What a Restructuring Support Agreement Is and Why It Matters
A Restructuring Support Agreement (RSA), sometimes called a “plan support agreement,” is a binding contract among a debtor and key stakeholders to support a specified restructuring path in a Chapter 11 case. At its core, an RSA frames the “deal” that will be implemented through the plan of reorganization and related motions, typically addressing claim treatment, governance, milestones, and voting commitments. While laypersons often assume an RSA is a simple letter of intent, it is, in fact, a sophisticated, enforceable instrument that can control the tempo, leverage, and outcomes of an entire case.
Done well, an RSA can reduce litigation risk, streamline the plan confirmation process, and preserve enterprise value by creating predictability and minimizing execution slippage. Done poorly, an RSA can invite challenge as an impermissible lock-up, impose unrealistic milestones that drive value-destructive sales, or entrench a favored constituency in violation of the duty to maximize the estate’s value. The distinction lies in careful structuring, meticulous compliance with the Bankruptcy Code, and integrated tax and financial modeling that reconciles legal promises with cash flow reality.
Core Components Found in Most Restructuring Support Agreements
Although each deal is unique, most RSAs share a common architecture. They define the “restructuring” to be supported, the claims and interests covered, and the parties’ obligations to vote in favor of the plan that implements that deal. RSAs also delineate conditions precedent, termination rights, case milestones (such as deadlines to file the plan, disclosure statement, and confirmation), and the scope of fiduciary out clauses for the debtor and sometimes for official committees. They frequently include no-shop or limited solicitation protections, diligence requirements, and specific stipulations regarding valuation and treatment of disputed claims.
The economics are typically embedded in attached term sheets and exhibits: claim classifications, percentage recoveries, new-money commitments, equitization mechanics, and planned rights offerings. Careful drafting is essential to align these economics with feasibility requirements and the absolute priority rule. Even seemingly routine provisions—such as how to calculate interest accruals during the case or whether original issue discount is recognized—can materially change recoveries, tax outcomes, and negotiations with trade creditors and landlords.
Legal Framework: What Courts Scrutinize and Why
Courts evaluate RSAs under several Bankruptcy Code provisions and general principles of contract and fiduciary law. Key issues include whether the agreement improperly dictates plan terms before adequate disclosure, whether prepetition solicitation violated securities and bankruptcy solicitation rules, and whether the RSA fetters a debtor’s fiduciary duties by unduly restricting alternatives. Judges frequently examine milestone reasonableness, termination triggers, and the breadth of no-shop clauses to ensure the debtor remains capable of acting in the best interests of the estate if a superior transaction emerges.
An RSA that attempts to bind parties without a path to informed consent is vulnerable. Courts may also scrutinize pay-to-play features and break-up fees for fairness and alignment with value maximization. The analysis is intensely fact-specific: the same covenant that is acceptable in a liquidity crisis may be oppressive in a stable operating environment. Therefore, parties should draft with case posture in mind, anticipating how the record—cash runway, market checks, valuation support—will look during a contested hearing.
Voting Commitments, Lock-Up Mechanics, and Solicitation Risk
RSAs commonly require signatories to vote in favor of a plan consistent with the attached term sheet. From a legal standpoint, the timing and process of soliciting those commitments is critical. Prepetition RSAs that obtain commitments before the petition date must be evaluated for compliance with bankruptcy solicitation rules and securities laws. In-court execution requires careful coordination with the disclosure statement process to ensure that votes are not procured based on inadequate information.
Laypersons often believe that an RSA guarantees confirmation. It does not. Votes can be disqualified if the court finds defective solicitation, and non-signatory creditors can still object on confirmation grounds, including classification issues, unfair discrimination, and feasibility. Moreover, even signatories typically preserve rights to terminate the RSA if certain conditions are not met, which can cause a swift unwinding of support. Precision in drafting the support obligations, permitted transfers, and amendment procedures determines whether voting commitments survive market turbulence.
Milestones and Termination Rights: Speed Versus Optionality
Most RSAs impose a series of milestones to drive case momentum: deadlines to file first-day motions, a plan term sheet, a disclosure statement, a plan, and confirmation and effective dates. While speed can preserve going-concern value and reduce administrative costs, unrealistic or inflexible milestones can force a value-destructive sale or a premature plan filing that lacks creditor consensus. Courts will often weigh the reasonableness of these milestones in light of liquidity constraints and market realities.
