Majority Clauses and Non-Bankruptcy Corporate Reorganizations— Contractual and Statutory Alternatives
Howard J. Kashner, 44(1): 123–39 (Nov. 1988)
This Article explores the principal contractual, statutory, and judicial barriers to nonbankruptcy corporate reorganizations and suggests ways of reducing them. It focuses on majority clauses and urges their selective employment by debtholders and corporations. It also discusses the use of provisions in corporate charters and debt documents that allow for the possibility of reorganization under Delaware and certain other corporate laws.
Reorganizations of Investment Companies
Michael L. Sapir and James A Bernstein, 50(3): 817–77 (May 1995)
Over the past decade, the tremendous growth and maturation of the mutual fund industry has been accompanied by considerable consolidation and transactional activity. This Article provides a general overview of investment company reorganizations under federal and state laws and reviews the numerous disclosure requirements and legal and regulatory constraints to which a mutual fund reorganization is subject. The Article is designed to guide the practitioner through the regulatory labyrinth from board consideration to preparation of filing to closing the transaction.
Competitive Choice Theory and the Unresolved Doctrines of Classification and Unfair Discrimination in Business Reorganizations Under the Bankruptcy Code
G. Eric Brunstad, Jr. and Mike Sigal, 55(1): 1–80 (Nov. 1999)
This Article applies the authors' theory of competitive choice, introduced in the August 1999 issue of The Business Lawyer, to analyze the unresolved doctrines of classification and unfair discrimination in Chapter 11 business reorganization cases. See G. Eric Brunstad, Jr. & Mike Sigal, Competitive Choice Theory and the Broader Implications of the Supreme Court's Analysis in Bank of America v. 203 North LaSalle Street Partnership , 54 BUS. LAW. 1475 (1999). The authors' theory is that the best decisions regarding what is to be done with bankrupt debtors, their obligations, and their assets are more likely to be realized if decisionmaking in the bankruptcy context is made to approximate decisionmaking in the context of financially healthy firms outside the bankruptcy arena. Conceiving the Chapter 11 process as a forum for complex decisionmaking, the authors analyze how decisions regarding a firm's fate are made in nonbankruptcy settings and then identify some of the specific complications that arise in the insolvency context that both alter the decisionmaking landscape and, likewise, require special procedures to overcome the parties' incentives to make improvident choices that undermine the broader policies of Chapter 11 as a whole. As part of their analysis, the authors identify the role of the Code's classification and unfair discrimination doctrines in eliciting independent business judgment regarding the firm's fate, preventing inappropriate hold-out behavior, avoiding unnecessary costs, and preserving commercial expectations. In addition, after discussing the history of these two doctrines, together with their place within the larger fabric of the reorganization process, the authors propose a set of standards designed to define and enhance the doctrines' roles in facilitating the two recognized policies underlying Chapter 11 of preserving viable business enterprises and maximizing property available to satisfy the claims of creditors.
First Report of the Select Advisory Committee on Business Reorganization
American Bar Association Business Bankruptcy Committee, Select Advisory Committee on Business Reorganization (SABRE) , 57(1): 163 (Nov. 2001)
Annotated List of Resources
American Bar Association Business Bankruptcy Committee, Select Advisory Committee on Business Reorganization (SABRE) , 57(1): 245 (Nov. 2001)
Second Report of the Select Advisory Committee on Business Reorganization
Select Advisory Committee on Business Reorganization (SABRE), Business Bankruptcy Committee, ABA Section of Business Law , 60(1): 277—325 (Nov. 2004)
Cross–Border Tender Offers and Other Business Combination Transactions and the U.S. Federal Securities Laws: An Overview
Jeffrey W. Rubin, John M. Basnage, and William J. Curtin, III, 61(3):1071—1134 (May 2006)
In structuring cross–border tender offers and other business combination transactions, parties must consider carefully the potential application of U.S. federal securities laws and regulations to their transaction. By understanding the extent to which a proposed transaction will be subject to the provisions of U.S. federal securities laws and regulations, parties may be able to structure their transaction in a manner that avoids the imposition of unanticipated or burdensome disclosure and procedural requirements and also may be able to minimize potential conflicts between U.S. laws and regulations and foreign legal or market requirements. This article provides a broad overview of U.S. federal securities laws and regulations applicable to cross–border tender offers and other business combination transactions, including a detailed discussion of Regulations 14D and 14E under the Securities Exchange Act and the principal accommodations afforded to foreign private issuers thereunder.
