Distorted Choice in Corporate Bankruptcy

62 Pages Posted: 16 Oct 2020 Last revised: 11 Dec 2020

See all articles by David A. Skeel

David A. Skeel

University of Pennsylvania Carey Law School; European Corporate Governance Institute (ECGI)

Date Written: 2020


We ordinarily assume that a central objective of every voting process is ensuring an undistorted vote. Recent developments in corporate bankruptcy, which culminates with an elaborate vote, are quite puzzling from this perspective. Two strategies now routinely used in big cases are intended to distort, and clearly do distort, the voting process. Restructuring support agreements (RSAs) and “deathtrap” provisions remove creditors’ ability to vote for or against a proposed reorganization simply on the merits.

This Article offers the first comprehensive analysis of these new distortive techniques. One possible solution is simply to ban distortive techniques, as several scholars advocate with RSAs that offer joinder bonuses. Although an antidistortion rule would be straightforward to implement, I argue this would be a mistake. The distortive techniques respond to developments that have made reorganization difficult, such as claims trading and a greater need for speed. Further, Chapter 11’s baseline was never intended to be neutral: it nudges the parties toward confirming a reorganization plan. There also are independent justifications for some distortive techniques, and the alternative to using them might be even worse—possibly leading to more fire sales of debtors’ assets.

How can legitimate use of the new distortive techniques be distinguished from more pernicious practices? To answer this question, I outline four rules of thumb to assist the scrutiny. Courts should consider whether holdouts are a serious threat, the magnitude of the coercion, the significance of any independent justifications, and whether the holdout threat is an intentional feature of the parties’ contracts. I then apply the rules of thumb to a few prominent recent cases. I conclude by considering two obvious extensions of the analysis, so-called “gifting” transactions in Chapter 11 and bond-exchange offers outside of bankruptcy.

Keywords: Corporate bankruptcy law & practice, Chapter 11, reorganization, distortive incentives, restructuring & plan support agreements, RSAs, PSAs, deathtrap provisions, claims trading, Section 363 asset sales, rights offerings

JEL Classification: G33, G38, K22

Suggested Citation

Skeel, David A., Distorted Choice in Corporate Bankruptcy (2020). Yale Law Journal, Vol. 130, p. 366, 2020, U of Penn, Inst for Law & Econ Research Paper No. 20-53, Available at SSRN: https://ssrn.com/abstract=3712485

David A. Skeel (Contact Author)

University of Pennsylvania Carey Law School ( email )

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European Corporate Governance Institute (ECGI)

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