. Ultimately, there will be cost of $12 billion. cash operating loss of over $500 pressure to create a dedicated fund, DAVID H. CONAWAy Takata’s airbag recall is tragic Shumaker, Loop & Kendrick million since the inception of the or source of funds, to address these LLP (USA) because the airbags are allegedly recall in 2013. Moreover, Takata is losses over an extended period of responsible for over 15 deaths and facing civil and criminal fines and time. over 150 accidents around the penalties from various government world, according to the December, Takata’s corporate structure Wall Street agencies, throughout the world. A 2016 reports by the number of class action lawsuits Journal Bangkok Post Takata was started in 1933 in Japan and the . have been filed seeking redress from primarily producing lifelines for Takata for the tragic loss of life, The economic loss parachutes and other textiles. Over personal injury, and property time, Takata expanded into seat damage allegedly caused by the The Takata airbag recall has belts, child restraints, and airbags. defective airbags. already caused enormous economic To accommodate a world-wide As a result of the economic consequences to certain of Takata’s auto industry, Takata expanded loss, the automakers will likely stakeholders, including customers, geographically, including in the emerge as Takata’s largest class of lenders, investors and equity U.S., Mexico, Brazil and Uruguay. unsecured creditors. Takata holders. The customers are mainly In Europe, Takata has facilities in supplied defective products to the 19 automakers throughout the Germany, Czech Republic, Poland, automakers, which at a minimum world including BMW, Ford, Hungary, Romania, and Russia. In creates claims for breaches of Honda and Volkswagen. Asia, Takata maintains facilities in contract, for the $12 billion of Honda is also one of Takata’s Singapore, the Philippines, reported losses. It is not clear who, major investors. An October 7, Thailand, Malaysia, Korea, China, Wall Street Journal between Takata and the 2016 article India and Indonesia. automakers, is paying the costs of reported that the recall burden of Prior to the airbag recall which the airbag recall, but it is a the automakers was Honda 47%, began in 2013, Takata had a seat reasonable assumption that Takata Toyota 21%, Nissan 11%, and all belt recall in the U.S. in 1995 is unable to absorb all of the costs, others 20%. relating to about 8.5 million and that the automakers are According to numerous media vehicles built from 1986-1991, absorbing a significant share. reports, the airbags recalled globally which at the time was identified as There has been no indication total 122 million, and the cost of the second largest recall in the 30 that Takata is not paying its replacement and repair totals year history of the U.S. Share your views! suppliers in the ordinary course of approximately $12 billion. Department of Transportation. Moreover, the U.S.’s National business. Faced with uncertainty, Highway Traffic Safety vendors often impose cash-before- The restructuring Administration (“NHTSA”) issued a delivery terms on its customers, to statement that the automakers have hedge against a potential loss Faced with the consequences of the “ultimate responsibility” for the should the customer file for impact of the airbag recall, in costs of replacing the airbags. insolvency protection, including a February, 2016, Takata’s Board of NHTSA appears to be particularly Chapter 11 filing. A material Directors appointed a steering imposition of cash payment terms committee to explore solutions 28 | WINTER 20 16/ 17 US COLUmN including a restructuring of its businesses. According to the Wall Street Journal on May 25, 2016, Takata engaged Lazard Ltd. to seek a cash infusion and negotiate with automakers over “the ballooning” costs, and to help craft a restructuring plan to deal with “billions of dollars” of liabilities. Reuters reported that the restructuring would focus on Takata’s Michigan-based assets, which account for one-half of Takata’s global sales. Takata’s Michigan-based entity is TK Holdings, Inc. Indeed, Takata also engaged the well-known New York- based restructuring law firm, Weil, Gotshal & Manges LLP to advise regarding a restructuring. Numerous news reports 2017. Reportedly, all of the bidders’ meltdown of the global financial including from Reuters , Bloomberg proposals have included a U.S. markets. and the Wall Street Journal in the Chapter 11 filing of certain of Normally in a Section 363 sale, fall of 2016 indicated that Takata Takata’s U.S.