Why Do Distressed Companies Choose Delaware? An Empirical Analysis of Venue Choice in Bankruptcy

Abstract

We analyze a sample of large Chapter 11 cases to determine which factors motivate the choice of filing in one court over another when a choice is available. We focus in particular on the Delaware court, which became the most popular venue for large corporations in the 1990s. We find no evidence to suggest that Delaware's popularity was driven by managers or equity holders seeking a procedure friendly to their interests. Instead, debt structure differences, specifically, the fraction of assets financed with secured debt, and court characteristics, particularly a court's level of experience, are the most important factors driving the choice of venue. While Delaware does not appear significantly different with respect to deviations from absolute priority in favor of equity or likelihood of producing reorganizations, it does differ along the dimension of speed. Controlling for other factors, we find that a Delaware reorganization is between 140 and 190 days faster than an equivalent case in another court. Given that speed benefits secured creditors most, we conclude that Delaware's popularity in the 1990s was unlikely to have resulted from a pro-debtor bias combined with a manager or equity holder preference for Delaware.

Keywords: bankruptcy, Chapter 11, venue choice, forum shopping, Delaware, reorganization

JEL Classification: K0, K1, K2, K3