The two-thirds test is measured on claims that vote, so the blocking stake depends on who else turns up, and buying a third of the class usually overpays.
A class of claims accepts a Chapter 11 plan when holders of at least two-thirds in amount, and more than half in number, of the claims that vote accept it. A blocking position is therefore a rejecting amount greater than half of the amount voting yes. In an illustrative $900M class where a supporting group holds 58 per cent, anything above $261M blocks: 29.0 per cent of the class, not the 33.3 per cent the rule of thumb suggests.
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Distressed investors talk about "a third plus one" as if it were a fixed number. It is not, because the test in section 1126(c) of the Bankruptcy Code is measured on claims actually voted, not on the whole class. Who else turns up, and how much the plan's supporters already hold, set the size of the block. Getting it wrong means buying debt you do not need, at a price that may never be recovered.
| Input | Value |
|---|---|
| Class size, allowed claims | $900M |
| Held by the group that signed the restructuring support agreement | 58% ($522M) |
| Held by everyone else | 42% ($378M) |
| Price of the term loan | 72 |
| Number of holders in the class | 150 |
| Number of holders in the supporting group | 20 |
Class accepts if: Yes ÷ (Yes + No) ≥ 2/3, and yes-voting holders > 1/2 of holders voting
Rearranged: the class rejects if No > Yes ÷ 2
If everyone votes, the block is above one-third of the class; if a share T of the class votes, above T ÷ 3
In Excel, the blocking amount against a known yes vote: =Yes/2, and its cost =Yes/2*Price/100.
Buying a full third of the class, $300M, would cost $216.0M, so the rule of thumb overpays by $28.1M on these figures. The overpayment is the price of not knowing the supporting group's holdings, and in practice those are disclosed in the group's filings, so it is avoidable.
This is an illustration of the voting arithmetic, not legal advice; vote tabulation, claim classification and designation questions turn on the facts of each case.
| Yes vote, % of class | Block above, % of class | Block above, $M | Largest possible no vote, % |
|---|---|---|---|
| 50.0% | 25.0% | 225 | 50.0% |
| 58.0% | 29.0% | 261 | 42.0% |
| 62.0% | 31.0% | 279 | 38.0% |
| 66.7% | 33.3% | 300 | 33.3% |
Once the supporting group passes two-thirds of the whole class, 66.7 per cent, no combination of other holders can block on amount. Below it, the stake needed is half of whatever the group holds, which is why the race for a blocking position is really a race against the group's own buying.
| Share of class voting | Block above, % | Block above, $M | Cost at 72, $M |
|---|---|---|---|
| 100% | 33.3% | 300 | 216.0 |
| 85% | 28.3% | 255 | 183.6 |
| 70% | 23.3% | 210 | 151.2 |
Low turnout makes blocks cheaper, but it is a risk to rely on it: holders who stay silent in a quiet case vote when they see a fight. The price matters as much. The same $261M block costs $143.6M at 55 and $221.8M at 85, so the earlier the position is built in the case, the cheaper the leverage.
The second limb of the test counts holders, not dollars. The supporting group has 20 members. If 100 holders vote, acceptance needs more than 50 of them in favour; the group alone fails. It passes only if no more than 19 other holders vote against it. Large groups usually sign up enough smaller holders to clear this, but a class with many retail or small institutional holders can be blocked in number by investors who together hold far less than $261M. Courts can also designate, and so disregard, votes cast in bad faith under section 1126(e), and a position bought only to block may attract that challenge.
The common mistake is to treat a blocking position as a veto. It defeats the class vote, not the plan. Under section 1129(b) the debtor can still confirm over a rejecting class if at least one impaired class accepts, as section 1129(a)(10) requires, and the plan is fair and equitable to the dissenters. What the block buys is the cost and risk of a cramdown fight, including a valuation contest, and its worth is whatever the plan's proponents will pay to avoid that. The second mistake is to forget the vote mechanics outside court: amending a credit agreement turns on the required lenders, which is why an uptier can strip a minority without any class vote at all.
Size a blocking position as half of the yes vote, plus one dollar, and check it against the number of holders. On these illustrative figures that is $261M, 29.0 per cent of the class, for $187.9M at 72. Whether it is worth buying depends on where the class sits in the waterfall, which the free workbook for this book answers with its fulcrum finder, and on whether the fulcrum moves with the valuation a cramdown fight would test.
More than one-third of the amount that actually votes in the class, which is the same as rejecting with more than half of the amount voting yes. If every claim votes, that is above 33.3 per cent of the class; if 70 per cent of the class votes, above 23.3 per cent. Against a supporting group holding 58 per cent, anything above 29.0 per cent blocks.
Yes, through cramdown, if at least one impaired class accepts and the plan is fair and equitable and does not discriminate unfairly against the rejecting class. A blocking position therefore buys leverage over the class vote, not a veto over the plan. Its value in the illustrative case, $187.9M at a price of 72, depends on how credible a cramdown would be.
Yes. Acceptance also needs more than half in number of the holders who vote. A supporting group of 20 large holders fails the numerosity test if 20 or more other holders vote against, even when it holds most of the debt. With 100 holders voting, it needs more than 50 votes in favour.
This article is one calculation from The Distressed Debt Investor. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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