-based subsidiaries. a debtor procures a “stalking horse” Undoubtedly, the bidders prefer a bid that is subject to higher and “ solicited bids from various strategic and financial buyers or investors Chapter 11 filing to obtain the better bids, and ultimately court IT IS NOT CLEAR with respect to certain of its assets, benefits and protection of Section approval. It appears that the WHO, BETWEEN presumably primarily the U.S.- 363 of the Bankruptcy Code, which “auction” may already be occurring based assets. The reported bidders generally allows a debtor to sell and upon a Chapter 11 filing, a TAKATA AND THE included Daicel Corp., Autoliv Inc., assets free and clear of liens and single-bidder Section 363 sale could AUTOMAKERS, Bain Capital, Kohlberg Kravis and encumbrances to a third party be presented to the Bankruptcy Roberts (KKR), Key Safety buyer, with liens attaching instead Court. Takata could assert to the IS PAYING THE Systems, Inc. and Carlyle Group. to the proceeds of the sale. U.S. Bankruptcy Court that the COSTS OF THE On October 17, 2016, the Wall However, news reports indicate that Section 363 sale procedures and Street Journal reported that a joint Takata Corporation’s management safeguards were in fact followed AIRBAG RECALL, bid of $3.5 billion was made by expressed a preference to avoid a pre-petition, and provide evidence BUT IT IS A Daicel and Bain Capital, which was bankruptcy filing. One wrinkle of that the winning bid was indeed one of five bids that cleared the first the Section 363 strategy is the subject to rigorous marketing, REASONABLE round of bids. Subsequently, based recent U.S. 2nd Circuit Court of negotiation and auction, albeit pre- ASSUMPTION on November 16, 2016 Wall Street Appeals ruling in the General petition, and that the highest and Journal and December 15, 2016 Motors case holding that “new best bid is in the best interests of THAT TAKATA Bloomberg reports, the automaker- GM” (the Section 363 purchaser) Takata’s estate and stakeholders. IS UNABLE TO customers preferred a bid that could be sued for faulty ignition Whether any non-U.S. Takata included either Sweden’s Autoliv switches made by “old GM” prior entities seek insolvency protection ABSORB ALL or Michigan-based Key Safety to its Chapter 11 filing. Perhaps under foreign insolvency laws is far OF THE COSTS Systems, as automakers seek a bidders would be willing to pay less from clear. Thus, whether such partner with a track record of or require a purchase price Takata entities may also seek quality control and operations in holdback, to account for this recognition of the foreign major world markets. potential risk. proceeding the U.S. pursuant to a Based on the continuous flow Another interesting question Chapter 15 petition for recognition of news reports from reliable will be, in the event of a Chapter 11 is likewise uncertain. It nevertheless sources, it is clear that Takata is filing, would the normal Section appears somewhat likely that attempting to address the financial 363 procedures be followed? The Takata’s U.S.-based entities will seek ” and other issues arising from its Lehman Brothers Section 363 sale Chapter 11 protection in 2017 to to Barclays in 2008 clearly address the economic consequences airbag recall. It is now clear that a I restructuring is being considered, demonstrated a U.S. Bankruptcy of its unfortunate airbag recall. that would involve an investment or Court’s willingness to flex the Note: purchase of assets by a combination customary Chapter 11 procedures 1 Takata Corp. is a limited reporting company in of financial and strategic buyers. to accommodate business goals. the U.S., thus financial and other information produced by the company is not available. The bidding process continues and Lehman Brothers was sold to Reliable business news sources including the on December 15, 2016, Bloomberg Barclays, as the sole bidder, within Wall Street Journal, Reuters, Bloomberg and Dow Jones have frequently reported on the airbag recall, reported that the successful bidder five days after Lehman’s Chapter the potential losses and potential restructuring.