Law Commons^™

The Covid-19 Pandemic And Business Law: A Series Of Posts From The Oxford Business Law Blog, Gert-Jan Boon, Markus K. Brunnermeier, Horst Eidenmueller, Luca Enriques, Aurelio Gurrea-Martínez, Kathryn Judge, Jean-Pierre Landau, Marco Pagano, Ricardo Reis, Kristin Van Zwieten

Faculty Scholarship

The COVID-19 Pandemic is the biggest challenge for the world since World War Two, warned UN Secretary General, António Guterres, on 1 April 2020. Millions of lives may be lost. The threat to our livelihoods is extreme as well. Job losses worldwide may exceed 25 million.

Legal systems are under extreme stress too. Contracts are disrupted, judicial services suspended, and insolvency procedures tested. Quarantine regulations threaten constitutional liberties. However, laws can also be a powerful tool to contain the effects of the pandemic on our lives and reduce its economic fallout. To achieve this goal, rules designed for normal times …

Too-Big-To-Fail Shareholders, Yesha Yadav

Vanderbilt Law School Faculty Publications

To build resilience within the financial system, post-Crisis regulation relies heavily on banks to fund themselves more fully by issuing equity. This reserve of value should buttress failing banks by providing a mechanism to pay off creditors and depositors and preserve the health of financial markets. In the process, shareholders are wiped out. Scholars and policymakers, however, have neglected to examine which equity investors, in fact, are purchasing bank equity and taking on the default risk of U.S. banks. This Article addresses this question. First, it shows that five asset managers - BlackRock, Vanguard, State Street Global Advisors, Fidelity and …

Disciplining Corporate Boards And Debtholders Through Targeted Proxy Access, Michelle M. Harner

Faculty Scholarship

Corporate directors committed to a failed business strategy or unduly influenced by the company’s debtholders need a dissenting voice—they need shareholder nominees on the board. This article examines the bias, conflicts, and external factors that impact board decisions, particularly when a company faces financial distress. It challenges the conventional wisdom that debt disciplines management, and it suggests that, in certain circumstances, the company would benefit from having the shareholders’ perspective more actively represented on the board. To that end, the article proposes a bylaw that would give shareholders the ability to nominate directors upon the occurrence of predefined events. Such …

Rediscovering Corporate Governance In Bankruptcy, David A. Skeel Jr.

All Faculty Scholarship

In this Essay on Lynn LoPucki and Bill Whitford’s corporate reorganization project, written for a symposium honoring Bill Whitford, I begin by very briefly describing its historical antecedents. The project draws on the insights and perspectives of two closely intertwined traditions: the legal realism of 1930s, whose exemplars included William Douglas and other participants in the SEC study; and the law in action movement at the University of Wisconsin. In Section II, I briefly survey the key contributions of the corporate governance project, which punctured the then-conventional wisdom about the treatment of shareholders in bankruptcy, managers’ principal allegiance, and many …

Ring-Fencing, Steven L. Schwarcz

Faculty Scholarship

“Ring-fencing” is often touted as a regulatory solution to problems in banking, finance, public utilities, and insurance. However, both the precise meaning of ring-fencing, as well as the nature of the problems that ring-fencing regulation purports to solve, are ill defined. This article examines the functions and conceptual foundations of ring-fencing. In a regulatory context, the term can best be understood as legally deconstructing a firm in order to more optimally reallocate and reduce risk. So utilized, ring-fencing can help to protect public-benefit activities performed by private-sector firms, as well as to mitigate systemic risk and the too-big-to-fail problem inherent …

Clawbacks: Prospective Contract Measures In An Era Of Excessive Executive Compensation And Ponzi Schemes, Miriam A. Cherry, Jarrod Wong

All Faculty Scholarship

In the spring of 2009, public outcry erupted over the multi-million dollar bonuses paid to AIG executives even as the company was receiving TARP funds. Various measures were proposed in response, including a 90% retroactive tax on the bonuses, which the media described as a "clawback." Separately, the term "clawback" was also used to refer to remedies potentially available to investors defrauded in the multi-billion dollar Ponzi scheme run by Bernard Madoff. While the media and legal commentators have used the term "clawback" reflexively, the concept has yet to be fully analyzed. In this article, we propose a doctrine of …

Leverage In The Board Room: The Unsung Influence Of Private Lenders In Corporate Governance, Frederick Tung

Faculty Scholarship

The influence of banks and other private lenders pervades public companies. From the first day of a lending arrangement, loan covenants and built-in contingency provisions affect managerial decision making. Conventional corporate governance analysis has been slow to notice or account for this lender influence. Corporate governance discourse has traditionally focused only on corporate law arrangements. The few existing accounts of creditors' influence over firm managers emphasize the drastic actions creditors take in extreme cases - when a firm is in serious trouble - but in fact, private lender influence is a routine feature of corporate governance even absent financial distress. …

Managers’ Fiduciary Duties In Financially Distressed Corporations: Chaos In Delaware (And Elsewhere), Rutheford B. Campbell Jr., Christopher W. Frost

Law Faculty Scholarly Articles

The inherent conflict between creditors and shareholders has long occupied courts and commentators interested in corporate governance. Creditors holding fixed claims to the corporation's assets generally prefer corporate decision making that minimizes the risk of firm failure. Shareholders, in contrast, have a greater appetite for risk, because, as residual owners, they reap the rewards of firm success while sharing the risk of loss with creditors.

