Like much of life, the study of bankruptcy is the study of leverage. Chapter 11 of the United States Bankruptcy Code may be appropriately described as providing a framework within which interested parties may negotiate solutions to the problems facing a troubled company. The allocation of leverage to the negotiating parties is critical to the ultimate outcome of the process. In any negotiation setting control over the bargaining process is a key item of leverage. This Article proposes a framework for analysis and suggests solutions to the problem of control over corporations during the pendency of a Chapter 11 reorganization case.
This Article recommends an approach to Chapter 11 decision-making that relies heavily upon the teachings of financial economics. When presented with a particular question that cannot be addressed through the plan negotiation process, courts should look to the wishes of the residual owners of the assets and income of the corporation whenever possible. If that group cannot be found or for any reason does not participate in the decision-making process, courts should make use of an impartial third party as fact finder and focal point for significant decisions.
In support of this proposition, this Article examines the Chapter 11 corporate governance structure against the general principles informing the non-bankruptcy system. Section I sets the stage with a general description of the goals of Chapter 11, the process of negotiation among the owners of the business, and several business decisions that require particular attention. Section II describes the non-bankruptcy governance structure applicable to corporations that are solvent and to corporations that are falling. Section III describes the changes in this structure necessitated by the reorganization process. Section IV critiques the bankruptcy governance structure in light of principles underlying the non-bankruptcy system and the various theories of the purpose of the reorganization process. Section V concludes with specific recommendations for improvements in the method by which the bankruptcy asylum is run.