The Search for an Unbiased Fiduciary in Corporate Reorganizations
55 Pages Posted: 24 Oct 2009 Last revised: 19 May 2011
Date Written: 2011
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.
Recent headlines highlight that stakeholder control issues are at the forefront of financially-distressed situations large and small. The U.S. government, as creditor, dictated the terms of Chrysler’s and General Motors’ bankruptcies. It also demanded and received preferred stock from several troubled financial institutions, giving those institutions little time or flexibility to consider or reject the terms of the government’s offer. And the U.S. government is not alone in using high-pressure tactics with distressed companies; stakeholders - particularly lenders and other significant creditors - employ such tactics consistently and routinely.
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, and bankruptcy courts often do not learn of conflicts, if at all, until it is too late. Accordingly, this article suggests the use of a third-party neutral to correct information asymmetry and promote objectivity and fairness in the bankruptcy process.
Keywords: bankruptcy, chapter 11, reorganization, control, control contest, fiduciary, fiduciary duties, activism, distressed debt, mediation
JEL Classification: K22
Suggested Citation: Suggested Citation