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Bond workouts are a famously dysfunctional method of debt restructuring. The process is so ridden with opportunistic and coercive behavior by both bondholders and bond issuers as to make success intrinsically unlikely. Yet since 2008 bond workouts have quietly started to work. A segment of the restructuring market has shifted from bankruptcy court to out-of-court workouts by way of exchange offers made only to large institutional investors. The new workouts feature a battery of strong-arm tactics by bond issuers, and aggrieved bondholders have complained in court. There resulted a new, broad reading of the primary law governing workouts, section 316(b) of the Trust Indenture Act of 1939 (TIA), which prohibits majority-vote amendments of bond payment terms and forces bond issuers seeking to restructure to resort to exchange offers. This Article exploits the bond market's reaction to the shift in law to reassess a longstanding debate in corporate finance regarding the desirability of TIA section 316(b). Section 316(b) has attracted intense criticism, with calls for its amendment or repeal because of its untoward effects on the workout process and tendency to push restructuring into the costly bankruptcy process. Yet section 316(b) has also been staunchly defended on the ground that mom-and-pop bondholders need protecti from sharp-elbowed issuer tactics. We draw on a pair of original, hand-collected data sets to show that many of th empirical assumptions made in the debate no longer hold true. We show that marke have learned to live with section 316(b)'s limitations, denuding the case for repeal any urgency. Workouts generally succeed, so that there is no serious transaction cost problem stemming from the TIA; when a company goes straight into bankruptcy th tend to be independent motivations. We also show that workout by majority amendment would not systematically disadvantage bondholders. Indeed, the recent turn to secured creditor control of bankruptcy proceedings makes direct amendment all the more attractive to unsecured bondholders. Based on this empirical background, we cautiously argue for the repeal of section 316(b). Section 316(b) no longer does much work, even as it prevents bondholde and bond issuers from realizing their preferences regarding modes of restructuring and voting rules. We do not know what contracting equilibrium would obtain followin repeal, but think that the matter is best left to the market. Still, we recognize that markets are imperfect and that a free-contracting regime may result in abuses. Accordingly, we argue that repeal of section 316(b) should be accompanied by the resuscitation of the long-forgotten doctrine of intercreditor good faith duties, which presents a more fact-sensitive and targeted tool for policing overreaching in bond workouts than the broad reading of section 316(b).

The fraud-on-the-market class action no longer enjoys much academic support. The justifications traditionally advanced by its defenders — compensation for out-of-pocket loss and deterrence of fraud — are thought to have failed due to the action's real world dependence on enterprise liability and issuer-funded settlements. The compensation justification collapses when considered from the point of view of different types of shareholders. Well-diversified shareholders' receipts and payments of damages balance over time and amount to a wash before payment of litigation costs. The shareholders arguably in need of compensation — fundamental value investors who rely on published reports — are undercompensated due to pro rata distribution of settlement proceeds to all class members. The deterrence justification fails when enterprise liability is compared to alternative modes of enforcement, such as actions against individual perpetrators, which deter fraud more effectively. If, as the consensus view now has it, fraud on the market makes no policy sense, then its abolition would seem to be the next logical step. Yet most observers continue to accept the action on the same ground cited by the Supreme Court when it first implied a private right of action under the Securities and Exchange Act of 1934 in 1964's J.I. Case v. Borak: a private enforcement supplement is needed in view of inadequate Securities and Exchange Commission (SEC) resources. In other words, even a private-enforcement supplement that makes no sense is better than no privateenforcement supplement at all. This Article questions this backstop policy conclusion by highlighting the sticking points retarding movement toward fraud on the market's abolition and mapping a plausible route to a superior enforcement outcome. We recommend that private plaintiffs be required to meet an actual-reliance standard. We look to the SEC, rather than to Congress or to the courts, to initiate the change because the SEC is the lawmaking institution most responsible for the unsatisfactory status quo and best equipped to propose corrective action. Because an actual reliance requirement would substantially diminish the flow of private litigation, we also suggest a compensating increase in public-enforcement capability. More specifically, the SEC Division of Enforcement needs enough funding to redirect its efforts away from the enterprise and toward culpable individuals. The Article addresses three barriers standing between here and there. First, there is a new justification for fraud on the market circulating in the wake of the failure of the original justifications: fraud-on-the-market litigation enhances the operation of the corporate governance system. We show that this line of reasoning, while well suited to justify the federal mandatory-disclosure system, does not support — and even detracts from — the case for fraud on the market. Second, we turn to politics to explain why fraud on the market retains political legitimacy despite the failure of its policy justifications. Third, we assess the contention that inadequacy of public enforcement resources justifies maintaining a fraud-on-the-market action. To that end, we show that circumstances have changed materially since the Supreme Court first invoked the justification in 1964. The SEC budget has grown elevenfold in real terms in the intervening forty-seven years, with much of the growth coming in the wake of the Enron fraud. The SEC's enforcement resources, like those of the plaintiffs' bar, ultimately are funded with dollars drawn from shareholder pockets, inviting direct comparison between the two. We show that public enforcement offers the shareholders mare value than private enforcement. Private resources are tied to a low-deterrence, enterprise-liability framework. Public enforcement, even now, yields the shareholders comparable damage returns per dollar invested in enforcement. It can be deployed more flexibly, and it can be refocused against individual wrongdoers to enhance deterrence. We conclude that increased public enforcement makes sense for shareholders even if it implies a diminished volume of private litigation and propose a political trade-off for the SEC to present to Congress: double the enforcement budget in exchange far an SEC-promulgated regulation replacing fraud on the market with an actual-reliance requirement.

