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Abstract: In this Article, we begin what we believe will be a fruitful area of scholarly inquiry: an in-depth analysis of credit derivatives. We survey the benefits and risks of credit derivatives, particularly as the use of these instruments affect the role of banks and other creditors in corporate governance. We also hope to create a framework for a more general scholarly discussion of credit derivatives.
We define credit derivatives as financial instruments whose payoffs are linked in some way to a change in credit quality of an issuer or issuers. Our research suggests that there are two major categories of credit derivative. First, a credit default swap is a private contract in which private parties bet on a debt issuer's bankruptcy, default, or restructuring. For example, a bank that has loaned $10 million to a company might enter into a $10 million credit default swap with a third party for hedging purposes. If the company defaults on its debt, the bank will lose money on the loan, but make money on the swap; conversely, if the company does not default, the bank will make a payment to the third party, reducing its profits on the loan.
Second, a collateralized debt obligation (CDO) is a pool of debt contracts housed within a special purpose entity (SPE) whose capital structure is sliced and resold based on differences in credit quality. In a cash flow CDO, the SPE purchases a portfolio of outstanding debt issued by a range of companies, and finances its purchase by issuing its own financial instruments, including primarily debt but also equity. In a synthetic CDO, the SPE does not purchase actual bonds, but instead enters into several credit default swaps with a third party, to create synthetic exposure to the outstanding debt issued by a range of companies. The SPE finances its purchase by issuing financial instruments to investors, but these instruments are backed by credit default swaps rather than any actual bonds.
In the Article's first substantive part, we discuss the benefits associated with both types of credit derivatives, which include increased opportunities for hedging, increased liquidity, reduced transaction costs, and a deeper and potentially more efficient market for trading credit risk. We then discuss the risks associated with credit derivatives, such as moral hazard and other incentive problems, limited disclosure, potential systemic risk, high transaction costs, and the mispricing of credit. After considering the benefits and risks, we discuss some of the implications of our findings, and make some preliminary recommendations. In particular, we focus on the issues of disclosure, regulatory licenses associated with credit ratings, and the special treatment of derivatives in bankruptcy.
credit derivatives, credit quality, banks, credit default swap, collateralized debt obligation, risks, moral hazard, disclosure, credit ratings, bankruptcy
Abstract: Hostile takeovers are commonly thought to play a key role in rendering managers accountable to dispersed shareholders in the Anglo-American system of corporate governance. Yet surprisingly little attention has been paid to the very significant differences in takeover regulation between the two most prominent jurisdictions. In the UK, defensive tactics by target managers are prohibited, whereas Delaware law gives US managers a good deal of room to maneuver. Existing accounts of this difference focus on alleged pathologies in competitive federalism in the US. In contrast, we focus on the supply-side of rule production, by examining the evolution of the two regimes from a public choice perspective. We suggest that the content of the rules has been crucially influenced by differences in the mode of regulation. In the UK, self-regulation of takeovers has led to a regime largely driven by the interests of institutional investors, whereas the dynamics of judicial law-making in the US have benefited managers by making it relatively difficult for shareholders to influence the rules. Moreover, it was never possible for Wall Street to privatize takeovers in the same way as the City of London, because US federal regulation in the 1930s both pre-empted self-regulation and restricted the ability of institutional investors to coordinate. Our account has implications for debates about takeover regulation in both the US and the EU.
hostile takeovers, history of corporate law, comparative corporate law, self-regulation, institutional investors, evolution of law, Anglo-American corporate governance
Abstract: This article addresses the question whether the recent changes in bank and insurance firm governance suggest that U.S. financial firm governance will soon replicate the governance of nonfinancial firms. In addressing this question, the Article starts from the assumption that we must consider both corporate governance and the background insolvency procedures to fully appreciate the overall governance framework. In particular, the relationship between corporate governance and insolvency tends to be complementary. The governance of nonfinancial U.S. firms, for instance, relies on ex post correctives such as takeovers to address the conflicts of interest between managers and widely scattered shareholders; and if the firm fails, offers a manager-driven reorganization option. In other nations, such as Germany and Japan, banks and other large investors actively participate in corporate governance; bankruptcy is characterized by immediate displacement of managers and liquidation of the firm. I describe U.S. governance as an "ex post" framework, and the German and Japanese alternative as an "ex ante" approach. Unlike nonfinancial firms, the governance of U.S. banks and insurance companies has long been ex ante in character. Takeovers and other ex post correctives have been rare, and insolvency means immediate removal of the managers and liquidation of the firm. Although the principal overseer of bank and insurance managers is a governmental regulator, rather than a private investor, the overall governance framework functions very much like the approach used by nonfinancial firms in Germany and Japan. The recent changes in bank and insurance firm governance have introduced a significantly greater market component, but the regulatory framework puts real limits on how far the transition can or will go. Despite the changes, bank and insurance governance has retained much of its traditional character. As the discussion thus far suggests, much of the analysis is descriptive rather than normative in character. In discussing the treatment of insolvent banks and insurers, however, the article offers several prescriptions for improving the governance framework. In order to reduce managers' current incentive to avoid insolvency proceedings at all costs, and to harness managers' superior information about the firm, the article calls for changes to both bank and insurance insolvency law. In banking, managers should be permitted to propose a "prepackaged" purchase and assumption transferring the banks assets and liabilities to another bank; and a traditional reorganization option should be added to insurance insolvency. The article also argues that lawmakers should add insurance insolvency (though not bank insolvency) to the Bankruptcy Code.
Abstract: The usual reaction if one mentions bankruptcy as a mechanism for addressing a financial institution's default is incredulity. Those who favor the rescue of troubled financial institutions, and even those who prefer that their assets be promptly sold to a healthier institution, treat bankruptcy as anathema. Everyone seems to agree that nothing good can come from bankruptcy. Indeed, the Chapter 11 filing by Lehman Brothers has been singled out by many as the primary cause of the severe economic and financial contraction that followed, and proof that bankruptcy is disorderly and ineffective. As a result, ad hoc rescue lending to avoid bankruptcy has been the preferred solution. In this Article, we seek to provide the first careful assessment of the belief that governmental rescues are preferable to bankruptcy. While the interaction of financial firms, systemic risk, and Chapter 11 is complex, our analysis suggests that the widespread belief that bankruptcy should not be used to resolve the distress of financial firms is misguided, and that it has had serious costs in the recent crisis. Although bankruptcy is not always the optimal response to financial distress, it is more effective than is generally realized. In Parts I and II of the Article, we describe the principal problems created by financial distress - debt overhang and creditor runs - and the mechanisms bankruptcy provides for addressing these problems. We then provide historical context in Part III, looking to Drexel Burnham's bankruptcy in 1990 for further lessons about the efficacy of bankruptcy. In Part IV, we turn to firm-specific bailouts, describing this strategy's benefits and the distortions it causes. We then shift our focus back to bankruptcy, considering the (legitimate) concern that it may not adequately counteract systemic risk in Part V, and exploring its treatment of derivatives, one of the chief new habitats of systemic risk, in Part VI. Part VII is a brief conclusion.
