Behind Closed Doors: The Influence of Creditors in Business Reorganizations

General corporate law delegates the power to manage a corporation to the board of directors. The board in turn acts as a fiduciary and generally owes its duties to the corporation and its shareholders. Many courts and commentators summarize the board’s primary objective as maximizing shareholder wealth. Accordingly, one would expect a board’s conduct to be governed largely by the interests of the corporation and its shareholders. Yet, anecdotal and increasing empirical evidence suggest that large creditors wield significant influence over their corporate debtors. Although this influence is most apparent as the corporation approaches insolvency, the strength of the creditors’ negotiating position often is based on the terms of the pre-insolvency contract. Creditors typically obtain restrictive covenants and veto rights that allow them to assert control over various corporate actions. Nevertheless, the extent of creditor influence is hard to gauge accurately because it frequently materializes behind closed doors, in negotiations between the corporation and creditors over refinancing terms, forbearance agreements, covenant waivers or rescue financing. This Article attempts to shed some light on the nature and extent of creditor influence by examining creditor influence over corporate debtors and creditors’ committees in Chapter 11 reorganization cases. Specifically, it reports and analyzes data from an empirical survey of professionals and individual creditors participating in the Chapter 11 process. In many respects, the data confirm what commentators have gleaned from the terms of creditors’ contracts and activity documented on Chapter 11 dockets—creditors are trying to exert greater influence over corporate decisions in the restructuring context