Kelli A. Alces
Florida State University College of Law
Arizona Law Review, Vol. 50, p. 1053, 2008
FSU College of Law, Public Law Research Paper No. 335
FSU College of Law, Law, Business & Economics Paper No. 8-16
Creditors exercise significant power over financially distressed corporations, thereby pushing corporate managers further into the realm of unprofitable risk aversion. The heavy hand of creditor power and the threats creditors are able to make to managers' professional stability and success misalign senior officers' incentives by undermining their freedom to make wealth-maximizing decisions on behalf of the corporation. The importance of independent managerial decision making is paramount in the law of corporate governance and that independence has been inefficiently undermined by the exertion of oppressive creditor control.
This article resolves the problem by creating a mechanism to balance shareholder and creditor influence over management so that no one constituent is able to dominate or undermine the independence of managerial decision making. A new shareholder representative called an" equity trustee" will represent shareholder interests during times of financial distress. The equity trustee gives voice to shareholder preferences in times when creditors are likely to dictate terms of governance so that the creditor voice does not grow too strong. The equity trustee should serve to balance competing preferences so that managers maintain independence and the ability to make value-maximizing decisions without fear of destructive retribution from either shareholders or creditors.
Number of Pages in PDF File: 54
Keywords: corporate law, corporate governance, creditors, corporate debtors, corporate managers, shareholdersAccepted Paper Series
Date posted: June 12, 2008 ; Last revised: October 7, 2011
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