Termination rights are equally consequential. Creditors may negotiate multiple off-ramps tied to missed milestones, adverse rulings, breach of covenants, material adverse changes, or receipt of a superior proposal. The debtor typically seeks a fiduciary out to consider bona fide alternatives that could deliver greater value. The balance is delicate: too many exit ramps destabilize the case; too few can ossify a suboptimal path. Counsel should test termination provisions against plausible downside scenarios to avoid unintentional triggers.
DIP Financing, Cash Collateral, and RSA Interdependencies
Debtor-in-possession (DIP) financing terms and cash collateral usage frequently interlock with the RSA. Lenders may condition DIP availability on execution of an RSA, or the RSA may require obtaining a DIP on specified terms. Cross-defaults can cascade: a milestone miss under the RSA can remedy-default the DIP, inviting a liquidity cliff. Drafters should harmonize covenants, timing, and financial reporting across the RSA and DIP documents to prevent inadvertent tripping of covenants.
Budget assumptions also need to dovetail. If the RSA anticipates a rights offering or asset sale proceeds to fund plan distributions, the DIP budget must account for fees, marketing and diligence costs, and potential delays inherent in regulatory approvals. Inconsistent documents are a frequent source of breakdowns in otherwise well-structured cases, turning an apparent consensus into emergency litigation over liquidity and adequate protection.
Tax Considerations That Shape RSA Economics
From the perspective of an attorney and CPA, tax is inseparable from RSA design. Cancellation of indebtedness income (CODI) at the debtor level can be triggered or mitigated depending on whether the plan effects a debt-for-equity exchange, a sale transaction, or a debt reinstatement. Attribute reduction rules, including net operating loss limitations and Section 382 ownership changes, must be modeled alongside the RSA’s contemplated equity allocations and rights offerings. Failure to align these variables can erode value designed into the RSA’s economics.
For pass-through entities, the analysis is even more intricate. Partnerships may generate CODI allocations to partners, potentially creating phantom income for some stakeholders. In addition, withholding, original issue discount implications, and the treatment of exit financing fees may affect distributions and withholding obligations. An RSA that glosses over these issues invites messy disputes at plan confirmation and exposes the reorganized entity to avoidable tax risk. Tailored tax covenants, tax sharing arrangements, and Section 382 protective provisions often belong in, or alongside, the RSA.
Intercreditor, Subordination, and Trade Supplier Dynamics
RSAs intersect with preexisting intercreditor agreements and subordination provisions, which may limit a class’s ability to support or oppose a plan. Conflicts often arise where senior creditors negotiate for recoveries premised on rigid enforcement of payment waterfalls, while junior creditors seek litigation value from lien challenges or recharacterization claims. The RSA must accommodate these instruments’ constraints or document a roadmap for litigating around them, including budget allocations for investigations and challenge rights.
Trade creditors and critical vendors introduce another layer of complexity. An RSA may contemplate “critical vendor” payments or cure amounts under assumption of executory contracts to stabilize operations. Without careful documentation and an evidentiary record supporting the necessity and benefit of such payments, these features may be challenged as discriminatory or inadequately justified. Moreover, treating trade constituencies inconsistently across affiliates can create unfair discrimination arguments that jeopardize confirmation.
Executory Contracts, Leases, and RSA-Driven Business Decisions
Implementing an RSA often requires synchronized decisions about assumption or rejection of executory contracts and leases. The RSA may set deadlines and parameters for these decisions, but operational facts should drive the outcomes. Cure obligations, adequate assurance of future performance, and the availability of assignment rights all influence feasibility and creditor recoveries. It is common for debtors to discover that a seemingly minor lease clause materially affects the economics of the RSA’s contemplated restructuring path.
In addition, RSAs sometimes allocate economic responsibility for cure payments among different creditor groups or allow for targeted buyouts of burdensome agreements. Such provisions must align with the Bankruptcy Code’s requirements and the plan’s classification scheme. A mismatch will invite objections from counterparties and from creditors whose recoveries are indirectly reduced by cure expenses that were underestimated or misallocated.
Third-Party Releases, Exculpation, and Governance Provisions
RSAs frequently foreshadow the scope of third-party releases and exculpation provisions that will be sought in the plan. Courts vary in their willingness to approve nonconsensual releases, and the trend is toward heightened scrutiny. Overreaching release language can derail confirmation or require a costly re-solicitation. The safest course is to ensure that the record supports necessity, fairness, and specific consideration for any proposed releases, and to distinguish clearly among debtor releases, third-party releases, and exculpation.