Chapter 11 reorganization, insolvency, financial crisis, intervention in financial markets, government rescue, ad hoc rescues, bailout, Federal Reserve, investment banking, Lehman Brothers, debt overhangs, creditor runs, systemic risk, derivatives
Abstract: Chrysler entered and exited bankruptcy in 42 days, making it one of the fastest major industrial bankruptcies in memory. It entered as a company widely thought to be ripe for liquidation if left on its own, obtained massive funding from the United States Treasury, and exited via a pseudo sale of its main assets to a new government-funded entity. The unevenness of the compensation to prior creditors raised considerable concerns in capital markets, which we evaluate here. We conclude that the Chrysler bankruptcy cannot be understood as complying with good bankruptcy practice, that it resurrected discredited practices long thought interred in the 19th and early 20th century equity receiverships, and that its potential, if followed, for disrupting financial markets surrounding troubled companies in difficult economic times is more than small.
corporate reorganization, bankruptcy, chapter 11
Abstract: Hostile takeovers are commonly thought to play a key role in rendering managers accountable to dispersed shareholders. Yet, surprisingly little attention has been paid to the very significant differences in takeover regulation between the two most prominent practitioners of hostile takeover, the United Kingdom and the United States. In the UK, defensive tactics by target managers are prohibited, whereas in the United States, Delaware law gives managers a good deal of room to maneuver. We examine the evolution of the two regimes from a public choice perspective, and argue that the differences between the two countries is influenced by differences in the mode of regulation - that is, by who it is that does the regulating.
take-over regulation, John Armour, David Skeel, hostile take-overs, U.S., UK, corporate governance, supply side, competitive federalism, policy, legislation, defensive tactics, poison pills, modes of regulation, litigation, financial performance, hostility,share ownership, self-regulation,comparison
Abstract: Conservative Christians are often accused, justifiably, of trying to impose their moral views on the rest of the population: of trying to equate God's law with man's law. In this essay, we try to answer the question whether that equation is consistent with Christianity.
It isn't. Christian doctrines of creation and the fall imply the basic protections associated with the rule of law. But the moral law as defined in the Sermon on the Mount is flatly inconsistent with those protections. The most plausible inference to draw from those two conclusions is that the moral law - God's law - is meant to play a different role than the law of code books and case reports. Good morals inspire and teach; good law governs. When the roles are confused, law ceases to rule and discretion rules in its place. That is a lesson that many of our fellow religious believers would do well to learn: Christians on the right and on the left are too quick to seek to use law to advance their particular moral visions, without taking proper account of the limits of law's capacity to shape the culture it governs. But the lesson is not only for religious believers. America's legal system purports to honor the rule of law, but in practice it is honored mostly in the breach. One reason why is the gap between law's capacity and the ambitions lawmakers and legal theorists have for it. Properly defining the bounds of law's empire is the key to ensuring that law, not discretion, rules.
Abstract: In the 1980s and early 1990s, many observers believed that the American corporate bankruptcy laws were desperately inefficient. The managers of the debtor stayed in control as "debtor in possession" after filing for bankruptcy, and they had the exclusive right to propose a reorganization plan for at least the first four months of the case, and often far longer. The result was lengthy cases, deteriorating value and numerous academic proposals to replace Chapter 11 with an alternative regime. In the early years of the new millennium, bankruptcy could not look more different. Cases proceed much more quickly, and they are much more likely to result in auctions or other sales of assets than in previous decades. This transformation is due in part to a change in the major corporations that file for bankruptcy. Rather than industrial, bricks-and-mortar firms, many of the new debtors are knowledge-based firms with transient assets. Much more important, however, has been the adjustments creditors have made in an effort to reassert control in bankruptcy. In this Article, I focus on the two most important contractual developments: lenders' use of debtor-in-possession financing agreements as a governance lever; and the so-called pay-to-stay arrangements which give key managers bonuses for meeting specified performance goals (such as quick emergence from bankruptcy or the sale of important assets). Both of these developments can be seen as adjustments by creditors to counteract bankruptcy's interference with the shift in control rights that would ordinarily occur at the time of financial distress. As I have discussed elsewhere, chapter 11 functioned somewhat like an antitakeover device in the 1980s. Creditors have now neutralized its effects. Of the two new contractual approaches, pay-to-stay agreements have proven much more controversial, prompting heated complaints about excessive managerial pay in cases like Enron, Polaroid and Kmart. The controversy is similar in obvious respects to the recent complaints about performance-based pay outside of bankruptcy. I argue that pay-to-stay agreements are more defensible, but also argue that bankruptcy compensation should be constrained in several ways. Although the use of DIP financing agreements to shape bankruptcy cases has not received nearly so much attention, the effect is even more profound. I argue that the use of these agreements to control Chapter 11 cases is, on the whole, a beneficial development. But I also argue that some of their terms - such as provisions protecting pre-petition loans by the DIP lenders and the use of DIP agreements to lock up control - should be subject to careful judicial scrutiny.
Abstract: When the ascendancy of a new movement leaves a visible a mark on American politics and law, its footprints ordinarily can be traced through the pages of America's law reviews. But the influence of evangelicals and other theologically conservative Christians has been quite different. Surveying the law review literature in the 1976, the year Newsweek proclaimed as the year of the evangelical, one would not find a single scholarly legal article outlining a Christian perspective on law or any particular legal issue. Even in the 1980s and 1990s, the literature remained remarkably thin. By the 1990s, distinctively Christian scholarship had finally begun to emerge in a few areas. But even today, the scope of Christian legal scholarship is shockingly narrow for so nationally influential a movement.
This Article argues that the strange trajectory of Christian legal scholarship can only be understood against the backdrop of the fraught relationship between religion and American higher education starting in the late nineteenth century. As the nation's modern research universities emerged in 1870s, leading reformers began to promote nonsectarian, scientific approaches to scholarship. These developments increasingly excluded religious perspectives. But the disdain did not run in one direction only. For much of the twentieth century, American evangelicals absented themselves from American public life. Theologically conservative Christians who remained in legal academia operated under cover, a stance reflected in the absence of Christian legal scholarship except on church-state issues, in the Catholic natural law tradition, and in a handful of other areas.
