Debt as Corporate Governance

51 Pages Posted: 12 Mar 2022 Last revised: 24 May 2023

See all articles by Tomer Stein

Tomer Stein

University of Tennessee College of Law

Date Written: March 10, 2022

Abstract

Corporate law is dominated by an equity-only view of corporate governance that centers on management-shareholder dynamics. This Article expands the management-shareholder paradigm by developing a novel integrated theory of corporate governance that fully accounts for the firm’s debt. To that end, the Article carries out a comprehensive analysis of the debtholders’ influence on how the firm runs its affairs. This analysis reveals that debt does not merely function as a discipliner. Rather, it forms an integral part of the ownership and governance structure of the firm through the covenants that debtholders routinely contract for. These covenants create poison pills and other change-of-control and board restrictions, as well as restrictions on debt incurrence, asset transfers, and cash transfers such as dividends. Armed with these covenants, and the default and refinancing costs they impose on the firm, the debtholders control the firm’s operations and management along several dimensions.

In tune with this reality, the Article develops the theoretical underpinnings of debt as corporate governance and then moves on to map the standard debt covenants and their effect on the firm. Building on this integrated account, the Article updates the narrow equity-only view of the firm and demonstrates that perceiving corporate debt mechanisms as a governance system advances our understanding of pressing issues such as corporate social responsibility, interstate and federal corporate law competitions, and the roles of institutional investors.

Keywords: Corporate Governance, Corporate Law, Debt

Suggested Citation

Stein, Tomer, Debt as Corporate Governance (March 10, 2022). 74 HASTINGS L.J. 1281 (2023), University of Tennessee Legal Studies Research Paper, Available at SSRN: https://ssrn.com/abstract=4054898 or http://dx.doi.org/10.2139/ssrn.4054898

Tomer Stein (Contact Author)

University of Tennessee College of Law ( email )

1505 West Cumberland Avenue
Knoxville, TN 37996
United States

HOME PAGE: http://https://law.utk.edu/directory/tomer-s-stein/

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