The Corporate Governance and Public Policy Implications of Activist Distressed Debt Investing

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.

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

JEL Classification: G33, G34, K29