The first half of the Article is devoted to this historical exegesis and to a survey of current Christian legal scholarship. The Article then shifts from a critical to a more constructive mode, from telling to showing, as I attempt to illustrate what a normative, and then a descriptive, Christian legal scholarship might look like.
evangelicals, theologically conservative Christians, law review articles, scholarly literature, Christian scholarship, normative, secular law, law as morality, debt relief, Bono, norm entrepreneurs
Abstract: As commentators have long pointed out, once established, administrative agencies are almost impossible to kill. Scaling back the authority of an agency is somewhat easier, but even retrenchment proves difficult. Given these political realities, the trajectory of the Securities and Exchange Commission ("SEC") in corporate bankruptcy is remarkable. Led by William Douglas (head of the SEC before his appointment to the Supreme Court), the New Deal reformers and their allies in Congress transformed corporate reorganization practice by enacting the Chandler Act of 1938. In addition to destroying the influence of Wall Street bankers and lawyers, the Chandler Act positioned the SEC at the heart of the reorganization process. At first, the SEC did in fact play a dominant role in bankruptcy. But over the next several decades, the SEC slowly lost its grip. The end came in 1978, when Congress ushered the SEC out of bankruptcy almost completely as part of its next major reform. This Article addresses a single question: what happened? Why did the SEC, whose oversight had been seen as crucial to investor protection, disappear from bankruptcy? Drawing from recent positive political theory on Congressional institutions, I argue that the answer to these questions lies in the initial structuring of the SEC's role. In their zeal to destroy the Wall Street banks and lawyers who had previously dominated reorganization practice, William Douglas and the other New Deal reformers strengthened the hand of two interest groups, the general bankruptcy bar and bankruptcy judges, who each had strong incentives to resist SEC oversight. Congress's enactment of the Chandler Bill, rather than a companion bill considered at the same time, further compounded the SEC's troubles by subjecting subsequent reforms to a committee (the Judiciary Committee) that is more likely to favor bankruptcy lawyers than the SEC. Although these political factors explain the SEC's near disappearance from bankruptcy, this Article concludes that the time may now be ripe for the SEC to increase its profile once again, though in a more limited way than the New Deal reformers envisioned. Many of the securities law issues that the SEC regulates, from takeovers to securities trading, now figure prominently in major corporate reorganization cases as well. Regulation by the SEC would be the best means of coordinating the treatment of these issues inside of bankruptcy and out.
Abstract: We analyze a sample of large Chapter 11 cases to determine which factors motivate the choice of filing in one court over another when a choice is available. We focus in particular on the Delaware court, which became the most popular venue for large corporations in the 1990s. We find no evidence to suggest that Delaware's popularity was driven by managers or equity holders seeking a procedure friendly to their interests. Instead, debt structure differences, specifically, the fraction of assets financed with secured debt, and court characteristics, particularly a court's level of experience, are the most important factors driving the choice of venue. While Delaware does not appear significantly different with respect to deviations from absolute priority in favor of equity or likelihood of producing reorganizations, it does differ along the dimension of speed. Controlling for other factors, we find that a Delaware reorganization is between 140 and 190 days faster than an equivalent case in another court. Given that speed benefits secured creditors most, we conclude that Delaware's popularity in the 1990s was unlikely to have resulted from a pro-debtor bias combined with a manager or equity holder preference for Delaware.
bankruptcy, Chapter 11, venue choice, forum shopping, Delaware, reorganization
Abstract: The history of twentieth century Christian legal scholarship - really, the absence of Christian legal scholarship in America's elite law schools - can be told as a tale of two emblematic clashes: the first an intriguing historical footnote, the second a brief, explosive war of words. In the first, a tort action in Nebraska circa 1890,William Jennings Bryan and Roscoe Pound served as opposing counsel; the second was a war of words in the 1940s between a group of neo-Thomist scholars and defenders of Oliver Wendell Holmes. Using these two incidents to frame as a starting point, this essay briefly chronicles the disappearance of Christian legal scholarship from the elite law reviews for much of the twentieth century. In the past few years, however, there have been signs of a possible renaissance. The second half of the essay focuses on the signs of renewal. To organize the discussion, I address three very basic questions: What?, Who?, and How? - What are the most promising directions for Christian legal scholarship? Who is a Christian legal scholar? And how can Christian legal scholarship best be facilitated?
Law and Society, Legal History, Religion, evangelicals, theologically conservative Christians, law review articles, scholarly literature, Christian scholarship, realism, morality, moral philosophy, international human rights, Catholicism, William Jennings Bryan, Roscoe Pound, Oliver Wendell Holmes
Abstract: This article addresses two issues that have generated enormous debate in both the corporate law and the bankruptcy literature: the use of breakup fees and other lockup provisions, and Delaware's prominence as the nation's leading corporate address. The first half of the Article weighs in on the role of lockup provisions. Corporate law commentators have adopted widely divergent views of the propriety of lockups, with several calling for courts to uphold all lockups and others proposing varying levels and kinds of scrutiny. To make sense of this debate, I show that the existing literature can be distilled to three central issues: 1) commentators' views on the larger corporate law controversy over managers' proper response to unsolicited takeover bids; 2) their views as to whether target managers can or will prove disloyal to shareholders' interests; and 3) their assumptions about the appropriate size of lockups - that is, how much compensation should be allowed. In describing the importance of these three issues, I develop and defend my own normative position. Because lockups can entice managers to accede to a change in control they might otherwise resist, I argue that courts should enforce both first and second bidder lockups. Courts should limit lockup bidders to their reliance interest, however, rather than allowing even larger lockups. Interestingly, the Delaware case law on lockups has evolved in a direction quite similar to the normative approach I defend. I conclude the lockup analysis by considering the role of lockup provisions in bankruptcy. Although many courts and commentators have contended that bankruptcy calls for an entirely different approach to lockups, I argue that the extensive similarities between the two contexts suggest that courts should also apply a reliance-based approach in bankruptcy - though the approach should be tailored to reflect the nature of the bankruptcy decision making process. The second half of the Article considers the longstanding state law charter competition debate. The analysis begins by describing the two traditional views: "race to the bottom" theorists insist that Delaware and other states cater to managers at the expense of shareholders, whereas "race to the top" theorists contend that market forces impel managers and states to take shareholder interests into account. Much of the most recent literature leans toward the race to the top view, but concludes that Delaware's dominance enables it to favor local interests such as the Delaware bar. In assessing the literature, I emphasize the moral dimension in the Delaware case law, and show that many of the rules the benefit Delaware lawyers also further Delaware's role as moral arbiter in corporate law. Turning to corporate bankruptcy, I argue that Delaware's increasingly prominent role in bankruptcy offers many of the same benefits as its preeminence in state corporate law. Because corporate bankruptcy is regulated by Congress rather than the states, the analogy is far from perfect. But the similarities make clear that the recent campaign to prohibit large corporate debtors from filing for bankruptcy in Delaware is misguided. Several recent commentators have challenged an earlier article of mine that defended Delaware's popularity as a bankruptcy forum. I conclude by pointing out the problems in their critique.
