This Article begins by reviewing the agency costs that arise in firms outside of bankruptcy and the web of limitations on these costs. In particular, the Article examines how the state law voting regime affects managers' incentives to maximize the value of a firm. Under state law, shareholders generally hold the exclusive right to vote and exercise their right to vote by electing directors and approving fundamental corporate changes. In Chapter 11 bankruptcy, this regime is replaced by a system that gives the right to vote to most claim and equity holders and mandates a single vote on the plan of reorganization. While the state law regime gives voting authority to the group that has the appropriate incentives to maximize the value of the firm, the bankruptcy vote is intended only to determine the allocation of the value of the firm among the various claim and interest holders. One provision of the present Bankruptcy Code, section 1129(a)(10), is best understood as an attempt to limit agency costs by requiring approval of the plan by the class of creditors with the appropriate incentives to maximize the value of the firm. The courts have misunderstood and misapplied this section, however, so it has not served as an effective constraint on Chapter 11 agency costs. In fact, commentators have called for repeal of section 1129(a)(10). The Article concludes that the Code should be revised to effectively require approval of a plan of reorganization by the claim or interest holders with the appropriate incentives to maximize the value of the firm, just as shareholders in solvent corporations outside of bankruptcy hold ultimate authority over operation of the business.
Scott F. Norberg,
Debtor Incentives, Agency Costs and Voting Theory in Chapter 11
, 46 KAN. L. REV. 507
Available at: http://ecollections.law.fiu.edu/faculty_publications/233