A More Realistic Approach to Directors\u27 Duties

Expectations for what fiduciary duties can achieve in the corporate context are unrealistic. This segment of the law—and the alleged deficiencies therein—are blamed for corporate scandals, securities fraud, failed business plans, and even a company\u27s insolvency. Risk is, however, inherent in business, and human beings are flawed. Fiduciary duty law cannot change these basic facts. To the extent we think it can, we will continue to be disappointed and frustrated. This essay considers recasting (and to a greater extent codifying) directors’ duties in a positive frame to help foster better director oversight. It does not suggest that codifying greater clarity into directors’ duties would result in more or less director liability; rather, the primary objective would be to improve director performance outside of the litigation sphere

Teaching Business Law Through an Entrepreneurial Lens

The legal market has changed. Although change creates uncertainty and fear, it also can create opportunity. This essay explores the opportunity for innovation in the business law curriculum, and the role of simulation to help create more practice-aware new lawyers

Disciplining Corporate Boards and Debtholders Through Targeted Proxy Access

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 targeted proxy access would incentivize boards to manage difficult operational and financial situations more proactively, while creating a reasonable oversight mechanism for shareholders if those efforts fail. The article also discusses ways for shareholders to use general proxy access in distressed situations to strengthen the shareholder perspective in, and add value to, boards’ negotiations with debtholders. Yet failing the utility of traditional, general proxy methodology, the article suggests that targeted proxy access is a more tailored solution that mitigates many of the concerns articulated in the proxy access debate and provides a better balance between management autonomy and accountability

The Value of Soft Variables in Corporate Reorganizations

When a company is worth more as a going concern than on a liquidation basis, what creates that additional value? Is it the people, management decisions, the simple synergies of the operating business, or some combination of these types of soft variables? And perhaps more importantly, who owns or has an interest in these soft variables? This article explores these questions under existing legal doctrine and practice norms. Specifically, it discusses the characterization of soft variables under applicable law and in financing documents, and it surveys related judicial decisions. It also considers the overarching public policy and Constitutional implications of the treatment of soft variables in and outside of the federal bankruptcy scheme. The article concludes by considering the optimal treatment of soft variables in corporate reorganizations

Rethinking Preemption and Constitutional Parameters in Bankruptcy

Chapter 11 of the U.S. Bankruptcy Code allows financially distressed businesses to reorganize and emerge from bankruptcy free of their pre-bankruptcy debts and obligations. In general, a business can achieve this kind of “fresh start” by confirming a plan of reorganization or pursuing a going-concern sale that typically facilitates a change in ownership, a reduction in leverage, and the elimination of most claims against the company’s assets. Through these kinds of transactions, a business can emerge from bankruptcy with a stronger balance sheet and often a new ownership structure. It also can streamline operations by, for example, assuming valuable contracts and rejecting burdensome ones under the relevant provisions of the Bankruptcy Code. Although creditors’ claims may lose value through the bankruptcy process, all similarly situated creditors are treated fairly and in a nondiscriminatory manner. Distressed companies and their creditors should not have to worry about variances in state law insolvency schemes that might facilitate similar going-concern sales, but treat creditors differently or allow a process without the same kind of court or creditor oversight. Yet, states are increasingly adopting debtor-creditor laws that mimic key provisions of the Bankruptcy Code and permit the kind of fresh start for business debtors historically available only under federal bankruptcy law. These state laws may also provide rights or distributions to creditors that differ from, and conflict with, the provisions and purposes of the Bankruptcy Code. These new, sweeping state law insolvency schemes raise serious constitutional questions under both the Bankruptcy Clause and the Contract Clause. Policymakers and courts need to rethink and rebalance the allocation of powers between Congress and the states with respect to bankruptcy laws. More specifically, they need to define more clearly the parameters of federal preemption and preserve Congress’s exclusive authority over laws affecting the rights of creditors and other stakeholders in the context of a fresh start for business debtors

Mitigating Financial Risk for Small Business Entrepreneurs

Financial distress by definition threatens a company’s viability. Entrepreneurial and start-up entities are particularly vulnerable to this threat. Yet, much of the discussion following the recent recession focuses almost exclusively on financial institutions and “too-big-to-fail” entities. This essay re-examines lessons gleaned from the recession in the context of smaller, entrepreneurial entities. Specifically, it analyzes how small business entrepreneurs might invoke principles of enterprise risk management to mitigate the long-term impact of financial distress on their business models. It also considers related refinements to extant small business regulations, including the U.S. bankruptcy laws. The essay’s primary objective is to help policymakers, entrepreneurs and investors rethink financial distress and recognize opportunities for “successful failures

Committee Capture? An Empirical Analysis of the Role of Creditors\u27 Committees in Business Reorganizations

The number of businesses experiencing financial distress increased significantly during the past several years. The number of Chapter 11 reorganization cases likewise rose. And many of these business failures were spectacular, leaving little value for creditors and even less for shareholders. Consequently, how the business debtor\u27s limited asset pie is divided and who gets to allocate the pieces are very relevant and important questions. The U.S. Bankruptcy Code generally contemplates the appointment of a committee of the debtor\u27s unsecured creditors to serve as a fiduciary for all general unsecured creditors and as a statutory watchdog over the debtor and its assets. The creditors\u27 committee typically includes seven to nine of the debtor\u27s largest unsecured creditors, and it receives access to much of the debtor\u27s proprietary and confidential information, as well as a seat at the plan of reorganization negotiation table. Serving as a member of the creditors\u27 committee often gives a creditor a say in how the asset pie is divided. Whether that creditor uses its committee seat for the benefit of all creditors or simply to further its own agenda is an open question. This Article presents the first in-depth empirical analysis of the activities of creditors\u27 committees in, and their impact on, Chapter 11 reorganization cases. The primary data examine 296 Chapter 11 cases in six different jurisdictions. This analysis is supplemented by survey data collected from individuals who have served on creditors\u27 committees or worked as a professional to business debtors or creditors\u27 committees. The data support several strong associations between the presence of a creditors\u27 committee and, for example, whether the debtor reorganizes or pursues a sale of substantially all of its assets and the ultimate percentage recovery distributed to general unsecured creditors. Overall the Article provides critical data and analyses to help policymakers, judges, and Chapter 11 participants refine the role of creditors\u27 committees to maximize their utility

Facilitating Successful Failures

Approximately 80,000 businesses fail each year in the United States. This article presents an original empirical study of over 400 business restructuring professionals focused on a critical, arguably contributing factor to these failures—the conduct of boards of directors and management. Anecdotal evidence suggests that management of distressed companies often bury their heads in the sand until it is too late to remedy the companies’ problems, a phenomenon commonly called “ostrich syndrome.” The data confirm this behavior, show a prevalent use of loss framing, and suggest trends consistent with prospect theory. The article draws on these data and behavioral economics to examine the genesis and contours of this problem. It then discusses potential changes to applicable law and introduces a new “meet and confer” process for encouraging timely restructuring negotiations. The meet and confer process is designed to promote meaningful changes in management conduct and to facilitate more “successful failures.” Policymakers should adopt regulations fostering that mentality, rather than rewarding fear or ignorance in the face of failure