Corporate Rescue Law

With the growing number of bankruptcies in industries ranging from financial, manufacturing, to retail, what could be more timely than Corporate Rescue Law – an Anglo-American Perspective? Gerard McCormak’s review of practices in the two countries concludes there is more convergence than is generally recognized. the us moving is in a UK direction with regard to disposal of profitable components, rather than carrying on through the bankrupt corporate entity.

Both shareowners and creditors generally come out ahead when debt is restructured privately, rather than through Chapter 11. Such private restructuring is more likely to succeed when commercial banks or other sophisticated investors are involved and is facilitated when debt is concentrated, as through trading by vulture funds who are advantaged by private settlement, rather than going to court, which tends to be a more costly and time-consuming process.

McCormak provides an overview of recent law and legal thought, explaining the fundamental features in both the US and UK, entry routes to changes in corporate control, moratoriums on creditor enforcement actions, mechanisms to address financing difficulties, the role of employees, and restructuring plans themselves.

The US debtor has more rights to formulate a reorganization plan, has more prescriptive rights with regard to dividing creditors into classes, has cram down capability in exceptional circumstances to force acceptance by creditors, and has traditionally focused on getting the corporate vehicle in working order.

However, McCormak finds that a growing number of bankruptcies, at least among larger companies, have been essentially pre-packaged deals involving going-concern sales of company components blessed by the court to ensure conduct that brings the highest price. in contrast, the UK approach largely leaves matters to creditors, respecting the values of “simplicity and economic self-determination.”

Economics Of Corporate Governance and Mergers

This is a wide-ranging reader, with theory and empirical studies, domestic and international well represented. For example, one paper casts doubt on the frequent assertion that common law countries have better shareowner protection than civil law countries. Another examines the role of directors and the question of emphasis (monitoring vs. participants in management). Central to corporate governance are issues of mergers and acquisitions. If internal governance mechanisms are ineffective, which I have argued for decades, hostile takeovers can act as the avenue of last resort to discipline managers, although this all too often comes at the expense of acquiring shareowners.

Stephen Martin looks at five waves of mergers and finds irrational exuberance often plays a crucial role, concluding that although reasons for such waves may vary, results do not generally benefit shareowners. Another paper by Mike Scherer provides evidence that mergers do not generally increase productivity, despite glowing predictions by management. As the editors note, the findings of accounting data contrast sharply with those of the finance literature, short-term stock market event studies. Rises in merger activity are likely attributable to empire building by managers.

Examining Japanese mergers, Hiroyuki Odagiri finds mergers generally hurt relative profitability. A UK study finds that acquisitions, after implementation of the Cadbury Code, experience better long-run returns but the driver remains CEO ownership. Gerhard Clemenz creates a theoretical model to study the impact of vertical mergers between producers and retailers, finding that integrated firms should be better able to monopolize markets and drive up retail prices. A study of 13 indicators on competition for 29 countries finds economic performance best predicted by the degree of competition.

Not all the authors take a shareholder maximization of value view of the firm. Branston, Cowling and Sugden, for example, explore redesign of company laws based on wider membership and creation of more democratic forms. In “Corporate Governance and the Public Interest,” they call for greater participation by the public in strategic decision-making, especially mergers in the financial, IT, and communication sectors. Here, I found convincing arguments that an educated and participatory democracy can only be obtained with a communication revolution, since advertizing revenue now allocates coverage and interest.

The editors conclude that “corporate governance systems that better align shareholders’ and managers’ interests lead to better corporate performance” and “there is an important relationship between corporate governance structures and the quality of firm decision making,” especially with regard to mergers and acquisitions. Since most are suboptimal for both shareowners and society, “the suspicion remains that corporate governance systems and mechanisms are not yet optimal.” Masters of understatement but the volume includes a good collection of important reading and commentary.