Form or Substance? The Past, Present, and Future of the Doctrine of Independent Legal Significance
C. Stephen Bigler and Blake Rohrbacher, 63(1): 1–24 (November 2007)
The "bedrock" doctrine of independent legal significance provides that, if a transaction is effected in compliance with the requirements of one section of the Delaware General Corporation Law ("DGCL"), Delaware courts will not invalidate the transaction for failing to comply with the requirements of a different section of the DGCL—even if the substance of the transaction is such that it could have been structured under the other section. Two recent decisions of the Delaware courts have caused commentators to question the doctrine's status, but this Article looks to the foundation of the doctrine and the Delaware courts' use of equitable review (and substance–over–form doctrines) to clarify when the doctrine of independent legal significance does and does not apply and when it may be relied on with confidence by corporate practitioners in the future. The doctrine as applied by the courts is narrower than sometimes assumed by corporate practitioners, and the Delaware courts may reserve the equitable power to look through a transaction's form to its substance even if the doctrine does apply.
At the Crossroads: The Intersection of Federal Securities Laws and the Bankruptcy Code
Wendy Walker, Mike Wiles, Alan Maza, and David Eskew, 63(1): 125–146 (November 2007)
This Article examines the ways in which the federal securities laws and the U.S. Bankruptcy Code do—and, at times, do not—work together, with an emphasis on the potential conflict between the Fair Funds Provision of the Sarbanes–Oxley Act of 2002, which permits the U.S. Securities and Exchange Commission to distribute penalties and disgorged funds collected from debtor–corporations to shareholders, and the "absolute priority rule," which prevents distributions to equity holders in Chapter 11 reorganization cases absent payment in full of creditors. Although touched upon in some of the largest bankruptcy cases in recent years, including Enron, WorldCom, and Adelphia, this potential conflict has not been squarely addressed by the courts and presents issues which should be examined by Congress.
Corporate Governance of Troubled Companies and the Role of Restructuring Counsel
D.J. (Jan) Baker, John Wm. (Jack) Butler, Jr., and Mark A. McDermott, 63(3): 855–880 (May 2008)
Officers and directors of a troubled corporate enterprise can expect to face a host of complex decisions as they attempt to restructure the corporation's affairs. These decisions may be made more difficult because officers' and directors' fiduciary duties extend to all stakeholders, including creditors, when the corporation is in the zone of insolvency. The role of corporate restructuring counsel is critical in this uncertain environment. This Article provides a comprehensive overview of recent court decisions and statutory changes relating to the fiduciary duties of officers and directors of troubled companies. It also provides practical applications of these principles to common situations that directors and officers face as they attempt to guide a troubled business toward a successful restructuring.
Void or Voidable?—Curing Defects in Stock Issuances Under Delaware Law
C. Stephen Bigler and Seth Barrett Tillman, 63(4): 1109-1152 (August 2008)
It is not unusual for a Delaware corporation's stock records to have omissions or procedural defects raising questions as to the valid authorization of some of the outstanding stock. Confronted with such irregularities, most corporate lawyers would likely attempt to cure the defect through board and, if necessary, stockholder ratification. However, in a number of leading cases, the Delaware Supreme Court has treated the statutory formalities for the issuance of stock as substantive prerequisites to the validity of the stock being issued, and the court has determined that failure to comply with such formalities renders the stock in question void, i.e., not curable by ratification. Unfortunately, the decisions issued by the Delaware courts have not afforded the necessary certainty to allow practitioners to decide whether a particular defect in stock issuance is a substantive defect that renders stock void or a mere technical defect that renders stock voidable. This Article analyzes the cases giving rise to this lack of clarity and proposes that the Delaware courts apply the policy underlying Article 8 of the Delaware Uniform Commercial Code to validate stock in the hands of innocent purchasers for value in determining whether stock is void or voidable.
