Corporate America is increasingly financed by debt rather than equity. Two market forces drive this shift. On the demand side, private equity has generated an insatiable appetite for debt by acquiring large companies and entire industries through leveraged buyouts. On the supply side, innovations in debt markets—including syndicated lending, private credit, and other forms of nonbank credit—have expanded the debt needed to satisfy that demand.
As equity recedes from the center of corporate finance, debt has become a principal instrument through which corporate power is exercised, allocated, and disciplined. Although scholars have long studied how debt influences corporate governance, they have paid less attention to how its changing market structure alters investor conflict.
In my article, ‘The Law of Debtholder Capitalism’, forthcoming in the Columbia Business Law Review, I argue that this transformation changes the locus, form, and substance of investor conflicts. As companies become heavily debt-financed, disputes that once would have appeared as corporate governance conflicts increasingly appear as disputes over debt contracts. And because leverage amplifies insolvency risk, those disputes often migrate into restructuring negotiations—or, when private ordering fails, into bankruptcy court.
I call this new paradigm debtholder capitalism. Corporate power is increasingly organized through debt contracts rather than equity ownership. Debtholders do not own the corporation, hold the shareholder franchise, or occupy the formal position corporate law associates with ultimate ownership. Yet they exercise control over virtually every aspect of the debtor’s business by asserting contractual claims over its assets and cash flow.
What Causes Debt’s Ascendancy?
Supply and demand alone do not explain debt’s appeal. Its distinctive legal advantage lies in three characteristics: flexibility, marketability, and invisibility.
Under traditional relationship banking, a bank originated, held, and monitored a bespoke loan. Such loans were flexible because they were contractual, but illiquid because they depended on a bespoke lending relationship. Syndicated lending transformed that model. Banks increasingly arrange and underwrite loans, distributing credit exposure to institutional investors rather than holding the loans to maturity. Post-financial-crisis banking regulation accelerated this ‘originate-to-distribute’ model.
Syndicated debt retains contractual flexibility while acquiring secondary-market liquidity. Modular drafting allows covenants, liens, and amendment provisions to be assembled from reusable components; standardization makes those terms easier for investors to price and trade. Meanwhile, syndicated loans generally remain classified as loans rather than securities, keeping much of their distribution outside public securities disclosure requirements. These features allow companies to reorganize corporate control through private contract without reallocating equity ownership.
How Debt Changes the Corporate Purpose Debate
This transformation exposes an overlooked premise of contemporary debates over corporate purpose. Shareholder primacy and stakeholder capitalism disagree about whom corporate power should serve. Yet both imagine an equity-centered corporation: shareholders elect directors, directors exercise managerial discretion, and the central question is how that discretion should be exercised.
Debtholder capitalism questions that premise. Modern credit agreements are instruments of corporate governance. Covenants, liens, and consent rights constrain what firms may borrow, spend, sell, or restructure. The question is no longer simply whose interests directors should advance, but who determines the choices available to them.
This shift also unsettles the traditional legal distinction between debt and equity. Historically, corporate law protects dispersed shareholders through fiduciary duties while treating creditors as sophisticated counterparties capable of protecting themselves through contract. Today, however, the landscape of debt and equity has reversed: equity ownership has concentrated in institutional investors and private equity sponsors, while syndicated lending has dispersed debt ownership. Creditors increasingly face collective-action problems once associated with shareholders, sometimes bearing equity-like residual risk without receiving equity’s fiduciary protections.
Investor Conflicts in Debtholder Capitalism: Intra-Class Creditor Warfare
So, what happens when syndicated lending produces financial distress? Under relationship banking, a lender ordinarily chose between enforcing its claims and renegotiating with the debtor. Syndicated lending complicates that choice. A distressed debtor must now negotiate with dispersed creditors holding claims under shared debt documents. Although all may benefit from preserving the business, each has incentives to secure a better priority position or bargain for preferential treatment.
To be sure, creditor conflict is nothing new. Bankruptcy has always involved disputes among secured lenders, bondholders, trade creditors, and other claimants over priority and distribution. What distinguishes the new era is the rise of intra-class conflict: creditors occupying the same contractual position turn against one another.