Today's typical Chapter 11 case looks radically different than did the typical case in the 1978 Bankruptcy Code's early years. In those days, Chapter 11 afforded debtors a cozy haven. Most everything that mattered occurred within the context of the formal proceeding, where the debtor enjoyed agenda control, a leisurely timetable, and judicial solicitude. The safe haven steadily disappeared over time, displaced by a range of countervailing forces and a cooperative bankruptcy bench. Lenders, especially debtor-in-possession financers, gradually began to shape the trajectory of many proceedings. They today determine the course of most of the cases. More recently, additional players such as hedge funds and equity funds have also entered the scene, altering the bargaining dynamic. New financial instruments complicate debtors' capital structures and creditor incentives. Even the sites and modes of decisionmaking have shifted, as today's key decisions are negotiated and embedded in contracts concluded even before the debtor files for bankruptcy. The changes, which continue to accumulate, are fundamental. Here, Bratton and Skeel discuss the New Deal redirection and recent evolution of corporate reorganization.

This Article reconsiders Margaret Blair and Lynn Stout's team production model of corporate law, offering a favorable evaluation. The model explains both the legal corporate entity and corporate governance institutions in microeconomic terms as the means to the end of encouraging investment, situating corporations within markets and subject to market constraints but simultaneously insisting that productive success requires that corporations remain independent of markets. The model also integrates the inherited framework of corporate law into an economically derived model of production, constructing a microeconomic description of large enterprises firmly rooted in corporate doctrine but neither focused on nor limited by a description of principal-agent relationships among shareholders and managers. This Article shows that the model retains descriptive robustness, despite the substantial accretion of shareholder power during the two decades since its appearance. The Article also shows that the model taught three groundbreaking lessons to corporate legal theory. First, nothing binds microeconomic analysis together with a theory of the firm rooted in shareholder primacy. Second, microeconomics, with its emphases on efficiency and maximization, can be deployed in the service of an allocatively sensitive description of corporate governance, providing a more capacious methodological tent than anyone in corporate law understood prior to Blair and Stout's intervention. Third, it is not only possible but arguably necessary to take corporate law seriously when articulating a microeconomic theory of corporate production. To the extent an economic model's description of the appropriate legal framework differs materially from the inherited legal framework, there is a possible, even a probable, infirmity in the model.