Governance is another sensitive area. Many RSAs specify board composition, management changes, and appointment of a chief restructuring officer or independent directors to oversee conflict-heavy decisions. If these governance choices are perceived as entrenching a favored constituency, objectors will argue that the RSA undermines the debtor’s fiduciary duties. Transparent selection criteria, independent vetting, and a credible mandate for the independent directors can mitigate these risks while maintaining the RSA’s intended stability.
Valuation, Financial Projections, and Feasibility Under the RSA
Because an RSA commits key constituencies to specific recoveries, valuation is the fulcrum of negotiations. The enterprise value range must be defensible, the capital structure must be sustainable, and pro forma liquidity must support operations post-emergence. RSAs often attach or incorporate by reference a valuation summary and a financial model that tie directly to plan distributions, rights offering pricing, and management incentive plans. A failure to reconcile these elements will surface at confirmation as a feasibility objection.
Seemingly minor modeling choices—treatment of lease accounting, revenue recognition timing, or working capital seasonality—can swing valuation and thus recoveries. Stakeholders should expect rigorous scrutiny of assumptions and sensitivities. Courts are rightly skeptical of “hockey stick” projections that are inconsistent with historical performance and industry conditions. Embedding a disciplined forecasting process into the RSA timeline reduces rework and strengthens the evidentiary foundation for confirmation.
Disclosure, Transparency, and Information Flow
Transparency is mandatory, not optional. Creditors and the court will expect a robust evidentiary record supporting the RSA’s economics and governance. This includes detailed disclosure of financial projections, methodologies, conflicts, fee arrangements, and any side letters that could alter economic alignment. Inadequate disclosure can invalidate votes, prompt appointment of an examiner, or cause the court to deny approval of RSA-related relief.
Information sharing protocols must balance confidentiality with fairness. RSAs should contemplate controlled data room access, clean-team arrangements when appropriate, and covenant packages that allow stakeholders to monitor performance against milestones without compromising sensitive competitive information. The debtor’s communication strategy should be synchronized with the RSA’s timeline to avoid inconsistent messaging that can spook vendors, employees, or customers.
Regulatory and Industry-Specific Considerations
Many industries bring special regulatory overlays that an RSA must respect. Healthcare debtors face patient care ombudsman issues and licensing constraints; financial institutions and fintech platforms contend with state and federal regulatory permissions; energy companies must consider leasehold and environmental obligations; telecom operators navigate spectrum licenses and public interest considerations. The RSA’s milestones and plan structure should be tailored to the timelines and standards of applicable regulators.
Foreign affiliates and cross-border capital structures add complexity. Recognition issues, local insolvency proceedings, and tax treaties may affect the feasibility of an RSA-driven plan. Where cross-border assets underpin a DIP facility or serve as collateral for prepetition debt, the RSA should map out coordination with foreign courts and address potential ring-fencing. A failure to integrate these considerations can strand value offshore or invite parallel proceedings that disrupt execution.
Common Pitfalls and Misconceptions About RSAs
A recurring misconception is that an RSA “locks in” the case result. In reality, RSAs create a framework that remains subject to judicial approval, creditor scrutiny, and evolving facts. Another misconception is that speed is always good. Accelerated milestones can save carrying costs, but they can also foreclose superior value or short-circuit necessary diligence. Parties who underestimate the complexity of integrating DIP covenants, tax structuring, and operational demands often discover too late that their swift path to emergence is not feasible.
Other pitfalls include sloppy treatment of claims estimation, ambiguous definitions that invite litigation over termination rights, and failure to address how disputed claims will be reserved for or diluted. Overpromising on trade support without credible vendor engagement plans can backfire, as can neglecting the optics of management incentives in the face of significant creditor haircuts. A robust RSA anticipates these pressure points and documents pragmatic solutions.
Practical Steps to Structure and Implement an Effective RSA
First, align the business plan, capital structure, and tax strategy before committing to RSA economics. This means iterating the financial model with input from operational leadership, investment bankers, and tax advisors to test sensitivities around revenue, margin, and cash conversion. Second, engage with key constituencies early to identify the real fulcrum class and design a transaction that addresses their priorities without creating confirmation defects.