Business Successors and the Transpositional Attorney-Client Relationship
Henry Sill Bryans, 64(4): 1039–1086 (August 2009)
This Article focuses on the potential right of a business successor to assert various elements of a predecessor's attorney-client relationship and the implications to practitioners of a successor's ability to do so. An attorney-client relationship that the courts permit to be asserted by a business successor is referred to in the Article as a "transpositional" relationship. The Article examines in what context a successor may (1) enforce the duty of confidentiality of the predecessor's counsel; (2) assert the predecessor's attorney-client privilege; (3) disqualify the predecessor's counsel under the principles of Model Rule 1.9, or its equivalent, on the ground that such counsel should be viewed as the successor's former counsel for purposes of the Rule; and (4) assert a malpractice claim against the predecessor's counsel based exclusively on services provided to the predecessor. The Article concludes with some general observations about the decisions examined, the need of transactional lawyers to be familiar with the principles that courts have relied on, and transaction provisions that might be used to blunt the surprising, and arguably unfair, results that this line of decisions can sometimes produce.
After Twenty–Two Years, Section 203 of the Delaware General Corporation Law Continues to Give Hostile Bidders a Meaningful Opportunity for Success
A. Gilchrist Sparks, III and Helen Bowers, 65(3): 761–770 (May 2010)
Campbell, Iridium, and the Future of Valuation Litigation
Michael W. Schwartz and David C. Bryan, 67(4): 939 - 956 (August 2012)
Five years ago, two landmark federal court valuation decisions, Campbell and Iridium, held that market evidence—rather than the testimony of paid litigation experts—should be relied on to value corporations for purposes of litigation. While a number of decisions have followed Campbell and Iridium, their full potential to make business valuation litigation less costly and less susceptible to hindsight bias has yet to be realized.
Trademark Licensing in the Shadow of Bankruptcy
James M. Wilton and Andrew G. Devore, 68(3): 739-780 (July 2013)
When a business licenses a trademark, transactional lawyers regularly advise that if the trademark licensor files for bankruptcy, the licensee could be left without a right to use the mark and with only a bankruptcy claim for money damages against the licensor. Indeed, the ability of a trademark licensor to reject a trademark license and to limit a licensee’s remedies to a dischargeable claim for money damages has been a significant risk for licensees for twenty-five years based on the Fourth Circuit case, Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc. This result is grounded in the Bankruptcy Code prohibition on remedies of specific performance for non-debtor parties to rejected contracts and is in accord with Bankruptcy Code policy of affording debtors an opportunity to reorganize free of burdensome contracts. In the summer of 2012, however, the Seventh Circuit, in its decision Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, held that a non-debtor trademark licensee retains rights to use licensed trademarks following rejection of the contract by the debtor-licensor. The decision, derived from a pre-Bankruptcy Code paradigm for understanding the rights of non-debtors under rejected executory contracts that convey interests in property, creates a circuit split over the implications of trademark license rejection. This article asserts that the Sunbeam Products case misconstrues the rights of a trademark licensee as a vested property right and is therefore incorrect under both the holding of the Lubrizol case and the pre-Bankruptcy Code paradigm on which the Sunbeam Products case relies.