This Article reconsiders Margaret Blair and Lynn Stout's team production model of corporate law, offering a favorable evaluation. The model explains both the legal corporate entity and corporate governance institutions in microeconomic terms as the means to the end of encouraging investment, situating corporations within markets and subject to market constraints but simultaneously insisting that productive success requires that corporations remain independent of markets. The model also integrates the inherited framework of corporate law into an economically derived model of production, constructing a microeconomic description of large enterprises firmly rooted in corporate doctrine but neither focused on nor limited by a description of principal-agent relationships among shareholders and managers. This Article shows that the model retains descriptive robustness, despite the substantial accretion of shareholder power during the two decades since its appearance. The Article also shows that the model taught three groundbreaking lessons to corporate legal theory. First, nothing binds microeconomic analysis together with a theory of the firm rooted in shareholder primacy. Second, microeconomics, with its emphases on efficiency and maximization, can be deployed in the service of an allocatively sensitive description of corporate governance, providing a more capacious methodological tent than anyone in corporate law understood prior to Blair and Stout's intervention. Third, it is not only possible but arguably necessary to take corporate law seriously when articulating a microeconomic theory of corporate production. To the extent an economic model's description of the appropriate legal framework differs materially from the inherited legal framework, there is a possible, even a probable, infirmity in the model.

Should preferred stock be treated under corporate law as an equity interest in the issuing corporation or under contract law as a senior security? Should a preferred certificate of designation be subsumed in the corporate charter and treated as an incomplete contract filled out by fiduciary duty, or should it be treated as a complete contract with the drafting burden on the party asserting the right, as would occur with a bond contract? Is preferred stock equity or debt? This Article shows that preferred stock is both corporate and contractual—neither all one nor all the other. It sits on a fault line between two great private law paradigms, corporate and contract law, and draws on both. The overlap brings two competing grundnorms to bear when interests of preferred and common stockholders come into conflict: on the one hand, managing to the common stock as residual interest holder maximizes value; on the other hand, holding parties to contractual risk allocations maximizes value. When questions arise concerning the relative rights of preferred and common stock, the norms hold out conflicting answers. Delaware courts have taken the lead in confronting these questions by seeking to synchronize the law of preferred stock with the rest of corporate law—a project that has led to both innovation and stress. This Article examines recent cases about preferred stock to show two facets of Delaware law coming to bear as the synchronization process proceeds: first, reliance on independent directors for dispute resolution, and second, the common stock—value maximization norm. These trends cause the law to tilt toward corporate norms, thereby disrupting allocated risks in heavily negotiated transactions, particularly in the venture capital sector. The Article makes three recommendations that would promote the goal of restoring balance between the corporate and contract paradigms. First, the meaning and scope of preferred contract rights should be determined by courts, rather than by issuer boards of directors. Second, conflicts between preferred and common should not be decided by reference to a norm of common stock—value maximization. Instead, the goal should be the maximization of the value of the equity as a whole. Third, independent-director determinations of conflicts between preferred and common should not be accorded ordinary business judgment review. Instead, a door should be left open for good faith review tailored to the context. This review would require a showing of bad faith treatment of the preferred where the integrity of a deal has been undermined, with the burden of proof on the board.

This article reconsiders the dominant account of corporate law's duty of loyalty, which asserts that the courts have steadily relaxed standards of fiduciary scrutiny applied to self-dealing by corporate managers across more than a century of history to the great detriment of the shareholder interest. The account originated in Harold Marsh, Jr.'s foundational article, Are Directors Trustees? Conflict of Interest and Corporate Morality, published in The Business Lawyer in 1966. Marsh's showing of historical lassitude has been successfully challenged in a recent book by Professor David Kershaw. This article takes Professor Kershaw's critique a step further, asking whether the evolutionary erosion account continues to exert normative power in today's corporate governance context. The answer is that it does not, a result that obtains even though erosion of the standards that courts apply to management self-dealing has continued unabated ever since Marsh published in 1966, and even though there is no reason to think that management self-dealing benefits the shareholder interest. The result follows from the operation of the corporate governance system, which has assimilated and redeployed the erosion account's motivating insight that officer and director self-dealing transactions do not make cost-benefit sense from the shareholder point of view. Regulation backs up the norm of aversion. Disclosure rules make self-dealing transparent to shareholders, who have no reason to like self-dealing and who now stand ready and able to register their preferences regarding such matters in corporate boardrooms. At the same time, the requirement of a majority independent board makes self-dealing transactions by board members highly inconvenient, because self-dealing undercuts independence. The practice reflects all of this, as shown by reference to hand-collected datasets of self-dealing transactions at publicly traded companies and of litigation in respect of self-dealing transactions in the Delaware Chancery Court. The classic self-dealing transaction, although still a focal point of academic discourse on corporate fiduciary law, does not matter all that much in real world companies with dispersed shareholders. It is no longer an unsolved problem stemming from separated ownership and control.