Abstract: Unlike many key corporate law decisions, the 1984 Delaware Supreme Court decision in Aronson v. Lewis was not heralded by stories in the Wall Street Journal and New York Times, nor in any other newspaper of note. Even now, few people other than corporate law experts are likely to recognize the name. Yet Aronson plays a pivotal role in many corporate law decisions that do get a lot more attention. Aronson established the parameters for filing derivative litigation against the directors of a corporation (or a third party, but derivative suits against third parties are now rare). A shareholder who sues derivatively alleges that the directors have breached a duty to the corporation, and seeks to pursue the litigation on the corporation's behalf. In effect, the shareholder argues that the corporation should have brought the suit itself, but because it failed to do so, the shareholder would like to step into the company's shoes. The shareholder's right to sue is based on, or "derivative" of the corporation's right - hence, the name. Aronson v. Lewis is nested deep within the longstanding effort to devise a framework that sensibly mediates between the competing concerns of encouraging meritorious litigation through the derivative litigation device and screening out strike suits. To provide context, this article briefly surveys the history of the derivative litigation, a history that shows US and UK courts adopting very different stances toward derivative litigation and the policing of corporate directors. In the UK, the principal remedy for directorial misbehavior is private action by large shareholders or intervention by regulators, and courts have repeatedly stymied shareholder litigation. US courts, by contrast, helped to facilitate shareholder litigation. After pausing to consider the rise of federal securities litigation (which is "direct" rather than derivative in nature but poses many of the same problems as derivative litigation), the article focuses on a controversial Delaware Supreme Court case that set the stage for Aronson. The article then explores Aronson itself, and the remarkably effective framework it establishes for addressing derivative litigation.
corporation law, shareholder derivative litigation, breach of duty by corporate directors, legal history, business corporations, securities class actions
Abstract: What gets an economy up and running after a catastrophic war or a period of oppressive rule? While there are nearly as many answers to these questions as experts, one of the most prominent for the past century has been law. Nearly every page of Law and Capitalism, a remarkable new book by Curtis Milhaupt and Katharina Pistor, stands in implicit or explicit dissent from the prevailing view.
Milhaupt and Pistor's countermodel begins a matrix consisting of two axes. The first contrasts a purely protective regime on one end, with a pervasively "coordinative" approach on the other. The second axis ranges from decentralized governance at one end to centralized governance at the other. Using the matrix as an organizing framework, the authors then conduct detailed case studies of six high profile corporate crises in a total of seven countries (the U.S., Germany, Japan, South Korea, China, Singapore and Russia), each from the opening years of the new century. In each of the case studies, which they call "institutional autopsies," Milhaupt and Pistor find evidence both of transition and of retrenchment - and of the rolling relations between markets and law.
The first two parts of this Review describe and critique Milhaupt and Pistor's matrix-and-autopsy approach in more detail.The final three parts offer institutional autopsies of three crises that do not appear in the book. The first two are the two most obvious omissions from the period covered by Law and Capitalism, the collapses of WorldCom in the United States and Parmalat in Italy. Under the prodding of the Securities and Exchange Commission, both companies sought to remake themselves as paragons of corporate governance as they emerged from their insolvency proceedings. The final autopsy explores the more recent failure of Bear Stearns in early 2007. The autopsy considers the possibility that bankruptcy might have been a better solution to Bear's financial distress than the government-supported sale to J.P.Morgan, and argues that the government intervention delayed and may even have diminished the likelihood of thoroughgoing financial services reform.
Contract rights, property rights, centralized governance, decentralized governance, corporate autopsies, insolvency, endowment perspective, economic crisis, corporate governance, Parmalat, Bear Stearns, financial intermediation, financial services, regulation, regulatory reform
Abstract: This article explores three different kinds of reforms that could be used to help governmental corporations achieve some of the benefits of privatized, market-based governance without giving up governmental control. The first, and simplest, proposal is to use an annual contract between GOC managers and their ministerial shareholders to reduce managerial agency costs. In addition to providing a benchmark for managerial performance, the contract also could be used to segment the GOC's different goals in order to minimize the downside effects of having multiple principals (with multiple objectives) monitoring the manager-agents. Second, I suggest that requiring at least some GOC's to issue subordinated debt would create a class of private investors who could provide additional monitoring as well as market signals about the prospects of the firm. Finally, I focus on various boundary problems with GOC's, as compared to private firms. I argue that GOC's should be required to set up separate subsidiaries when they expand into new product areas. Requiring the GOC to set up a separate subsidiary would make it much easier to police inappropriate cross subsidization.
Abstract: Using a 1977 article by Robert Clark as the starting point, this article attempts to shed new light on the question of whether and when shareholder loans to her company should be either equitably subordinated or, as courts have done in a few recent cases, recharacterized as equity. In its emphasis on the particular issue of shareholder loans, the article has a narrower compass than Clark's article, which uses a four-part typology to explore the relationship among fraudulent conveyance law, equitable subordination, veil piercing and dividend restrictions. But the article also expands Clark's analysis in several respects. The most important adjustment involves the general Nonhindrance ideal, which we use to identify a crucially important form of interference with the rights of creditors that Clark does not himself consider directly. Part 1 of the article very briefly describes the 1939 Supreme Court case that served as a well-spring for equitable subordination doctrine in general, and for subordination of shareholder loans in particular. Part 2 then focuses on a series of recent decisions that have wrestled with the question whether shareholder loans should be recharacterized as equity contributions. Recharacterization doctrine is closely related to equitable subordination, but most courts view it as a separate development. Part 2 suggests that much of the confusion in the cases could be eliminated by disentangling two issues, whether the status of a loan is ambiguous (which raises issues of Truth, in terms of Clark's typology) and whether it was likely to destroy value that would otherwise go to creditors (the Nonhindrance concern); and by distinguishing bankruptcy recharacterization from the tax characterization cases that seem to have spawned the new doctrine. Part 3 then concludes by briefly considering the German and Austrian approaches to these same issues, which focus on capitalization and creditworthiness. The most important, and initially counterintuitive, implication comes in Part 2: whereas US courts have treated security interests as a badge of legitimacy in assessing shareholder loans, secured loans are actually the most worrisome form of shareholder investment. These security interests, we argue, should be disallowed.
corporations, corporate reorganization, fraudulent conveyance, recharacterization, bankruptcy, secured debt, shareholder loans, priority
Abstract: Ask most people what they associate with "Christianity and the corporation" and, at least in the US, they may mention activist nuns calling for shareholder votes on sweatshop labor, nuclear weapons or divestment from South Africa, or perhaps a newspaper story about mutual funds that invest only in "faith friendly" corporations. Each is a contemporary manifestation of relations that run far deeper, and date back well over a thousand years. The early church spawned many of the largest corporate enterprises of the middle ages, and tenaciously promoted the concept of a collective entity distinct from the state. When the modern large scale corporation emerged in the nineteenth century, Christian responses were more complicated. Many worried about the effects of limited liability, and evangelical populists insisted that railroads and other large corporations needed to be tamed by governmental regulation. But others held very different views. More recently, Christians perspectives have tended divide between those who view large scale corporations as an essential counterbalance to state power that should be free from governmental interference, and those who favor a much firmer regulatory grip. This chapter traces these Christian attitudes toward and influence on the large scale corporation. We begin with the pre-history, the emergence of key attributes of the corporate form in Western Europe in the late Roman Empire and thereafter. From there, we turn to England and the United States, where the corporation achieved its modern form in the mid nineteenth century. The remainder of the chapter focuses most extensively on the United States, which saw a remarkable proliferation of large, widely held corporations as a result of the so-called Great Merger Wave at the end of the nineteenth century. We are now in the midst of another upheaval. While the corporate form itself has not changed, the advent of new financing techniques has simultaneously provided new tools for, and put more pressure on, corporate managers. It is too early to define the Christian contributions to these developments with any precision, but just the right time to consider some of the possibilities.