Traditionally, this conflict is mediated by a governance structure that imposes a fiduciary duty on the corporation's managers-its officers and directors-to maximize the value of the shareholders' interests in the firm. In this traditional view, …

The Expressive Function Of Directors’ Duties To Creditors, Jonathan C. Lipson

All Faculty Scholarship

This Article offers an explanation of the “doctrine” of directors’ duties to creditors. Courts frequently say—but rarely hold—that corporate directors owe duties to or for the benefit of corporate creditors when the corporation is in distress. These cases are puzzling for at least two reasons. First, they link fiduciary duty to priority in right of payment, effectively treating creditors as if they were shareholders, at least for certain purposes. But this ignores the fact that priority is a complex and volatile concept. Moreover, contract and other rights at law usually protect creditors, even (especially) when a firm is distressed. It …

The Myth Of The Residual Owner: An Empirical Study, Lynn M. Lopucki

UF Law Faculty Publications

Most bankruptcy scholars who have considered the residual owner approach have come away with a healthy skepticism. But despite its theoretical difficulties, the residual owner approach persists. I attribute this persistence to an empirical assumption that usually remains implicit. In spite of the theoretical difficulties in identifying the single residual owners of bankrupt firms, the scholars who employ residual owner approaches believe that in reality, residual owners exist and can be easily identified inmost cases. Parties may bluster about the uncertainty of firm value and other parties may be compelled to compromise with them in order to avoid an expensive, …

Creditors' Ball: The "New" New Corporate Governance In Chapter 11, David A. Skeel Jr.

All Faculty Scholarship

In the 1980s and early 1990s, many observers believed that the American corporate bankruptcy laws were desperately inefficient. The managers of the debtor stayed in control as "debtor in possession" after filing for bankruptcy, and they had the exclusive right to propose a reorganization plan for at least the first four months of the case, and often far longer. The result was lengthy cases, deteriorating value and numerous academic proposals to replace Chapter 11 with an alternative regime. In the early years of the new millennium, bankruptcy could not look more different. Cases proceed much more quickly, and they are …

Introduction To The Symposium "Convergence On Delaware: Corporate Bankruptcy And Corporate Governance", Robert K. Rasmussen, Charles M. Elson

Vanderbilt Law Review

Bankruptcy is back. The use of Chapter 11 by large, publicly held firms was a subject of much debate in the academic and popular press in the late 1980s and the early 1990s. Firms such as Texaco, Revco, LTV, Federated Department Stores, Maxwell Communications, TWA, and Eastern Airlines all filed for bankruptcy during that time. The economic boom of the mid- and late 1990s, however, resulted in a relative dearth of high-profile bankruptcy cases. The recent economic downturn has moved corporate reorganizations back into the spotlight. The Chapter 11 filings by firms such as Enron, Global Crossing, the Loewen Group, …

Corporate Governance Reform And Reemergence From Bankruptcy: Putting The Structure Back In Restructuring, Charles M. Elson, Paul M. Helms, James R. Moncus

Vanderbilt Law Review

A company's descent into bankruptcy may result from one or more troubling factors. Often the failing enterprise has adopted a poor business model, been led by deficient management, or labored under an unworkable capital structure. More often than not, a business failure is also accompanied by a less-than-ideal corporate governance structure within the organization. The failure to adopt an effective corporate governance model often leads to a sterile, inactive board of directors and may hasten a firm's demise. Conversely, proper corporate governance may prevent a business's slide into Chapter 11. Indeed, several studies have demonstrated a strong relationship between corporate …

What Enron Means For The Management And Control Of The Modern Business Corporation: Some Initial Reflections, Jeffrey N. Gordon

Faculty Scholarship

The Enron case plays on many different dimensions, but its prominence is not merely part of popular culture's obsession with scandal du jour. Rather, the Enron situation challenges some of the core beliefs and practices that have underpinned the academic analysis of corporate law and governance, including mergers and acquisitions, since the 1980s. These amount to an interlocking set of institutions that constitute "shareholder capitalism," American-style, 2001, that we have been aggressively promoting throughout the world. We have come to rely on a particular set of assumptions about the connection between stock market prices and underlying economic realities; the reliability …

The Theory, Reality, And Pragmatism Of Corporate Governance In Bankruptcy Reorganizations, Christopher W. Frost

Law Faculty Scholarly Articles

Governing a corporation during a Chapter 11 reorganization presents a special case of the age-old problem of the separation of ownership and control. Critics of Chapter 11 have long pointed to the insulation provided by the automatic stay to managers of the business as one of the causes of bankruptcy inefficiency. Protected from the normal contractual and market forces that restrain the behavior of managers of healthy companies, managers of firms in bankruptcy, the harshest critics charge, use delay and other strategies to enrich themselves and the shareholders at the expense of the firm's creditors.

This Article addresses the financial …

8th Biennial Midwest/Midsouth Bankruptcy Institute, Office Of Continuing Legal Education At The University Of Kentucky College Of Law, Lawrence Ponoroff, Douglass G. Boshkoff, Tracey N. Wise, Christopher W. Frost, Keith M. Lundin, Ray Reynolds Graves, David G. Epstein, Joe Lee, Robert E. Mckenzie, Conrad K. Cyr

Continuing Legal Education Materials

Materials from the 8th Biennial Midwest/Midsouth Bankruptcy Institute held December 1997.