The Hertz Maneuver (and the Limits of Bankruptcy Law)

22 Pages Posted: 9 Nov 2020

See all articles by Anthony J. Casey

Anthony J. Casey

University of Chicago Law School; ECGI

Joshua Macey

University of Chicago Law School

Date Written: September 20, 2020

Abstract

On June 11, 2020, the Hertz Corporation attempted to become the first corporate debtor to finance a bankruptcy proceeding by issuing new shares of common stock to the public. Though many thought Hertz’s equity was worthless, its stock was trading at a positive value on the secondary markets, and Hertz was attempting to tap into that market value. When the bankruptcy court blessed the plan, many observers responded with outrage on behalf of retail investors who, they argued, were being duped into a worthless investment. They suggested that the law should prevent retail investors from buying these shares. Ultimately, the Securities Exchange Commission signaled that it had similar concerns and effectively killed the proposal.

This essay explores the questions raised by this incident. It argues that commentators were focused on the wrong bankruptcy problem. Contrary to the view of the commentators, Hertz’s bankruptcy does not show that retail investors require bankruptcy-specific protections. The Hertz maneuver does, however, highlight distortions created by bankruptcy law’s distribution rule, known as the absolute priority rule. That rule cuts off future opportunities for those holding equity (or junior claims) in a debtor firm and makes it difficult for stockholders and unsecured creditors to make long-term investments in the firm’s future value. From this perspective, existing proposals to alter bankruptcy’s priority rules begin to look like a form of investor protection that could facilitate investment in a firm’s long-term value.

Suggested Citation

Casey, Anthony Joseph and Macey, Joshua, The Hertz Maneuver (and the Limits of Bankruptcy Law) (September 20, 2020). University of Chicago Law Review Online (2020), Available at SSRN: https://ssrn.com/abstract=3695972 or http://dx.doi.org/10.2139/ssrn.3695972

Anthony Joseph Casey (Contact Author)

University of Chicago Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States
773.702.9578 (Phone)

HOME PAGE: http://www.law.uchicago.edu/faculty/casey

ECGI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Joshua Macey

University of Chicago Law School ( email )

1111 E 60th St
Chicago, IL 60637
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
933
Abstract Views
2,184
rank
30,137
PlumX Metrics