Sponsor Control: A New Paradigm for Corporate Reorganization

47 Pages Posted: 29 Jul 2022 Last revised: 9 Jan 2023

See all articles by Vincent S.J. Buccola

Vincent S.J. Buccola

University of Chicago - Law School; University of Pennsylvania - The Wharton School - Legal Studies & Business Ethics Department

Date Written: July 15, 2022

Abstract

Bankruptcy scholars have long organized their field around a stylized story, a paradigm, of lender control. When lenders extend credit, the story goes, they insist on the borrower agreeing to strict covenants and granting blanket liens on its assets; then, if the borrower later encounters financial distress, they use their bargained-for rights as prods to steer the company toward a resolution favorable to themselves, whether or not that resolution is value maximizing for the investors as a group. As fruitful as the lender-control heuristic has been, however, it no longer corresponds to reality.

This Article introduces a new interpretive paradigm that better accounts for a changed world. Today, more often than not, equity sponsors rather than senior lenders have practical control over the way that distressed companies respond to their financial problems. Lenders no longer hold the big sticks that they once wielded to establish precedence, and the people guiding today’s modal large, distressed business have powerful incentives to preserve the value of sponsor investments. The predictable effect of the new locus of control has been to stand familiar restructuring dynamics on their head. Indeed, a number of seemingly unconnected trends in reorganization practice may best be understood as resulting from sponsors’ first-order incentives to postpone a reckoning that might crystallize losses. Identifying the dynamics of sponsor control thus promises to shed light on a variety of scholarly and policy debates around corporate reorganization.

Keywords: bankruptcy, chapter 11, corporate reorganization, corporate law, corporate governance, creditor governance, private equity, liability management, RSAs, DIP lending

Suggested Citation

Buccola, Vincent S.J., Sponsor Control: A New Paradigm for Corporate Reorganization (July 15, 2022). 90 University of Chicago Law Review 1 (2023), Available at SSRN: https://ssrn.com/abstract=4170249 or http://dx.doi.org/10.2139/ssrn.4170249

Vincent S.J. Buccola (Contact Author)

University of Chicago - Law School ( email )

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University of Pennsylvania - The Wharton School - Legal Studies & Business Ethics Department ( email )

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HOME PAGE: http://lgst.wharton.upenn.edu/profile/buccola/

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