Timing Matters: Promoting Forum Shopping by Insolvent Corporations

Northwestern Law Review, Vol. 94, p. 1357, 2000

Reprinted in: Corporate Practice Commentator, Vol. 42, p. 721, 2001

Vanderbilt Law School, Joe C. Davis Working Paper Series, Working Paper No. 99-1

82 Pages Posted: 10 Feb 1999

See all articles by Robert K. Rasmussen

Robert K. Rasmussen

University of Southern California Gould School of Law

Randall S. Thomas

Vanderbilt University - Law School; European Corporate Governance Institute (ECGI)

Date Written: August 1999

Abstract

Most commentators decry forum shopping. This general hostility extends to forum shopping by firms filing for bankruptcy. Indeed, Congress is considering legislation designed to reduce forum shopping by companies filing for bankruptcy. This article makes two contributions to this debate. First, we show that the current debate is driven almost exclusively by attorneys trying to protect fees rather than by any principled objection to forum shopping. Second, on the merits, we argue that the hostility to forum shopping is misplaced. The near universal condemnation of forum shopping rests on the premise that, at the time the plaintiff selects a forum, there is a zero-sum game between the plaintiff and defendant - every advantage that a plaintiff secures comes at a cost to the defendant. We demonstrate that, in the bankruptcy context, this zero-sum game disappears if one forces a firm to commit to a specific venue before its seeks funds in the capital markets. Drawing on the "race to the top" literature in corporate law, we show that markets will discipline managers who act opportunistically. The threat of this discipline will lead managers to commit to the venue most likely to maximize firm value. Moreover, our proposal will create incentives for judges to exercise the vast discretion that the Bankruptcy Code gives them in a way which promotes efficiency.

Suggested Citation

Rasmussen, Robert K. and Thomas, Randall S., Timing Matters: Promoting Forum Shopping by Insolvent Corporations (August 1999). Northwestern Law Review, Vol. 94, p. 1357, 2000; Reprinted in: Corporate Practice Commentator, Vol. 42, p. 721, 2001; Vanderbilt Law School, Joe C. Davis Working Paper Series, Working Paper No. 99-1. Available at SSRN: https://ssrn.com/abstract=141892 or http://dx.doi.org/10.2139/ssrn.141892

Robert K. Rasmussen (Contact Author)

University of Southern California Gould School of Law ( email )

699 Exposition Boulevard
Los Angeles, CA 90089-0071
United States
213-740-6473 (Phone)
213-740-5502 (Fax)

Randall S. Thomas

Vanderbilt University - Law School ( email )

131 21st Avenue South
Nashville, TN 37203-1181
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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