Grassroots Shareholder Activism in Large Commercial Bankruptcies

By Dick, Diane Lourdes | Journal of Corporation Law, Fall 2014 | Go to article overview

Grassroots Shareholder Activism in Large Commercial Bankruptcies


Dick, Diane Lourdes, Journal of Corporation Law


ABSTRACT   I. INTRODUCTION  II. BACKGROUND: THE FAILURE OF TRADITIONAL LEGAL STRUCTURES TO      PROMOTE SHAREHOLDERS' INTERESTS IN BANKRUPTCY.      A. The Debtor's Management      B. Official Committees to Represent Claimants in Bankruptcy      C. Ad Hoc Groups; Direct Action by Large Shareholders      D. The Office of the U.S. Trustee, the Bankruptcy Court and the         SEC III. THE ROLE OF GRASSROOTS SHAREHOLDER ACTIVISM      A. Motivations for Grassroots Shareholder Activism         1. Shareholder Perceptions Regarding the Meaning of Equity            Ownership in the Modern Corporation         2. Shareholder Perceptions Regarding the Relationship Between            Market Power and Influence         3. Shareholders' Loyalty to the Debtor Corporation      B. Methods of Grassroots Shareholder Activism      C. A Postscript to Eastman Kodak: Shareholder Responses to the         Restructuring Outcome  IV. OPPORTUNITIES FOR LEGAL REFORM   V. CONCLUSION 

I. INTRODUCTION

In recent years, individual shareholders of large and distressed publicly traded corporations in Chapter 11 (1) bankruptcy have increasingly engaged in direct action and grassroots organization in their efforts to influence the restructuring. (2) By "direct action" (3) I mean personal involvement in the Chapter 11 case as a "party in interest," (4) generally on a pro se basis, by filing motions, making formal appearances at court hearings, and taking other steps to be heard on issues pertaining to a corporate debtor's restructuring. By "grassroots organization" (5) I mean spontaneous and organic efforts to mobilize outside of the legal structures (6) designed to protect stakeholder interests in large commercial bankruptcies. (7) These activities include holding meetings, disseminating information, collaborating to conduct research and prepare filings, and donating time, money, and in-kind resources to advance restructuring outcomes that better preserve the rights of non-insider holders of common stock in the debtor corporation.

Individual shareholders are engaging in direct action and grassroots organization because they are almost entirely disenfranchised once a corporation enters bankruptcy. (8) In the case of an insolvent company, the board of directors no longer owes its fiduciary duties exclusively to the corporation and its shareholders; instead, directors are generally expected to maximize the value of the firm for the benefit of creditors, who have also become residual stakeholders of the firm. (9) Even when the debtor is solvent, managers typically focus their efforts on gaining consensus to a Chapter 11 plan, often making significant concessions to creditors at the expense of shareholders. (10) Further compounding matters, the U.S. Trustee and bankruptcy courts have grown hostile to shareholder requests to appoint official equity committees in Chapter 11 proceedings, (11) making it very difficult for widely dispersed shareholders to come together and gain a seat at the bankruptcy negotiation table. (12)

In this way, bankruptcy law magnifies the severe collective action obstacles that shareholders already face under modern corporate law. (13) But in Chapter 11, the stakes are often much higher. This is because the modern commercial bankruptcy reorganization process relies upon party consensus rather than judicial edict, (14) meaning that claimants and interest holders must have a seat at the negotiation table if they ever hope to defend their rights and influence the proceedings.

In an attempt to overcome these and related challenges, a grassroots shareholder movement has been taking shape. (15) Angry investors from around the world, who stand to lose all or part of their life savings in prominent corporate bankruptcies, have taken to the Internet to parse through the debtor's financial information, critique the proposed restructuring plan and exchange information and expertise. (16) Many file their own motions and supporting documents with the bankruptcy court, (17) and some even attend hearings and make formal appearances in the case. …

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