Venezuela: Prospects for Restructuring Sovereign Debt and Rebuilding a National Economy

Venezuela is facing not only a grave humanitarian crisis, but an acute financial and economic one as well–including a massive debt burden.  Moreover, Venezuela is in the throes of an extended political stalemate between the forces aligned with the regime of Nicolás Maduro and those led by opposition leader and so-called “interim” Venezuelan president Juan Guaidó.  However, as long as the Maduro regime remains in power, it seems unlikely that Venezuela will be able to negotiate a restructuring deal with its foreign creditors, due in no small part to certain restrictions provided for in the current U.S. sanctions regime vis-à-vis … Read more

Delaware Law and the “End of History” in Creditor Protection

What should a judge do when creditors claim that they were harmed by management and a board’s carelessness or disloyalty?  If the creditors were shareholders, the judge would apply fiduciary duty doctrines to determine liability.  Yet it’s unclear what legal doctrines offer creditors redress.  In a new chapter, we examine how judges have struggled with that issue over much of American history.  We pay special attention to the approach of judges in Delaware, the most important jurisdiction for corporate law.  We trace three generations of jurisprudence that each takes a different approach to whether judges should use equitable doctrines to … Read more

Large Corporations Did Not Need A Bailout

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

The Social Costs of Dividends and Share Repurchases

On December 9, 2002, UAL Corporation, which operated as United Airlines, filed for bankruptcy protection, leading to huge losses by UAL’s creditors. Those creditors included UAL’s pensioners when UAL’s pension plans were terminated and taken over by the Pension Benefit Guaranty Corporation, which guarantees a much lower level of benefits than United had agreed to pay. Yet in the five years before the bankruptcy, UAL paid out more than $1.2 billion to shareholders in dividends and share buybacks.  The shareholders kept that money despite the losses to others.

A long-held view in the academy is that shareholders are “residual claimants” … Read more

Why Do Bankrupt Firms Have Such Complex Capital Structures?

Complex capital structures are prevalent in many recent high-profile Chapter 11 bankruptcy cases.  One recent example is Toys ‘R’ Us, whose debt structure was, as characterized by Bloomberg Businessweek, “as complex and precarious as a Jenga tower. [1]” It included dozens of subsidiary entities, with separate debt facilities against entities owning the intellectual property, the real estate, and international operations, among other asset groups.  Why do capital structures become fragmented and complex in this way, and what are the implications for bankruptcy law?

In my working paper, Disagreement and Capital Structure Complexity,  I suggest one reason why a firm’s … Read more

Insider Trading: Are Insolvent Firms Different?

Are insolvent firms different from solvent firms with respect to insider trading law and policy? Formally, the law does not change. But economic realities and non-securities law duties do. As a result, the insider trading landscape changes considerably. The law is more permissive in some ways, and more constraining in others, as troubled instruments trade.

One difference is the level of regulation of trading in the residual claims of the firm. In solvent firms, the residual claims are equity securities, and equity securities are subject to the full ambit of trading restrictions.

In insolvent firms, non-equity claims such as trade … Read more

The Bankruptcy Partition

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

How Creditors Affect Resource Allocation at Firms in Technical Default

A central topic in financial economics is how the allocation of cash flow and control rights among providers of corporate finance should evolve with firm performance. Theoretically, allowing for a transfer of control to creditors when a firm is in default can alleviate agency problems resulting from the separation of ownership and control, as well as conflicts of interest between debt and equity holders (Jensen and Meckling, 1976).[1] Empirical evidence confirms that governance by creditors has profound effects on not only bankrupt firms (Gilson, 1990), but also a broad spectrum of firms that are merely in technical default.[2]Read more

Do Creditors Actively Influence Corporate Tax Planning?

In our recent paper, we provide strong empirical evidence that banks play an active role in shaping borrowers’ tax planning. Our evidence is drawn from a comprehensive analysis of the impact of debt covenant violations on corporate tax avoidance.

Covenants must be maintained while the debt is outstanding and are tripwires for trouble. A violation of a covenant can put the borrowing firm into technical default and lead to the transfer of control rights to creditors, who then step in and exert strong influence over managerial decisions.

Using a large sample of covenant violations by U.S. public firms between 1997 … Read more

How Antitakeover Legislation Affects Accounting

In common law countries such as the U.S., corporate governance aims primarily to protect shareholders from managers’ self-dealing. Post-Enron reforms such as the Sarbanes-Oxley Act of 2002 and various Securities and Exchange Commission rules are examples of this shareholder-oriented approach. However, to the extent that the interests of shareholders and debtholders are not entirely aligned, governance reforms that benefit shareholders may harm debtholders. Similarly, some public polices such as state anti-takeover laws (ATLs) may entrench management and harm shareholders but benefit debtholders by reducing both the variance of cash flow from operations and the firm’s risk of default.

In our … Read more

Beyond Stakeholder Options in Bankruptcy

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

Sovereign Debt Restructuring: The Battle of Argentina Is Over. The Battle of Venezuela Is About to Begin.

Most of the lawsuits against Argentina in the New York courts ended in the Spring of 2016 through cash settlements with the major litigants.  The market is still digesting the lessons from this 15 years of bitter litigation.  That assessment may eventually conclude that

  • playing the part of a death-grip holdout in a sovereign debt restructuring will probably pay off handsomely,
  • obtaining a court injunction (a so-called pari passu injunction) preventing the sovereign borrower from paying its other external debt without making a “ratable” payment to holdouts is an essential element to a winning holdout strategy, and
  • creditors prepared

Read more

Gibson Dunn discusses MPM Silicones, LLC – The Dawn of a New Golden Age for Debtors?

On May 4, 2015, the District Court for the Southern District of New York affirmed Bankruptcy Judge Robert D. Drain’s ruling confirming the chapter 11 plan of MPM Silicones, LLC. The holdings of the District Court and the Bankruptcy Court are likely to have wide ranging ramifications, because they decrease the bargaining position of secured creditors in plan negotiations, while increasing the rights of debtors and junior creditors in contentious chapter 11 cases.

I. Background 

On August 26, 2014, Judge Drain ruled on several plan confirmation issues, including, most notably, that the debtors, Momentive Performance Materials, a manufacturer of silicone … Read more