A legally binding contract outlining the terms of a proposed reorganization, reached between a distressed company and a critical mass of its creditors or stakeholders. It commits the signatories to support the planned financial overhaul, typically in exchange for certain considerations or assurances. For instance, a company facing significant debt obligations might negotiate such a pact with its bondholders, specifying the amount of debt to be forgiven, the interest rates on the remaining debt, and the equity stake the bondholders will receive in the reorganized entity.
Such agreements provide several advantages. They foster stability during challenging financial times by pre-approving the reorganization plan from key parties, reducing the likelihood of disruptive litigation or competing proposals. The agreements can significantly expedite the reorganization process, potentially minimizing costs and preserving asset value. They also offer a framework for negotiation and consensus-building among diverse stakeholders, which are crucial for achieving a successful outcome.