Christian attitudes, legal history, religion, business corporations, decentralized governance
Abstract: Current odious debt doctrine - using the term "doctrine" loosely, since it has never formally been adopted by a court or international decision maker - dates back to a 1927 treatise by a wandering Russian academic named Alexander Sack. Sack suggested that debt obligations are odious and therefore unenforceable if 1) they were incurred without the consent of the populace; 2) they did not benefit the populace; and 3) the lender knew or should have known about the absence of consent and benefit. The tripartite Sack definition, which quickly became the foundation of odious debt analysis, contemplates a debt-by-debt approach to questionable borrowing. As attractive as it is in theory, the debt-by-debt approach has a debilitating weakness: money is fungible. A loan that is ostensibly incurred for beneficent purposes often may simply free up other money for misuse. The principal alternative to a debt-by-debt approach is focusing on the odiousness of the regime, rather than the nature of a particular loan. We argue in this article that a regime-centered strategy is the most promising way forward for odious debt doctrine. To make this case, we must first define what an odious regime is. Perhaps because the Sack definition does not home in directly on the regime, prior scholars have not defined what should or should not count as an odious regime. More surprising, even the few commentators who do call for regime-centered perspectives elide the definitional question. This article attempts to fill the vacuum. A regime is odious, we will argue, if it engages in either systematic suppression or systematic looting. Odious regimes sometimes suppress a subgroup of the population, as with blacks in Apartheid South Africa and Jews in Nazi Germany, and sometimes suppress the entire population, as with Idi Amin's Uganda. The suppression often, but not always, is accompanied by looting. Every odious regime, in our view, is marked by one, the other or both. After developing our definition, we consider how the definition might be operationalized. We propose that two existing institutions, the United Nations and the International Monetary Fund, share responsibility for identifying odious regimes. The UN, in our view, is best positioned to determine whether a regime is engaging in systematic suppression, while the IMF would assess concerns about looting and other, similar financial depredations. If the UN found evidence of systematic suppression, its declaration of odiousness, which could be made either while the regime was in place or after a new regime had emerged, would render obligations of the regime unenforceable. We envision the IMF policing a regime's looting by imposing conditionalities on access to IMF assistance as well as invalidating the regime's debt.
Odious debt doctrine, legal history, international law, politics, systematic suppression, systematic looting, tyranny, UN, United Nations, IMF, International Monetary Fund, sovereign debt, national debt, repayment, forgiveness
Abstract: For the past several decades, Congress has steadily expanded the exclusion of securities market operations from core bankruptcy protections. This Article focuses on three of the most important of these issues: the exclusion of brokerage firms from Chapter 11; the protection of settlement payments from avoidance as preferences or fraudulent conveyances; and the exemption of derivatives from the automatic stay and other basic bankruptcy provisions. In Parts I, II and III of the Article, I consider each of the issues in turn, showing that each has had serious unintended consequences. Both Drexel Burnham and Lehman Brothers evaded the brokerage exclusion, for instance; and the settlement provision has been invoked in several high profile contexts that do not fit neatly within the core cases for which it was designed. The application of the special derivatives provisions has also raised even more questions, once again most prominently in the Lehman bankruptcy. In the final part of the Article and in a brief conclusion, I explore the implications of the awkward interaction between bankruptcy and securities law. I begin by speculating about how bankruptcy courts will handle each of these issues if Congress does not alter the current rules. I then consider how Congress might intervene in these areas to address some of the problems that have arisen. I focus most extensively on the most complex of the issues, bankruptcy’s special protections for derivatives and other financial contracts. After surveying possible alternatives to the existing framework, I propose and defend two strategies for reform: under the first and more novel, the stay would apply in cases involving systemically important firms but not in other cases; and the second would simply remove the existing exemptions, imposing the stay in all cases. I argue that the choice between the two approaches depends on the overall structure of financial services regulation.
Bankrupt brokerage houses, corporate reorganization, securities law, derivative contracts, financial services, overlap between bankruptcy and securities law, automatic stay, exemptions from bankruptcy protection
Abstract: While evangelicals' stance toward markets has a rather libertarian tone, there is nary a whiff of libertarianism when it comes to gambling. Evangelicals have been the principal opponents of the lotteries nearly every state has put in place in the past three decades. Evangelicals also have actively opposed other efforts to expand legalized gambling, such as the recent movement to add slot machines to racetracks. The tension, of course, is that markets are not all that easy to differentiate from gambling. Although there are important distinctions, large numbers of investors are, at bottom, betting on uncertain outcomes in much the same way as gamblers who patronize casinos or buy lottery tickets. When we get to day-trading, moreover - that is, traders who rapidly buy and sell stocks, and generally close out all of their positions by the end of the day - we are looking at gambling, pure and simple. My suggestion that markets look a lot like gambling is not a novel idea. It also is not particularly surprising that evangelical Christians are hostile to gambling, much as their forbears were. Somewhat less clear is why evangelicals so fervently defend free markets. To understand the longstanding link between evangelicals and market-based economics, it is necessary to begin by briefly exploring attitudes toward gambling and the market economy in the early years of the Republic. After exploring the sometimes complicated early perspectives - gambling was generally condemned, but lotteries were used to finance churches and other institutions - the essay argues that evangelicals have been more willing to "renegotiate" their stance toward market developments (such as futures contracts) than toward traditional forms of gambling. The essay argues that evangelicals have sometimes expected too much from the law - from legal intervention - when it comes to racetrack slots and Internet gambling, and too little in the world that gave us Enron and WorldCom. The common theme is the question of what can - and can't - the law do well.
Abstract: For at least two decades now, commentators have suggested that international policymakers should establish a sovereign bankruptcy regime. In 2002, the debate intensified when the International Monetary Fund (IMF) explicitly endorsed the sovereign bankruptcy concept, and offered a detailed proposal for what the Fund refers to as a "Sovereign Debt Restructuring Mechanism." In this Article, we consider the arguments in favor of sovereign bankruptcy, assess the IMF's SDRM, and develop our own sovereign bankruptcy framework. Perhaps the single most important theme of our analysis is the importance of promoting adherence to absolute priority wherever possible. Contrary to much of the criticism of sovereign bankruptcy, which worries that this approach would seriously undermine creditors' entitlements, we argue that sovereign bankruptcy can actually assure greater adherence to absolute priority than the status quo. Because it is often impracticable to lend to sovereigns on a collateralized basis, creditors currently have great difficulty assuring that their priorities will be honored. Even ostensibly collateralized obligations, moreover, may not guarantee priority treatment, as evidenced by the subversion of priorities when Ecuador restructured its debt in 1999.
