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Abstract:
Increased creditor control in chapter 11 cases has generated considerable debate over the past several years. Proponents of creditor control argue that, among other things, it promotes efficiency in corporate reorganizations. Critics assert that it destroys corporate value and frequently forces otherwise viable entities to liquidate. The increasing involvement of professional distressed debt investors in chapter 11 cases has intensified this debate.

In this article, I present and analyze empirical data regarding the investment practices and strategies of distressed debt investors. Based on this data and actual case reports, I reach two primary conclusions. First, although relatively few in number, activist distressed debt investors are well-financed and relatively successful in their attempts to influence change at or to acquire troubled companies. Second, unchecked creditor control by distressed debt investors or others has the potential to lead to creditor self-dealing, to the detriment of the debtor and its other stakeholders.

The Bankruptcy Code, as currently structured, presents opportunities not only for creditor control, but also for creditor self-dealing. In analyzing the survey data and actual case reports, I suggest one possible legislative change to create a more balanced, estate-focused chapter 11 process. This change would entail eliminating the concept of statutory committees and replacing it with an estate representative. The concept of an estate representative is just one proposal; certainly, alternative or complementary legislative changes could create a more balanced playing field in chapter 11 cases. I discuss a few of these prospective changes here. Moreover, the concept of an estate representative is a preliminary proposal. Further research and study is necessary to develop this and related concepts.

activist investors, bankruptcy, chapter 11, creditor control, creditor conflict, creditors' committee, DIP loan, distressed debt, reorganization

Abstract:
Activist institutional investors traditionally have invested in a company's equity to try to influence change at the company. Some of these investors, however, are now purchasing a company's debt for this same purpose. They may seek to change a company's management and board personnel, operational strategies, asset holdings or capital structure.

The chapter 11 bankruptcy cases of Allied Holdings, Inc. and its affiliates exemplify the strategies of activist distressed debt investors. In the Allied cases, Yucaipa Companies, a distressed debt investor, purchased approximately 66% of Allied's outstanding general unsecured bond debt. Yucaipa used this debt position to exert significant influence over Allied's chapter 11 cases and business operations, including its labor contract with the Teamsters. Yucaipa emerged as Allied's majority shareholder under Allied's confirmed plan of reorganization.

Allied is not an isolated example. In 2006, distressed debt investors raised a record $19 billion in investment funds. The research shows that some investors are using these investment funds for activist purposes. Indeed, activist distressed debt investing is on the rise in both the United States and the United Kingdom. This activism is changing the dynamics of corporate restructurings and presenting new challenges for corporate management and public policymakers.

Activist Investors, Administration, Bankruptcy, Corporate Governance, Corporate Reorganization, Corporate Restructuring, Chapter 11, Creditor Control, Distressed Debt, Fiduciary Duties, Insolvency, Institutional Investors, Institutional Investor Activism

Abstract:
Enterprise risk management (ERM) targets overall corporate strategy and, when implemented correctly, can manage a corporation’s risk appetite and exposure. When ignored or underutilized, it can contribute to a corporation’s demise. In fact, many commentators point to ERM failures as contributing to the severity of the 2008 economic crisis. This essay examines the different approaches to ERM adopted by financial institutions affected by the 2008 economic crisis and how ERM contributed to the survival or failure of those firms. It then considers ERM in the broader context of corporate governance generally. This discussion reflects on ERM techniques for corporate boards and whether boards do or should have a duty to implement an effective ERM program. The essay concludes by encouraging boards, stakeholders, and policymakers to give more attention to ERM programs.

risk management, corporate governance, duty of care, Caremark, duty of loyalty, fiduciary duties, boards of directors

Abstract:
Corporations are vulnerable to the greed, self-dealing and conflicts of those in control of the corporation. Courts historically have regulated this potential abuse by designating the board of directors and senior management as fiduciaries. In some instances, however, shareholders, creditors or others outside of corporate management may influence corporate decisions and, in the process, extract corporate value. Courts generally address this type of corporate damage in one of two ways: they designate controlling shareholders as corporate fiduciaries and they characterize creditors, customers and others as contract parties with no fiduciary duties.

The traditional roles of corporate shareholders and creditors may support the courts’ willingness to treat the former, but not the latter, as corporate fiduciaries. But shareholders and creditors no longer are necessarily acting in accordance with their traditional roles. Institutional investors, led primarily by hedge funds and private equity firms, are pursuing activist agendas as both shareholders and debt holders and frequently are successful in their efforts to influence corporate affairs. These efforts, however, may not benefit the corporation or stakeholders generally. This article explores the increasing convergence in the rights and activism of shareholders and creditors and proposes an approach for governing their conduct that focuses on the constant in corporate transactions, i.e., the board.

corporate control, activist shareholder, controlling shareholder, activist investor, creditor control, distressed debt, fiduciary duty, business judgment rule, corporate governance

Abstract:
When a company experiences financial distress, a control contest often follows. Management fights to remain in control of the company, and shareholders, creditors and others try to influence management’s exercise of that control - or wrest it away. This is not a new phenomenon. The degree of influence now exerted by corporate stakeholders in the distressed context, however, is strikingly different than in the past.

This article analyzes the intensified contest for control in corporate reorganizations and whether, as a result, existing bankruptcy laws adequately protect the interests of all of a debtor’s stakeholders. Efforts by a stakeholder to influence control often lead to conflicts of interests and multiple, competing demands on bankruptcy fiduciaries, i.e. debtors in possession and statutory committees. In theory, these fiduciaries should shun their personal interests and any undue influence by particular stakeholders. In practice, however, debtors and committees frequently are unable or unwilling to do so. Accordingly, the article suggests the use of a third-party neutral to promote objectivity and fairness in the bankruptcy process and better protect corporate value.

bankruptcy, chapter 11, reorganization, control, control contest, fiduciary, fiduciary duties, activism, distressed debt, mediation