than giving Purina more breathing room. The lenders were desperate to get whatever money they could while the firm was still solvent. The frenzy only ended on October 28, when Purina filed for bankruptcy.
With Purina in Chapter 11, Koch Industries stood to lose its $100 million investment. The bankers stood to lose much more. And they did not accept this fact easily, in part because they knew how much money Charles Koch had. Charles Koch’s wealth was well known in spite of his penchant for secrecy. Forbes magazine publicized Charles Koch’s status as a billionaire and Bill Koch’s extensive litigation that dragged the family’s finances into a public courtroom. Press reports from the Wichita Eagle to the Wall Street Journal showed that Koch Industries enjoyed billions of dollars in revenue each year. This was one of the reasons bankers had been willing to risk more than $500 million to finance the Purina Mills acquisition. Now Charles Koch was telling them they would have to kiss that money good-bye. He wouldn’t pay them back.
Koch appeared to have structured the deal in a way that protected it from the bankers’ claims. Koch used debt that was called “non-recourse” debt, meaning that lenders could not collect the debt from Koch Industries itself—they had no recourse against the parent company. They could only collect debt against the assets of Purina Mills.
But there was a way around this clause. It was called “piercing the corporate veil.” Piercing the corporate veil is one of those arcane strategies known only to a small subset of deal makers and lawyers whose careers took off during the merger boom of the 1980s and 1990s. A banker can pierce the veil by showing that nonrecourse debt was actually a sham used by a borrower to escape liability. For nonrecourse debt to be justified, the parent company needed to be truly independent from the entity borrowing the money.
Lawyers pored over the details of the Purina acquisition with the goal of proving one argument: that Purina was essentially a division of Koch Industries, not an independent company. If they could show that Koch was responsible for what happened at Purina, then Koch would be on the hook for Purina’s bad debt.
This was not a particularly hard case to prove. Dean Watson, for example, had been Purina’s CEO. But had he ever truly been independent from Koch Industries? When Watson was in trouble, he called Wichita. Purina’s payroll was processed in Wichita, along with other administrative functions. One of Purina’s most vital business activities—buying the grain to make its feed—had been shifted to Koch Industries’ trading floor. It was impossible to make the argument that Koch was not fundamentally involved in Purina’s daily operations.
The banks would sue Koch in order to pierce the veil, and going to court was a risky proposition for Koch Industries. Piercing the veil was a “binary” proposition: either the bankers pierced the veil, or they did not. With a single verdict, a bankruptcy judge could expose Koch to enormous liabilities.
If Koch lost the court battle, it could also affect the entire system that Charles Koch built over thirty years. By the late 1990s, the company was an impossibly dense interlocking set of supposedly independent subsidiaries and joint ventures. This arrangement allowed Koch to become enormous by swallowing up dozens of smaller companies while shielding it from the full liability of owning each of those companies. If a Koch subsidiary went bankrupt, then Koch would only lose its investment in that subsidiary; it wouldn’t be on the hook for all the debt and outstanding obligations of that subsidiary. But if banks in the Purina bankruptcy pierced the veil, it could call into question the walls between all of Koch’s divisions. “Imagine all the Koch subsidiaries,” said the financier who worked on the Purina bankruptcy. “The last thing Koch wants to do is guarantee all the obligations of these entities.”
Lawyers working for the banks determined that their case was strong enough to make it past the first hurdles of a lawsuit. This meant that Koch faced the real risk of trial, and the bankers’ negotiating team highlighted this risk to Koch’s attorneys. The negotiators dropped the word “litigation” a lot. They made it clear what kind of dirty laundry would be dragged into open court. They emphasized just how eager they were to file a complaint. In short, they leveraged the legal threat into a bargaining chip.
Koch finally agreed to pay $60 million to help Purina emerge from bankruptcy in