Market Evidence, Expert Opinion, and the Adjudicated Value of Distressed Businesses
Robert J. Stark, Jack F. Williams, and Anders J. Maxwell, 68(4): 1039-1070 (August 2013)
One year ago, The Business Lawyer published an article arguing that courts, when adjudicating the value of distressed businesses, should predominantly defer to “market” evidence, rather than expert opinion. In Campbell, Iridium, and the Future of Valuation Litigation, authors Michael W. Schwartz and David C. Bryan contended that near-universal judicial deference to market data: (1) is supported by recent developments in the case law; (2) would obviate judicial “hindsight bias”; and (3) would enable a more efficient valuation process. Messrs. Schwartz and Bryan further argued that, to solidify the paradigm change, courts should start imposing a pretrial obligation on any litigant intending to present expert valuation opinion to move specially, under Federal Rule of Evidence 702(a), for allowance to do so. This article offers an opposing viewpoint and argues that Messrs. Schwartz and Bryan interpret applicable case law selectively, outside of a broader jurisprudential context, and in a manner that disregards deeply ingrained legal principles. The authors here further contend that: (a) Messrs. Schwartz and Bryan have not presented a compelling case of widespread judicial “hindsight bias”; (b) they have also failed to make a persuasive showing that their proposal will lead to meaningful process efficiencies; and (c) their thesis fails to appreciate the complexity of market dynamics. This article concludes that market evidence tends to require expert interpretation, especially when used to value troubled businesses.
A Further Comment on the Complexities of Market Evidence in Valuation Litigation
Gregory A. Horowitz, 68(4): 1071-1082 (August 2013)
This comment offers another view in the dialogue concerning the use of market evidence in valuation litigation initiated in these pages one year ago. In Campbell, Iridium, and the Future of Valuation Litigation, Michael Schwartz and David Bryan argued that an understanding of the importance of market evidence, and of costs and vagaries of a battle of valuation experts, should lead courts to adopt a rebuttable presumption against the admissibility of expert valuation testimony. Like Messrs. Stark, Williams, and Maxwell, whose views are forcefully advanced in a separate article here, I find this proposal ill-advised, but for somewhat different reasons. I agree with Messrs. Schwartz and Bryan that market evidence is central to any question of value, but argue that the market never speaks for itself, indeed never speaks with a voice capable of lay interpretation. By way of example, I present a “debt discount test” for determining whether the market deems an enterprise to be insolvent (the question at issue in both Campbell and Iridium) and show that, even while this test substantially simplifies the interpretation of market data, expert opinion is inevitably required in its application. The increasing recognition of the importance of contemporaneous market information will improve valuation litigation and narrow areas of good-faith dispute without the need for radical procedural limitations on the adversarial process.
Best Practices Report on Electronic Discovery (ESI) Issues in Bankruptcy Cases
ABA Electronic Discovery (ESI) in Bankruptcy Working Group, Bankruptcy Court Structure and Insolvency Process Committee, ABA Business Law Section, 68(4): 1113-1148 (August 2013)
Standing at the Singularity of the Effective Time: Reconfiguring Delaware’s Law of Standing Following Mergers and Acquisitions
S. Michael Sirkin; 69(2): 429-474 (February 2014)
This article examines the doctrine of standing as applied to mergers and acquisitions of Delaware corporations with pending derivative claims. Finding the existing framework of overlapping rules and exceptions both structurally and doctrinally unsound, this article proposes a novel reconfiguration under which Delaware courts would follow three black-letter rules: (1) stockholders of the target should have standing to sue target directors to challenge a merger directly on the basis that the board failed to achieve adequate value for derivative claims; (2) a merger should eliminate target stockholders’ derivative standing; and (3) stockholders xi of the acquiror as of the time a merger is announced should be deemed contemporaneous owners of claims acquired in the merger for purposes of derivative standing. Following these rules would restore order to the Delaware law of standing in the merger context and would advance the important public policies served by stockholder litigation in the Delaware courts.
