Michael Van Gorder and Tara C. Pakrouh
On February 5, 2015, RadioShack Corporation (“RadioShack”), along with several of its affiliates, filed for Chapter 11 Bankruptcy protection.
RadioShack had considered filing for bankruptcy for quite some time. Now that RadioShack has sought the court’s protection, critics have highlighted the company’s inability to adapt to changing markets or otherwise escape the 1980s—as was remarked in jest during RadioShack’s famous 2013 Super bowl commercial.
The overarching problem was the company’s inability to effectively compete with internet-based giants like Amazon or eBay. RadioShack’s business model may have been effective in decades past, but now that consumers can purchase most electronics online, there is less of a need for a network of brick and mortar stores. What pushed RadioShack over the bankruptcy ledge was the fact that it was highly leveraged, and as a result, its creditors had a fair amount of control over the company’s decisions, including a provision in its credit agreement that permitted the closure of only 200 stores per year.
The voluntary petition lists RadioShack’s assets at $1.2 billion and debts at $1.3 billion as of November 2014. As part of its reorganization, RadioShack plans to sell between 1,500 and 2,100 of its 4,100 stores to hedge fund Standard General LP—RadioShack’s lead lender and largest shareholder. Additionally, RadioShack secured $285 million in Debtor-In-Possession financing from a syndicate of pre-petition lenders in order to sustain its operations during bankruptcy proceedings.
In addition to routine first day motions, RadioShack filed an Emergency Motion for Interim and Final Orders (the “Emergency Motion”). Specifically, RadioShack requested authorization (1) to assume an agreement with several asset liquidation firms; (2) to proceed with closing up to 2,100 RadioShack stores and liquidating those stores’ inventories (the “Store Closing Plan”); and (3) to provide pay incentives to its field-based employees who, in conjunction with the liquidation firms, are currently closing the stores in question. In support, RadioShack argued that it had a valid business justification for its request and that the Bankruptcy Court for the District of Delaware had routinely authorized store closing or liquidation sales where the debtor was a retailer. Specifically, RadioShack argued that the Store Closing Plan was imperative to its reorganization plan since the relevant stores were currently operating at a loss and the sale of the stores’ inventories would generate much needed cash.
The court held an emergency first day hearing on February 6, 2015. In an interim order granting the Emergency Motion, the court ruled “the relief requested in the Motion is necessary on an interim basis and essential for the Debtors’ reorganization and such relief is in the best interests of the Debtors, their estates and their creditors . . . .” The court found that RadioShack “advanced sound business reasons for seeking to assume the Consulting Agreement . . . and . . . is a reasonable exercise of the Debtors’ business judgment and in the best interests of the Debtors and their estates.” The court also found the closing and liquidation of certain RadioShack stores was in the best interests of the Debtors’ estates and based on sound business judgment. The interim order also required that all objections to the entry of the order on a final basis be filed on or before February 17, 2015, and scheduled the final hearing for February 20, 2015. RadioShack’s remaining first day motions were heard on February 9, 2015.
Similarly situated companies should consider RadioShack’s efforts to fight change as a reminder that to survive, companies must adapt by trimming excess “fat” (for RadioShack that meant closing non-strategic stores), continuously evaluate ways to compete in the current market, and prepare for future competitors and concerns.
Michael Van Gorder is the Volume 40 Editor-in-Chief of the Delaware Journal of Corporate Law. Michael also serves as Wolcott Fellow to the Honorable James T. Vaughn, Jr. of the Supreme Court of Delaware. Tara Pakrouh is the Volume 40 External Managing Editor of the Delaware Journal of Corporate Law. She is a Judicial Intern to The Honorable Mary F. Walrath of the United States Bankruptcy Court for the District of Delaware.
Suggested Citation: Michael Van Gorder & Tara C. Pakrouh, RadioShack: Only the Relevant Survive, Del. J. Corp. L (Feb. 21, 2015), www.djcl.org/blog.