Milton Friedman’s famous statement that a corporation’s only social responsibility is to increase its profits led to the shareholder primacy view of corporate governance in the United States, leaving little room for consideration of other interests. A similar creditor primacy view, embodied in the creditors’ bargain model, took hold as the dominant theory of corporate reorganization under Chapter 11 of the US Bankruptcy Code.
In the corporate governance realm, the single constituency approach of shareholder primacy has come under increasing attack in recent decades as scholars and others argue for a broader purpose of business that includes the interests of all affected parties. Academic criticism of shareholder primacy has been robust, including Oxford Professor Colin Mayer’s stakeholder-oriented statement of corporate purpose as ‘producing profitable solutions to problems of people and planet.’ This shift is also reflected by the changing views of the business community. The influential Business Roundtable recently revised its Principles of Corporate Governance to replace profit maximization as the purpose of business with a stakeholder approach. Regulatory approaches, like the European Union’s 2024 Corporate Sustainability Due Diligence Directive, also advance the stakeholder approach.
Sustainability is about consequences. It is a stakeholder approach that requires consideration of the interests of all who may be affected by an action. Why is that important in Chapter 11 corporate restructuring? Because Chapter 11 is very different from the English scheme of arrangement. The scheme, which is the model for most global corporate restructuring regimes, is a limited tool that traditionally would adjust the debt of a single class of creditors based upon a super-majority vote and a judicial determination of fairness. The interests of all schemed creditors are considered by the process and are the only interests affected by it. This is consistent with the stakeholder approach. In contrast, Chapter 11 is a coercive process with many powerful tools that can impose significant consequences on both creditor and non-creditor stakeholders. Those interests need to be considered as part of the process.
While US bankruptcy law, as currently envisioned under the creditor primacy theory, gives little weight to the interests of stakeholders who are not in-the-money creditors, my paper, titled Sustainable Bankruptcy, concludes that Chapter 11 adopts a broad stakeholder view for participation that facilitates a robust sustainability approach. Sustainability does not dictate an outcome or require that competing interests prevail over the interests of financial stakeholders. It merely requires that the interests of all affected parties be considered, and Chapter 11 does this.
In contrast to corporate decisions, almost all bankruptcy decisions that might have significant stakeholder consequences either require advance court approval or can be challenged before they are implemented. Also, unlike corporate decision making, the Chapter 11 process provides advance notice and allows virtually all parties who might be affected by a decision to participate in the decision-making process. While the ability to be heard is not the same as a grant of substantive rights, it does permit the interests of others to be considered in a Chapter 11 case. Participation matters and, according to an old American aphorism, the squeaky wheel gets the grease.
Adopting a sustainable approach will make no difference in the great majority of Chapter 11 cases because they affect only the debtor, its creditors, and its shareholders. However, some Chapter 11 cases raise serious sustainability concerns. A few, like the General Motors restructuring, the restructuring of religious and charitable institutions with histories of child sexual abuse, or the restructuring of opioid producers like Purdue Pharma are of great public concern. In those cases, the bankruptcy courts have become a principal forum for important public policy debates.
Thus Chapter 11 is not simply a forum for effectuating a creditors’ bargain. It is a coercive process that can impose significant costs on non-creditors. Sustainability should be part of that process, and the decisions made should balance the interests of all who are affected by them and not serve only the interests of a select few. Although contrary to creditor primacy, all of the costs and benefits of the process must be considered in order to justify the alteration of legal rights, even under a Kaldor-Hicks efficiency approach.
The full paper is available here.
G. Ray Warner is a Professor of Law at St. John’s University, New York.
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