Rolling Back the Repo Safe Harbors
Edward R. Morrison, Mark J. Roe, and Christopher S. Sontchi, 69(4): 1015-1048 (August 2014)
Recent decades have seen substantial expansion in exemptions from the Bankruptcy Code’s normal operation for repurchase agreements. These repos, which are equivalent to very short-term (often one-day) secured loans, are exempt from core bankruptcy rules such as the automatic stay that enjoins debt collection, rules against prebankruptcy fraudulent transfers, and rules against eve-of-bankruptcy preferential payment to favored creditors over other creditors. While these exemptions can be justified for United States Treasury securities and similarly liquid obligations backed by the full faith and credit of the United States government, they are not justified for mortgage-backed securities and other securities that could prove illiquid or unable to fetch their expected long-run value in a panic. The exemptions from baseline bankruptcy rules facilitate this kind of panic selling and, according to many expert observers, characterized and exacerbated the financial crisis of 2007–2009. The exemptions from normal bankruptcy rules should be limited to United States Treasury and similar liquid securities, as they once were. The more recent expansion of these exemptions to mortgage-backed securities should be reversed.
Massey Prize for Research in Law, Innovation, and Capital Markets Symposium—Foreword
70(2): 319-320 (Spring 2015)
Financial Innovation and Governance Mechanisms: The Evolution of Decoupling and Transparency
Henry T. C. Hu; 70(2): 347-406 (Spring 2015)
Financial innovation has fundamental implications for the key substantive and information-based mechanisms of corporate governance. “Decoupling” undermines classic understandings of the allocation of voting rights among shareholders (via, e.g., “empty voting”), the control rights of debtholders (via, e.g., “empty crediting” and “hidden interests”/ “hidden non-interests”), and of takeover practices (via, e.g., “morphable ownership” to avoid section 13(d) disclosure and to avoid triggering certain poison pills). Stock-based compensation, the monitoring of managerial performance, the market for corporate control, and other governance mechanisms dependent on a robust informational predicate and market efficiency are undermined by the transparency challenges posed by financial innovation. The basic approach to information that the SEC has always used—the “descriptive mode,” which relies on “intermediary depictions” of objective reality—is manifestly insufficient to capture highly complex objective realities, such as the realities of major banks heavily involved with derivatives. Ironically, the primary governmental response to such transparency challenges—a new system for public disclosure that became effective in 2013, the first since the establishment of the SEC—also creates difficulties. This new parallel public disclosure system, developed by bank regulators and applicable to major financial institutions, is not directed primarily at the familiar transparency ends of investor protection and market efficiency.
As starting points, this Article offers brief overviews of: (1) the analytical framework developed in 2006−2008 for “decoupling” and its calls for reform; and (2) the analytical framework developed in 2012−2014 reconceptualizing “information” in terms of three “modes” and addressing the two parallel disclosure universes.
As to decoupling, the Article proceeds to analyze some key post- 2008 developments (including the status of efforts at reform) and the road ahead. A detailed analysis is offered as to the landmark December 2012 TELUS opinion in the Supreme Court of British Columbia, involving perhaps the most complicated public example of decoupling to date. The Article discusses recent actions on the part of the Delaware judiciary and legislature, the European Union, and bankruptcy courts—and the pressing need for more action by the SEC. At the time the debt decoupling research was introduced, available evidence as to the phenomenon’s significance was limited. This Article helps address that gap.
As to information, the Article begins by outlining the calls for reform associated with the 2012−2014 analytical framework. With revolutionary advances in computer- and web-related technologies, regulators need no longer rely almost exclusively on the descriptive mode rooted in intermediary depictions. Regulators must also begin to systematically deploy the “transfer mode” rooted in “pure information” and the “hybrid mode” rooted in “moderately pure information.” The Article then shows some of the key ways that the new analytical framework can contribute to the SEC’s comprehensive and long-needed new initiative to address “disclosure effectiveness,” including in “depiction-difficult” contexts completely unrelated to financial innovation (e.g., pension disclosures and high technology companies). The Article concludes with a concise version of the analytical framework’s thesis that the new morphology of public information—consisting of two parallel regulatory universes with divergent ends and means—is unsustainable in the long run and involve certain matters that need statutory resolution. However, certain steps involving coordination among the SEC, the Federal Reserve, and others can be taken in the interim.