We argue in this Article that the classification and voting rules of a sovereign bankruptcy regime can be used to address this problem. As a baseline, we propose that the SDRM or other framework enforce strict, first-in-time absolute priority. Bonds issued first would have priority over those issued later. The only exceptions to first-in-time priority would involve trade debt (which would always be treat as a priority obligation) and collateralized lending (which would be given priority treatment under some circumstances). Against this backdrop, we propose a two step classification and voting process for confirming a restructuring plan. The debtor would first make a proposal as to how much its overall debt would be scaled back - that is, how large the overall "haircut" to creditors would be. If a majority of all creditors approved the haircut, the second step would simply entail reducing the creditors' claims in this amount, starting with the lowest priority creditors and working up the priority hierarchy. This two step approach not only would reinforce the creditors' priorities within the SDRM; it also would clarify their priorities outside of the restructuring process.
The Article proceeds as follows. Part I explores the principal alternatives to sovereign bankruptcy - collective action provisions and the status quo - and explains why neither is an adequate substitute for an SDRM. In Part II, we provide a brief overview of the IMF's current proposal, and note some of its principal shortcomings - most importantly, its inadequate consideration of the SDRM's ex ante effects. Parts III-VII then develop our proposal. Part III takes up the question whether to impose a stay on litigation. Part IV then gets to the heart of the SDRM, and outlines the classification and voting scheme. Part V addresses the issue of interim financing. In Part VI, we argue that oversight should be vested in existing bankruptcy and insolvency courts. We then complete the discussion by discussing opt-out in Part VII, and tie the analysis together with a brief conclusion.
Bankruptcy, sovereign bankruptcy, bankruptcy framework, sovereign debt restructuring mechanism
Abstract: Chapter 11's distinctive post-petition financing rules trace their ancestry back to the origins of large scale corporate reorganization in America in the nineteenth century. In this sense, post-petition financing has always been with us. But in the past decade, the role of the financers has changed. After a century in the shadows, post-petition lenders have stepped onto center stage. The DIP loan agreement has become the single most important governance lever in many large Chapter 11 cases. Why have these formerly bashful financers suddenly started hogging the spotlight? I argue in this article that the generous terms offered to DIP financers have encouraged lenders to make loans to cash-starved debtors, and that these lenders have used their leverage to fill a governance vacuum that was created by the enactment of the 1978 Code. Prior to the New Deal, J.P. Morgan and a handful of other Wall Street banks dominated the governance process when large companies were reorganized. The New Deal reformers kicked the Wall Street banks out in 1938, and required that a trustee be appointed to run the debtor's business in large reorganization cases. When the 1978 Code eliminated the mandatory trustee requirement, it left a governance void in Chapter 11. After creditors were burned in a number of post-1978 cases, bank lenders began using their post-petition financing agreements to rein in debtors' managers, and to influence the course of the reorganization process. After recounting this history in Part I of the Article, I describe the current DIP financing arrangements in Part II. There are two general kinds of DIP loans. In most cases, the DIP financing takes the form of a standard loan. By structuring the loan as a revolving credit agreement, and imposing strict conditions on each new round of financing, the lender is assured that it will have significant leverage over the debtor's managers' decision-making throughout the Chapter 11 case. I call these arrangements loan-oriented DIP financing. I refer to the second type of DIP financing arrangement as loan-and-control financing. In these cases, the DIP loan is used to transfer control to the DIP lender itself, either through a sale to the DIP lender or as the intended outcome of the Chapter 11 reorganization. Although DIP lenders have improved Chapter 11 governance in the past decade, there are significant grounds for concern as well. I explore these concerns in Part III. With loan-oriented DIP financing, the principal concerns are that the lender may have too great an incentive to force the debtor to liquidate assets, due to the lender's priority status; and that the lender will use the post-petition loan to improve the status of loans it extended prior to bankruptcy. The principal danger with loan-and-control transactions is that the lender will use the DIP financing agreement to divert value from general creditors or stymy other, competing bids for control of the troubled company. I offer a variety of proposals for counteracting these problems. Courts should refuse to permit provisions that protect a pre-petition loan, for instance; better yet, the pre-petition and post-petition loans should be separated, and the pre-petition portion paid last. With loan-and-control transactions, I argue that provisions that could chill alternative bids should be subject to at least as much scrutiny as anti-takeover devices receive outside of bankruptcy. I also argue that claims trading is often a superior mechanism for transferring control, and should be encouraged by reducing some of the frictions that interfere with the market. Part IV concludes the Article by very briefly describing some of the implications of the analysis for other jurisdictions.
Chapter 11, post-petition financing rules, bankruptcy, debtor-in-possession financing
Abstract: Faced with hundreds of clergy sexual misconduct cases, the Boston Archdiocese hinted that it was considering filing for bankruptcy before later settling the cases. This Article explores the implications for a religious organization of filing for bankruptcy. The Article focuses on four obvious problems with the bankruptcy alternative: the possibility that the case would get kicked out as having been filed in bad faith; the question of what church assets would get pulled into the bankruptcy process; the fact that the church might be subject to intrusive scrutiny in bankruptcy; and the moral implications of a bankruptcy filing. These concerns suggest that religious organizations should only file for bankruptcy as an absolute last resort. Nevertheless, the Article concludes that it may be appropriate to file for bankruptcy under some circumstances if the religious organization commits to paying all of its creditors in full.
Bankruptcy, religious organization and bankruptcy
Abstract: The book that will lay the groundwork for the corporate law debates of the coming decade is The Anatomy of Corporate Law. Written by seven of the world's leading corporate law scholars - Henry Hansmann, Reinier Kraakman and Ed Rock of the U.S.; Paul Davies of England; Gerard Hertig of Switzerland; Klaus Hopt of Germany; and Hideki Kanda of Japan - The Anatomy of Corporate Law attempts to identify the underlying structure of corporate law, and to provide a framework for understanding the wide range of approaches that different countries take to corporate law regulation. It is hard to overstate the significance - and the success - of this project. Traditional comparative law scholarship tended to explore the differences among jurisdictions in intricate detail. The authors of The Anatomy of Corporate Law insist that these local variations are only that - variations on a single, common theme. Throughout the book, they take a functional approach, an approach that emphasizes the extent to which countries that seem to have very different legal rules nevertheless tend to develop roughly similar solutions to the characteristic problems of corporate law. The central issue for corporate law in every jurisdiction, they argue, is three kinds of agency problem: the potential conflicts between managers and shareholders, between majority and minority shareholders, and between the firm and third parties. To understand how different countries address these conflicts, the authors develop a typology of ten different strategies. The authors divide the strategies into two categories, which they refer to as "regulatory" and "governance" approaches, and then distinguish strategies that operate ex ante from those that come into play ex post. Having developed their typology, the authors then apply it to related party transactions, control transactions, investor protection and a variety of other key corporate law issues. The great virtue of The Anatomy of Corporate Law is that its typology of strategies provides a simple, user-friendly way to compare the corporate law regimes of a wide range of different countries. Almost as remarkable as the typology itself - especially given that the book is the work of seven different scholars - is the clarity and elegance of the analysis. The authors develop and apply their typology in less than two hundred pages, a succinctness that would fill the editors of that other anatomical guide, Gray's Anatomy, with envy. To say so much in so brief a compass, the authors obviously had to exercise ruthless editorial judgment as what to include and what to omit. After describing the authors' typology and exploring several of their applications, I focus on several issues and perspectives that the authors left out. The most important omission is the bankruptcy or insolvency regime. In recent years, it has become increasingly apparent that bankruptcy - or corporate reorganization - is best seen as a component of corporate law; and indeed that it is impossible to understand other corporate law issues without appreciating the role that bankruptcy plays in shaping the incentives of managers and other constituencies even while the corporation is financially healthy. Second, the authors also omit any sustained discussion of corporate groups - that is, the parent-subsidiary arrangements that characterize nearly every large corporation. Although the authors refer to the extensive regulations of corporate groups in Germany and elsewhere, they have little to say about these regulations and do not offer any analysis of the factors that influence a company's decision whether to set up a new business as a division within an existing corporation, or to locate the business in a separate corporation. Finally, the authors do not consider the distinctive challenges of corporate governance in developing countries. Although the authors suggest that the ten-part typology is relevant to any country, their analysis focuses on five notably developed jurisdictions - the U.S., the U.K., Germany, France and Japan. In the developing nations whose corporate law has been a particular concern in recent years, by contrast, it is important to move beyond the typology in order to account for problems such as limited judicial enforcement. My analysis can be seen as a proposing several friendly amendments to the authors' analysis. The additions suggest ways that the anatomy could be made even more complete.
