Law and Courts in an Age of Debt

Abstract

Judges perform very different analyses when investors ask for protection. When the petitioning party is a shareholder, the court will deploy broad equitable doctrines with an eye towards reaching a fair result. On the other hand, creditors usually find a much less sympathetic ear, as courts typically march through technical analyses such as examining whether the offending party violated a contract term, with far less concern for whether the outcome is fair. In an era where many firms are highly leveraged, the end result is that the role of the courts in regulating investor opportunism and creating boundaries for “market” conduct has been greatly diminished, with consequences for both real-world corporate behavior and the development of the law.

Keywords: debt equity conflict; corporate governance; corporate law; bankruptcy; debt finance

JEL Classification: K22; K20; M100; G33; G30; G34