In the spring of 2020, as the Covid-19 pandemic shut down economies around the world, pressure arose for governments to respond to the growing threat of pandemic-related market distress. In the United States, the initial proposals for government action varied in nature and focus. Some proposals targeted the financial system while a few targeted small businesses and individuals. Others were intended to bail out large businesses and specific industries. Still other proposals took a more institutional focus. In the context of bankruptcy law, many experts imagined building up the bankruptcy system as a primary bulwark against a seemingly imminent wave … Read more
The CARES Act passed in response to the COVID-19 crisis provides billions of dollars in industry-specific loans that will go to large corporations like Boeing and the major airlines. These provisions are part of a larger compromise that also puts important funds into the hands of individuals and small businesses. But one should not be fooled into thinking the provisions benefiting large corporations and their shareholders were a necessary part of a coronavirus bailout. Instead they go against the core principles that should guide policymakers in responding to a crisis of this sort.
As Eric Posner and I explained in … Read more
As Toys ‘R’ Us heads for liquidation, a common refrain has it that the toy retailer failed to successfully reorganize in Chapter 11 because it took on too much debt. The 2005 leveraged buyout (LBO) of Toys ‘R’ Us by a group of investors led by KKR Group, Bain Capital, and Vornado Realty Trust is a particular target for blame. But this ignores the larger issue, of which the LBO and the subsequent bankruptcy are merely symptoms. In short, Toys ‘R’ Us collapsed, like many companies have, because of a failure to innovate.
Unmanageable debt and capital structures – though … Read more
Corporate bankruptcy law is built around the idea of replicating the hypothetical bargain that would occur among creditors of a firm if they could all negotiate ex ante. By the common account, the creditors in that bargain would agree on a set of rules that maximize value. In our working paper, “The Bankruptcy Partition,” we introduce an important qualification to this idea. When investors gather to invest in a common venture, their focus is on maximizing the value of that particular venture, rather than maximizing their total wealth as a group. The focus of the hypothetical creditors’ bargain, then, is … Read more
Much of the debate in bankruptcy scholarship today centers on the extent to which the law protects stakeholder options. In a new paper, “Beyond Options,” we argue that this focus is misplaced. Protecting options is neither necessary nor sufficient for advancing the goal of a well-functioning bankruptcy system. What is needed is a regime that cashes out the rights of junior stakeholders with minimal judicial involvement.
Modern bankruptcy scholarship adopts an options-based perspective, seeing options embedded in every layer of the firm’s capital structure and examining ways that current law redistributes value across stakeholders by modifying, creating, or destroying options. … Read more
The following post comes to us from Anthony Casey, Assistant Professor of Law at the University of Chicago Law School. It is based on his recent article, “The New Corporate Web: Tailored Entity Partitions and Creditors’ Selective Enforcement,” which is available here.
Firms have developed sophisticated legal mechanisms that partition assets across some dimensions and not others. The result is a complex web of interconnected affiliates. For example, an asset placed in one legal entity may serve as collateral guaranteeing the debts of another legal entity within the larger corporate group. Conventional accounts of corporate groups cannot explain these … Read more
The partitioning of businesses into separate legal entities has been the focus of financial and legal study for decades. This literature has looked at the implications of legal separations across various dimensions such as corporate governance, limited liability, tax, and risk partitioning. In a recently published article, No Exit: Withdrawal Rights and the Law of Corporate Reorganizations, Douglas Baird and I look at the intersection of entity partitioning and bankruptcy law.
Many recent high-profile bankruptcy cases have presented complicated questions of how legal entities should be treated in the bankruptcy process. These cases were particularly challenging because the entity … Read more
One of the highest-profile provisions of the Dodd-Frank Act is Section 922. That provision provides protection and monetary awards for whistleblowers. To qualify, the whistleblower must provide information to the Securities and Exchange Commission that leads to the recovery of monetary sanctions. While many have argued that this provision does not go far enough in providing incentives for whistleblowers, the reality is that it goes too far. By providing protection and compensation for whistleblowers without imposing any costs, Section 922 attracts both low- and high-quality tips without providing the SEC with any means of differentiating the two. This will lead … Read more