Corporate law, structure of corporate law, corporate regulation, agency problems, comparative corporate law
Abstract: Americans have always loved risk takers. Like the Icarus of ancient Greek lore, however, even the most talented entrepreneurs can overstep their bounds. All too often, the very qualities that make Icaran executives special - self-confidence, visionary insight, and extreme competitiveness - spur them to take misguided and even illegal chances. The Icaran failure of an ordinary entrepreneur isn't headline news. But put Icarus in the corporate boardroom and - as this book vividly demonstrates - the ripple effects can be profound. Ever since the first large-scale corporations emerged in the nineteenth century, their ability to tap huge amounts of capital and the sheer number of lives they affect has meant that their executives play for far greater stakes. Excessive and sometimes fraudulent risks, competition, and the increasing size and complexity of organizations: these three factors have been at the heart of every corporate breakdown from 1873, when financial genius Jay Cooke collapsed, to the corporate scandals of the early 21st century. Compounding the scandals is an ongoing cat-and-mouse game between regulators' efforts to police the three factors that lead to Icarus Effect failures and efforts by corporate America to evade this regulation in the name of efficiency and flexibility. These efforts to side-step oversight can rapidly spiral out of control, setting the stage for the devastating corporate failures that punctuate American business history. But there is also a silver lining to the stunning failures: the outrage they provoke galvanizes public opinion in favor of corporate reform. The most important American business regulation has always been enacted in response to a major breakdown in corporate America. Today's business environment poses unprecedented perils for the average American as for the first time ever, more than half of Americans now own stock. Identifying the problems of the past, this book offers a strikingly new diagnosis of the fundamental flaws in corporate America today, and of what can be done to fix them.
corporate entrepreneurship, corporate reform, corporate scandals, corporate failures, corporate regulation
Abstract: The American approach to personal and corporate bankruptcy is unique in the world, providing the most generous provisions for canceling an individual's debts. Corporate debtors are given more flexibility than anywhere else to renegotiate their obligations and start over. Why did American bankruptcy diverge in almost every conceivable respect from its antecedents in English law and from the current English system? These questions have taken on great importance as other nations increasingly look to the U.S. in reforming their own insolvency and business regulation. This volume draws on the insights of a wide range of disciplines, including political science, economics, law, and history, to explain the remarkable history of U.S. bankruptcy law. The distinctive contours of U.S. bankruptcy law are seen as emerging from the confluence of three political factors: the growth of an organized creditor lobby; the countervailing pressure of pro-debtor ideological currents whose influence is magnified by American federalism; and the emergence of an increasingly powerful bankruptcy bar. These factors explain why, in the 19th century, large-scale corporate reorganization, which began with the railroads, developed in the courts rather than in Congress, and why Congress failed to enact a permanent bankruptcy law until 1898. Political analysis also explains how future Supreme Court Justice William Douglas and his New Deal allies persuaded Congress to usher Wall Street out of large-scale reorganization in the 1930s; and why Douglas's New Deal vision was completely repudiated when Congress overhauled the bankruptcy laws once again in 1978. The same tools are used to demonstrate that a fiercely divided bankruptcy commission and the 1994 Republican takeover of Congress are responsible for the recent, ideologically charged battles over consumer bankruptcy. In summary, this analysis shows that the same political factors have continued to shape America's unique response to financial distress, from the origin of our bankruptcy laws through to the present day.
Abstract: Along with the burgeoning legal literature on norms has come a renewed interest in the use of shaming sanctions as an alternative to standard forms of punishment. Shaming enthusiasts such as Professor Dan Kahan have argued that shaming sanctions can be used either as an independent sanction, or to supplement sanctions such as fines that might not otherwise convey an adequate amount of moral disapproval. Shaming skeptics worry that shaming sanctions will lead to idiosyncratic or unpredictable enforcement. This Article focuses on the role that shaming can or could play in corporate law. Although this Article is not the first to consider corporate shaming, it seeks to extend the literature in at least two respects. First, the Article provides the most detailed examination to date of what we might call the "anatomy" of corporate shaming - the role and limitations of the enforcer; the enforcement community (or audience); and, most interestingly in corporate law, the target, which can be the firm itself, individual managers, or both. Second, the Article significantly expands the focus of the shaming inquiry. The existing literature, both in the corporate context and elsewhere, has focused almost entirely on the use of shaming sanctions as a penalty for violating a criminal or certain kinds of civil laws (such as non-criminal environmental provisions). From this perspective, the enforcer is always a court. Yet private parties also shame wayward directors and firms. In the corporate law context, shareholder activists and the financial press have made frequent use of shaming techniques. Each time CalPERS publishes a list of underperforming firms, for instance, one of its central goals is to shame the offending firms. To more fully understand corporate shaming, the Article therefore considers both private and judicial enforcers. The Article explores three "case studies" of shaming in particular detail: the use by CalPERS and the financial press of "rosters of shame;" shareholder activist Robert Monks and Nell Minow's more aggressive shaming campaigns, which included a full-page Wall Street Journal advertisement shaming the directors of Sears by name; and the decision of the Delaware chancery court in a case stemming from alleged Medicaid and Medicare violations by Caremark Industries. For private enforcers like CalPERS and other shareholder activists, I suggest that the SEC could facilitate shaming by forcing offending firms to bear some of the costs of shaming efforts. Even in the absence of such changes, these shaming efforts seem likely to continue to prove quite effective as a device for prodding recalcitrant boards into action. For judicial shaming, I consider how shaming could be fit into the kinds of multi-faceted liability schemes that have been proposed in the literature on corporate criminal and tort liability.
