15 - Bargaining over equity's share in the bankruptcy reorganization of large, publicly held companies

Summary

This chapter reports some of the results of an empirical study of the bankruptcy reorganization of large, publicly held companies. We present data relevant to what many consider to be the central issue of reorganization theory – how the value of the reorganizing enterprise should be divided among the various claims and interests. We demonstrate that there is indeed systematic deviation from the absolute priority rule in favor of junior interests; but, with respect to large, publicly held corporations, the debate about how to prevent these deviations is, for the most part, a tempest in a teapot – the difference between absolute priority and the actual outcomes of these cases is relatively small.

[Part I, on the legal context in which bargaining occurs, and Part II, on the history and theory of bargaining in bankruptcy cases, have been removed as they address issues discussed in other articles included in this volume.] Part III describe[s] our methodology. In Part IV we present our findings as to the frequency of “settlement” in these cases. In Parts V and VI, we present our findings as to the terms of settlement, comparing the legal entitlements of various participants in hypothetical adjudications and their recoveries under the actual settlement agreements. In these parts, we also discuss the possible reasons for “gaps” between the hypothetically correct solutions in adjudication (as provided by the absolute priority rule) and the settled outcomes. Part VII discusses the implications of these empirical findings for bankruptcy policy.