Many look toward enactment of the law-reform agenda held out by proponents of shareholder empowerment as a part of the regulatory response to the current financial crisis. This Article argues that the financial crisis exposes major weaknesses in the shareholder empowerment case. Our claim is that shareholder empowerment delivers management a simple and emphatic marching order: manage to maximize the market price of the stock. This is exactly what the managers of a critical set of financial firms did in recent years. They managed to a market that focused on increasing observable earnings, and, as it turned out, they failed to factor in concomitant increases in risk that went largely unobserved. The fact that management bears primary responsibility for the disastrous results does not suffice to effect a policy connection between increased shareholder power and sound regulatory reform. A policy connection instead turns on a counterfactual question: whether increased shareholder power would have imported more effective risk management in advance of the crisis. We conclude that no plausible grounds exist for making such a case. In the years preceding the financial crisis, shareholders validated the strategies of the very financial firms that pursued high-leverage, high-return, and high-risk strategies and penalized those that did not. It is hard to see how shareholders, having played a role in fomenting the crisis, have a positive role to play in its resolution. The prevailing legal model of the corporation strikes a better balance between the powers of directors and shareholders than does the shareholder-centered alternative. Shareholder proponents see management agency costs as a constant in history and shareholder empowerment as the only tool available to reduce them. This Article counters this picture, making reference to agency theory and recent history to describe a dynamic process of agency-cost reduction. It goes on to show that shareholder empowerment would occasion significant agency costs of its own by forcing management to a market price set under asymmetric information in most cases and set in speculative markets in which heterogeneous expectations obscure the price's informational content in others.

Corporate governance interventions by hedge fund shareholders are triggering debates between advocates of management empowerment and advocates of aggressive monitoring by actors in the capital markets. This Article intervenes with an empirical question: What, based on the record so far, have the hedge funds actually done to their targets? Information has been collected on 130 domestic firms identified in the business press since 2002 as targets of activist hedge funds, including the funds' demands, their tactics, and the results of their interventions for the targets' governance and finance. The survey results show that the hedge funds have an enviable record in getting targets to accede to their demands, using the proxy system with remarkable, perhaps unprecedented, success. If the pattern of intervention persists in time, expands its reach, and maintains the present high level of governance success, then the separation of ownership and control will become a less acute problem for corporate law. Such a change will occur however only to the extent that clear cut financial incentives encourage an expanded field of intervention. To get a sense of the sample's bearing on the question as to such incentives' existence, returns from hedge fund engagement with the sample firms are compared to returns from market indices. The results are mixed. The answer to the question whether the activists have beaten the market depends on the assumptions one brings to the comparison. But it at least can be argued that the hedge funds have not beaten the market respecting the targets in the sample. A question accordingly arises respecting the depth and durability of any shift in the balance of corporate power stemming from hedge fund activism. Meanwhile, the financial results also show that hedge fund activism is a more benign phenomenon than its critics would have us believe. Hedge fund interventions neither amount to near-term hold ups nor revive the 1980s leveraged restructuring. Short term investments are rare. Large cash payouts have been made by only a minority of the firms surveyed, and borrowing has been the mode of finance in only a minority of the payout cases. [PUBLICATION ABSTRACT]

The article begins with the provisions themselves - first affirmative covenants and financial covenants, and then restrictive covenants. The discussion explains the drafting pattern by reference to both the legal framework and the financial economics of the agency costs of debt. There emerges a unitary picture of the entire collection of covenants used in practice. The article continues by situating the covenants in transactional context, drawing on empirical studies from financial economics. Incidence varies considerably, from near absence to pervasive coverage, depending not only on the borrowers creditworthiness but on the credit market segment in which the borrowing occurs. Tight and pervasive coverage tends to presuppose relational lending, whether in the bank or private placement market. In the public bond markets, where arms-length contracting prevails, coverage lends to be loose and sporadic. The article then takes up a variant on the theme of constraint by promise, looking at provisions that trigger loan prepayment upon events customarily covered in the full set of covenants, explaining why mandatory pay down sometimes emerges as a superior choice to prohibition by promise.