Out-of-court corporate restructurings, or “corporate workouts,” involve high-stakes multi-party negotiations without a clear procedural framework, such as the one that Chapter 11 provides. This gives the parties the freedom to design workouts without the constraints imposed by a rigid legal process – and can save them significant amounts of money.

At the same time, corporate workouts suffer from “process fragility.” Successful workouts require consensus building between key stakeholders, yet individual claimants find themselves in a multi-party prisoners’ dilemma where defection is a dominant strategy. Solving this problem in a way that is inclusive of relevant stakeholders and does not generate losses associated with sharp dealing is a significant challenge.

In a new article, we argue that artificial intelligence (AI) tools can increase the efficiency of corporate workouts. Based on previous work about AI in negotiations, we envision a “Corporate Restructuring Machine” (CRM). This would be a private, online, AI-enhanced platform that companies and their stakeholders could join at different times, for different services, and at different prices. The CRM would come with communication, analytical, and alternative dispute resolution tools designed to mitigate workouts’ process fragility and encourage more inclusive and less socially costly corporate workouts.

The CRM could also change corporate workouts in more radical ways. Eventually, it would allow parties to continuously renegotiate companies’ capital structures, obviating the need for companies to corral investors at a particular moment to resolve their financial distress. Put differently, the CRM would fundamentally change the corporate workout from a discrete economic and legal event to a continuous process.

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Corporate restructuring practice has long been developing legal and practical tools to reduce the process fragility of corporate workouts. Starting in the 1980s and 1990s, informal rules and business practices such as the London Approach to corporate workouts and the INSOL Principles for a global approach to multi-creditor workouts aimed to stabilize out-of-court restructurings.

Those rules and practices, though, became obsolete. They worked for companies whose capital structures were concentrated, homogeneous, and stable – such as when financing was provided by a handful of commercial banks in a syndicated loan. Once dispersed debtholders with heterogeneous interests financed firms, however, the London Approach and the INSOL Principles were less useful. Recent experiences with so-called “liability management exercises” and “cooperation agreements” illustrate both the breakdown of the London Approach and the INSOL Principles on the one hand, and the persistence of process fragility in corporate workouts on the other.

Over the last 10 years, a variety of AI applications have emerged to support out-of-court restructurings and other complex multi-party negotiations. These tools facilitate, among other things, the timely detection of financial distress, assessment of creditors’ claims, design of efficient restructuring plans, evaluation of a company’s performance after reorganization, and the smooth management of the restructuring process. However, all these tools operate independently. They were developed to solve specific problems (and at times for specific parties) and so could provide only limited relief.

Corporate workouts would benefit from a platform with a suite of AI tools designed to facilitate negotiations and decision-making in a corporate workout context. To the best of our knowledge, though, no such platform exists.

The CRM would change this. It would offer, among other things, interest and financial analysis, communication assistance, transcription, mediation, and arbitration services. Companies and their stakeholders (particularly creditors and shareholders) could join the platform and opt into AI applications at different times, for different services, and at different prices.  In so doing, parties could commit in a contract or company charter to using the CRM to address financial distress. As an open platform that makes negotiating with multiple parties less expensive, the CRM could help complete corporate workouts that included stakeholders that otherwise might not participate. The CRM could thus revitalize the London Approach and the INSOL Principles for today’s financial markets.

To be sure, the CRM would not render court-supervised restructurings obsolete. Corporate workouts can still fail for a variety of reasons. Corporate debtors or other stakeholders might trust a court-supervised process more than a machine-run restructuring. Not enough stakeholders might sign up for a comprehensive CRM restructuring, at least initially. Corporate financial distress stemming from mass tort episodes, would inevitably involve parties who never agreed to use the CRM. We nevertheless think the CRM could streamline cases likely headed for corporate workouts. By making workouts more efficient, parties would have an incentive to use the platform and its services more frequently.

The CRM could change corporate workouts in more radical ways, too. Consider what would happen if the CRM were coupled with “self-driving contracts,” which would rewrite and adjust their own terms according to a set of rules. Various factors, such as interest rates, would be continuously modified as macroeconomic conditions, asset values, or business prospects changed. The CRM could be used to negotiate, craft, or even broadly oversee different self-driving contracts, which might ultimately result in a company’s financial and operational profile becoming self-driving, too.

This would fundamentally change the nature of corporate restructuring. Currently, a restructuring, whether in- or out-of-court, is a discrete economic event that occurs when a firm experiences or is threatened with financial distress. The task for the corporation’s managers is to find the point where the company is distressed enough to warrant a workout, yet not so distressed as to squander the company’s going concern value and make any reorganization futile.

By making corporate workouts a continuous process, self-driving contracts and the CRM could help prevent an acute crisis situation from occurring. And because a company’s contracts would be in a constant state of renegotiation, the company’s operations could keep up with any fast-moving changes, keeping its financial and operational profiles stable.

This constant, technology-driven renegotiation would also change humans’ roles in corporate workouts, particularly those of lawyers and other restructuring professionals. Automated processes and effective algorithms would reduce the need for human negotiators and ad hoc crisis managers. Where humans remained involved, they would be assisted by intelligent machines, working together in muti-disciplinary teams.

The outcome could be a fully automated (AI-driven), comprehensive and private reorganization system that would sharply reduce the need for human negotiation and the reworking of a company’s capital structure at a particular moment. Ultimately the CRM might change the very notion of a “corporate workout.” As continuous and AI-managed financial engineering becomes the new normal, the old workout might disappear altogether in an efficiently managed “self-driving corporation.”

This post comes to us from Horst Eidenmüller, statutory professor of commercial law at the University of Oxford and a professorial fellow at St. Hugh’s College, Oxford, and Jared Mayer, the Harry A. Bigelow Teaching Fellow & Lecturer in Law at the University of Chicago Law School. It is based on their recent article, “Introducing the Corporate Restructuring Machine: An Open Platform Approach,” available here.