The Search for an Unbiased Fiduciary in Corporate Reorganizations

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.

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

JEL Classifications: K22

Working Paper Series