Corporate Bankruptcy Tourists
Oscar Couwenberg and Stephen J. Lubben; 70(3): 719-750 (Summer 2015)
Foreign corporations facing financial distress have a choice: restructure in their home jurisdiction or file for bankruptcy in the United States. And some number of foreign corporations do file bankruptcy petitions in the United States. But besides the occasional anecdotal account, how frequently this actually happens or what types of foreign firms are apt to file in the United States is almost completely unstudied. American firms that file under chapter 11 and foreign firms that file under chapter 15 are the frequent objects of study, but what of the foreign firms that file under chapters 7 or 11? This Article addresses this obvious gap in the literature by constructing a database of foreign corporate debtors. By analyzing this new dataset, this Article concludes that the United States Bankruptcy Code is used by foreign debtors in a way that is diametrically opposed to most of the extant thinking on transnational insolvency. In particular, foreign debtors use the American bankruptcy system to impose a global discharge on assets, without the cooperation of any jurisdiction beyond the United States, where the case is pending. This is in complete contrast with the efforts of UNCITRAL to facilitate cross-border cooperation among jurisdictions.
The Past and Future of Debt Recharacterization
James M. Wilton and William A. McGee, 74(1) 91-126 (Winter 2018/2019)
The bankruptcy doctrine of debt recharacterization, as developed in four federal circuits, uses multi-factor tests derived from tax cases involving solvent companies. Aspects of these tests make no sense when applied to debt of insolvent companies and the U.S. Treasury has determined that, even for the purpose originally intended, the tests produce “inconsistent and unpredictable results.” The Ninth Circuit has now joined the Fifth Circuit in looking to state law as the basis for determining whether debt claims should be recharacterized as equity and disallowed in bankruptcy cases. This Article examines these two approaches, analyzing arguments for and against application of a federal or a state law rule of decision for debt recharacterization. Drawing on U.S. Supreme Court precedent, statutory analysis, and policy, the Article shows that, under long-standing legal principles, state law provides the proper framework for determining whether debt should be recharacterized as equity in bankruptcy and offers both consistency between state and federal courts and a higher degree of predictability concerning the enforcement of insider debt. The article predicts that the U.S. Supreme Court will ultimately resolve the circuit split in favor of a state law rule of decision. In anticipation of such a ruling, the article concludes by providing an overview of choice of law issues and state law approaches to debt recharacterization.
Rethinking the Board of Directors: Getting Outside the Box
Stephen M. Bainbridge, 74(2) 285-296 (Spring 2019)
Externalizing Board Governance Means Changing the Board’s Function
Kelli Alces Williams, 74(2) 297-306 (Spring 2019)
Do Conflicts of Interest Require Outside Boards? Yes. BSPs? Maybe
Usha R. Rodrigues, 74(2) 307-312 (Spring 2019)
Upstream Liability, Entities as Boards, and the Theory of the Firm
Andrew Verstein, 74(2) 313-328 (Spring 2019)
Board Governance for the Twenty-First Century
Faith Stevelman and Sarah C. Haan, 74(2) 329-350 (Spring 2019)
Board 3.0: An Introduction
Ronald J. Gilson and Jeffrey N. Gordon, 74(2) 351-366 (Spring 2019)
Capitalism and Pragmatism Govern New Paradigms for Corporate Governance
Philip C. Thompson, 74(2) 367-372 (Spring 2019)
Outsourcing the Board: A Rebuttal
M. Todd Henderson, 74(2) 373-386 (Spring 2019)
Third-Party Releases in Bankruptcy Cases: Should There Be Statutory Reform?
Richard L. Epling; 75(2): 1747-1768 (Spring 2020)
Third-party releases, which can function as de facto discharges of nondebtors, have become an increasingly common feature of reorganization plans. There is no definitive Supreme Court case dealing with the legality and scope of such plan provisions, and the seven circuit courts of appeals that have addressed release issues have either disagreed or posited various legal tests and standards to satisfy the “extraordinary circumstances” bar they set for approving such releases.