Third, build an evidentiary record contemporaneously: valuation materials, market checks for any M&A alternative, and analyses supporting any special provisions such as third-party releases or critical vendor payments. Fourth, harmonize the RSA with DIP and cash collateral documents to avoid cross-default traps. Finally, draft clear, balanced milestones and termination rights, with a meaningful fiduciary out that is narrow enough to satisfy supporters but broad enough to satisfy the court that value maximization remains paramount.
How Experienced Professionals Add Measurable Value
An experienced attorney and CPA team can translate commercial objectives into enforceable, court-approvable terms while safeguarding tax efficiency. Professionals pressure-test valuation, ensure classification schemes correspond to real-world claim dynamics, and calibrate releases and exculpation to prevailing case law. They also coordinate solicitation timing, disclosure content, and securities considerations to protect votes from disqualification.
On the financial side, seasoned advisors optimize rights offering structures, evaluate backstop economics, and negotiate DIP terms that complement the RSA instead of contorting it. On the tax side, they model CODI, attribute reduction, and Section 382 outcomes; design tax sharing arrangements; and craft governance structures that preserve tax assets post-emergence. These tasks are not “nice to have.” They are the difference between a plan that closes and one that collapses under scrutiny.
Cost, Timing, and the Realities of RSA Negotiations
Negotiating an RSA is resource-intensive. Stakeholders exchange drafts at a rapid clip while valuation and operational diligence proceed in parallel. Counsel should budget for iterative revisions, frequent working sessions, and a confirmation timeline that builds in contingency for contested issues. Attempting to compress the process without resourcing it properly tends to produce defective documents that are expensive to fix in court.
Timing expectations should be grounded in liquidity runway and market conditions. If a sale process is a serious alternative, the RSA should reflect a credible market check rather than a perfunctory signpost. When stakeholders sense that the process is performative rather than substantive, litigation risk escalates. A candid assessment of alternatives, memorialized in the RSA’s recitals and milestones, fosters credibility with the court and with non-signatory creditors.
Documentation Hygiene: Definitions, Exhibits, and Consistency
Precision in definitions prevents costly disputes. Key terms—such as “material adverse effect,” “permitted liens,” “eligible claims,” and “superior proposal”—must be tailored to the case. Exhibits should be complete, including term sheets, cap tables, corporate governance documents, and any backstop commitments. Inconsistencies across the RSA, DIP credit agreement, and plan term sheet are among the most common and most avoidable sources of litigation.
Version control and signatory diligence are equally important. RSAs often include transfer restrictions and joinder mechanics for new holders. If the cap table or register is inaccurate, voting outcomes and economics can be thrown into doubt. Establishing a clean record of beneficial ownership, custodial arrangements, and permitted transfer mechanics reduces post-solicitation challenges and protects the integrity of the vote.
Preparing for Objections and Building the Court Record
Even with broad support, expect objections. Common themes include allegations of coercive milestones, inadequate disclosure, overbroad releases, unfair discrimination among similar claims, and solicitation defects. Anticipate these lines of attack by developing targeted declarations from financial advisors, operational leadership, and any proposed independent directors, plus detailed exhibits that support necessity and fairness.
Hearing strategy matters. Organize testimony to address feasibility, best interests of creditors, and good faith sequentially, underscoring how the RSA preserves value and treats similarly situated creditors consistently. Be prepared to narrow provisions on the record—such as trimming release scope or flexing milestones—without unraveling the core deal. Courts appreciate parties who balance firmness with pragmatism.
Bottom Line: RSAs Are Powerful Tools That Demand Sophisticated Execution
Restructuring Support Agreements can accelerate a Chapter 11 case, protect enterprise value, and produce predictable outcomes, but only when they are tailored to the debtor’s operating realities, capital structure, and tax posture. What appears simple—a consensus term sheet—often masks a thicket of interdependent covenants, disclosures, and regulatory constraints. Overconfidence in template language is a recipe for delay and value erosion.
Engaging experienced counsel and integrated financial and tax advisors early pays for itself in avoided missteps and enhanced recoveries. The right team will architect an RSA that survives judicial scrutiny, aligns incentives across stakeholder classes, and positions the reorganized company for sustainable performance post-emergence. In an environment where time is costly and credibility is currency, that sophistication is not optional; it is decisive.