Abstract: Throughout the 1960s and 1970s, Vern Countryman was the leading progressive bankruptcy scholar - and in fact the leading bankruptcy scholar of any perspective. This article explores the links between Countryman's work and that of his New Deal predecessors, on the one hand, and his successors, on the other. In addition to Countryman himself, the article focuses on William Douglas, who was Countryman's predecessor and mentor, as well as being the leading bankruptcy scholar of the New Deal. Among Countryman's successors, the article focuses on the work of Elizabeth Warren, Countryman's successor at Harvard Law School and the nation's leading current progressive scholar. The article considers both the continuities and some surprising disjunctions in the evolution of progressive bankruptcy scholarship. Countryman differed from William Douglas, who as chairman of the Securities and Exchange Commission had spearheaded a dramatic overhaul of the nation's corporate reorganization laws, in three crucial respects. Whereas Douglas was best known for his contributions to corporate bankruptcy, Countryman focused much of his energy on the financial distress of individuals. Countryman also forged much closer ties to the bankruptcy bar, and he was much less sympathetic to instrumental perspectives, as evidenced by his hostility to the emerging law and economics movement. Each of these attributes plays a similarly prominent role in the work of Elizabeth Warren and other current progressives. The article shows that the shifts in progressive thinking can be traced in large part to economic forces such as changes in the credit markets. The analysis also suggests ways in which current progressives could revitalize the kinds of arguments made by their predecessors.
Abstract: Throughout the 1960s and 1970s, Vern Countryman was the leading progressive bankruptcy scholar- and in fact the leading bankruptcy scholar of any perspective. This article explores the links between Countryman's work and that of his New Deal predecessors, on the one hand, and his successors, on the other. In addition to Countryman himself, the article focuses on William Douglas, who was Countryman's predecessor and mentor, as well as being the leading bankruptcy scholar of the New Deal. Among Countryman's successors, the article focuses on the work of Elizabeth Warren, Countryman's successor at Harvard Law School and the nation's leading current progressive scholar. The article considers both the continuities and some surprising disjunctions in the evolution of progressive bankruptcy scholarship. Countryman differed from William Douglas, who as chairman of the Securities and Exchange Commission had spearheaded a dramatic overhaul of the nation's corporate reorganization laws, in three crucial respects. Whereas Douglas was best known for his contributions to corporate bankruptcy, Countryman focused much of his energy on the financial distress of individuals. Countryman also forged much closer ties to the bankruptcy bar, and he was much less sympathetic to instrumental perspectives, as evidenced by his hostility to the emerging law and economics movement. Each of these attributes plays a similarly prominent role in the work of Elizabeth Warren and other current progressives. The article shows that the shifts in progressive thinking can be traced in large part to economic forces such as changes in the credit markets. The analysis also suggests ways in which current progressives could revitalize the kinds of arguments made by their predecessors.
Abstract: This article contends that the important recent literature exploring historical and political influences on American corporate law has neglected a crucial component of corporate governance: corporate bankruptcy. Only by appreciating the complementary relationship between corporate law and corporate bankruptcy can we understand how corporate governance operates in any given nation. To show this, I contrast American corporate governance with Japan and Germany. America's market-driven corporate governance can only function effectively if the bankruptcy framework includes a manager-driven reorganization option. The relational shareholding that characterizes Japanese and German corporate governance, by contrast, requires a much harsher bankruptcy regime. Drawing on recent insights in corporate finance, I argue that a permanent change in the corporate governance approach (such as an increase in relational governance in the United States, as some commentators have advocated) would require a corresponding change in corporate bankruptcy, and vice versa. In order to understand why American corporate governance differs so dramatically from Japan and Germany, I explore the evolution of corporate governance and corporate bankruptcy in the three countries in historical and political terms. Focusing in greatest detail on the United States, I provide a more complete account (including extensive research of primary sources) of the remarkable history of corporate reorganization in this country than any previous analysis; and demonstrate that market-driven corporate governance and corporate reorganization did, as my theory predicts, develop in complementary fashion. My analysis of interest group activity, as well as structural and ideological factors, in the United States and in Japan and Germany suggests that corporate governance patterns will remain surprisingly stable in each of the three countries, despite the increasing internationalization of markets. This is not to say that one of the two systems is now and will continue to be superior to the other, however. The two approaches appear both to be generally efficient and to have characteristic biases.
Abstract: In the bank and insurance company contexts, the insolvency framework has long been pervasively regulatory in nature. Regulators determine whether and when to initiate an insolvency proceeding; and they control nearly aspect of the insolvency process, including the ultimate issue of how to resolve the financial distress. The savings and loan, banking and insurance company crises in the past two decades underscored some of the limitations of a regulator-driven system. Regulators were widely viewed as having waited too long to initiate insolvency proceedings for many financial intermediaries, for instance, due at least in part to perverse incentives they have to delay rather than initiating in a timely fashion. Commentators also were critical of regulators' disposition decisions. In the banking context, commentators proposed a variety of alternatives to the existing framework, each of which would give creditors or the market a much greater role, particularly at the initiation stage. While the proposals might plausibly improve on the existing regime, each also raises significant concerns. Rather than opting for such an approach, Congress retained the existing framework but sought to impose much greater restrictions on regulatory discretion. In contrast to either of these approaches, I argue in this article that managers should be given the authority to initiate an insolvency proceeding. Although managers have little incentive to initiate an insolvency proceeding under existing law, lawmakers could alter this by giving them a "bonus" in connection with the initiation decision. The question how best to structure the bonus leads me to a consideration of whether lawmakers should add a reorganization option to the existing alternatives for resolving insolvent intermediaries. I conclude that reorganization is an attractive option in the insurance context, since it both would act as a bonus to managers and could be an effective disposition option. Although reorganization is less attractive for banks, I conclude that managers should be permitted to propose prepackaged purchase and assumption transactions (i.e., sales to third parties). Following my consideration of these initiation and disposition questions, I use a simple investment analysis drawn from the finance literature to assess several important priority issues. In a subsequent draft, I will conclude by briefly considering whether bank and insurance insolvency should be brought within the Bankruptcy Code, and will argue that they should not.
Abstract: The purpose of this article is to consider both the merits of the recent Delaware venue controversy-is Delaware venue a good or a bad thing?-- and the question whether efforts to eliminate Delaware bankruptcy venue are likely to succeed. In doing so, I will place particular emphasis on two perspectives that are almost entirely lacking in the existing debate. First, both proponents and critics of Delaware venue have failed to fully consider the relationship between Delaware's rise to prominence in bankruptcy and its role in corporate law generally. I argue that the two are integrally related. Just as the efforts of Delaware and other states to attract corporations have induced Delaware to regulate corporate law in a generally efficient manner, the same forces will have a beneficial effort on Delaware's bankruptcy judges. Second, the article offers a detailed historical perspective on the venue controversy. I focus in particular on a series of debates in the 1930s that raised almost precisely the same issues that are being addressed today. Not only does the historical analysis underscore the connection between Delaware venue and Delaware's role in corporate law generally, but it also provides important insights into the political question of whether venue reform is likely to be adopted. While my analysis focuses on the Delaware venue controversy, it is important to emphasize that preserving the existing framework is only one way to use venue decisions to improve the performance of bankruptcy judges. I briefly decision two other approaches as well, "domicile-only" venue and contractual choice of venue.
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