The paradigmatic example is the liability management exercise (‘LME’): out-of-court restructurings designed to obtain liquidity or rearrange creditor rights. In an uptier exchange, favored lenders approve amendments authorizing higher-priority debt and exchange their existing claims into it, leaving excluded lenders behind. In a drop-down transaction, valuable assets are moved outside the original collateral package and pledged to secure new financing. Both transactions can redistribute value among creditors who previously shared the same rank.
Yet courts largely adjudicate these conflicts as questions of contractual interpretation, not investor governance. In In re Serta Simmons Bedding, L.L.C., 125 F.4th 555 (5th Cir. 2024), the Fifth Circuit rejected an uptier because the credit agreement’s ‘open market purchase’ exception did not authorize it. In Wesco Aircraft Holdings, Inc. v. SSD Investments Ltd., 2025 WL 3514358 (S.D. Tex. Dec. 8, 2025), by contrast, a district court upheld a priority-shifting transaction because each step complied with the governing indentures; it refused to imply additional protections that sophisticated creditors had not bargained for. And in Aimco CLO 10 Ltd. v. Revlon, Inc. (In re Revlon, Inc.), 2023 WL 2229352 (Bankr. S.D.N.Y. Feb. 24, 2023), a bankruptcy court dismissed excluded lenders’ efforts to unwind a drop-down for lack of standing, leaving direct damages claims as their available recourse.
These cases reveal a striking asymmetry in how courts police investor opportunism. A controlling shareholder’s extraction of value from minority shareholders may trigger entire fairness review. Yet a favored creditor group’s comparable conduct turns principally on whether the transaction is forbidden by the ‘four corners’ of the debt documents. In one setting, courts scrutinize the substantive fairness of investor conduct; in the other, they ask what the contract says. Existing regime treats creditor opportunism as a problem of contractual entitlement, even when the underlying conflict concerns the exercise of corporate power.
Consequences of ‘Creditor-on-Creditor Violence’
Why should we care if LMEs undercut creditor rights? After all, they are sophisticated financial institutions capable of absorbing the losses. And if they cannot recover, one might argue that the tradeoff is justified: distressed debtors survive another day without liquidating their business, laying off employees, or distributing supply chains. Turns out, there are social and systemic costs: the proliferation of LMEs threatens to make corporate finance more expensive and less stable.
The social costs of creditor conflict. Opportunism breeds distrust. Lenders demand higher interest rates, tighter covenants, and broader blocking rights to protect against one another. Following Serta, for example, anti-uptier provisions reportedly spread from 10% to roughly 70% of syndicated loan agreements. These defensive measures raise financing costs and may obstruct productive restructurings. What this shows is that sophistication does not confer foresight: no credit agreement can anticipate every future maneuver. Private ordering thus risks becoming a vicious cycle of distrust, defensive contracting, and further distress.
Disaggregating the corporate form. A broader consequence of intra-class creditor conflict is that it unsettles the fundamental architecture of corporate governance. Under the familiar ‘nexus of contracts’ theory, the corporation consists of a complex web of contractual relationships and implicit commitments. Corporate law makes that web governable by centralizing business decision-making authority in the board of directors. Debtholder capitalism partially reverses that aggregation by dispersing governance authority across competing contractual and property entitlements. One creditor controls collateral, another liquidity, and another access to rescue financing. While the board remains the formal decisionmaker, its practical discretion is increasingly constrained by overlapping creditor rights. When creditors scramble over different slices of the firm’s value, the corporation risks becoming a contested field of private-law entitlements rather than a coherent enterprise capable of pursuing an identifiable purpose.
Simply put, debtholder capitalism shifts the corporation from purpose to survival. Before asking whom the corporation should serve, we must ask whether it can remain sufficiently intact to serve anyone at all.
The author's article is forthcoming in the Columbia Business Law Review, and a pre-publication version can be accessed here.
Jason Jia-Xi Wu is a bankruptcy litigator and J.D. graduate of Harvard Law School.
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