Badges of Opportunism: Principles for Policing Restructuring Support Agreements

Bankruptcy is a market for corporate control. Current bankruptcy practice offers two alternative mechanisms for effectuating changes in control of a firm: (1) a pre-plan all-asset sale under section 363(b) of the Bankruptcy Code; or (2) an asset sale or recapitalization pursuant to a plan of reorganization under section 1129 of the Code. Pre-plan sales under section 363(b) are fast, but lack the procedural protections associated with a restructuring or sale pursuant to a plan. Plan confirmation can be costly and uncertain, however. Restructuring support agreements (“RSAs”)—contractual agreements to support a future restructuring that has certain agreed-upon characteristics—appear to offer a salutary bridge between the efficiencies of a quick sale and the procedural protections of a plan. RSAs, however, can also facilitate opportunistic behavior that enable creditors to hold value maximization hostage to an adjustment in distributional priority. This Article explores the use of RSAs in corporate control transactions in bankruptcy. We catalogue the good and bad uses of RSAs. We show how RSAs can be used to effectuate an “end-run” around the plan process and identify certain “badges of opportunism” that should serve as red flags for abusive RSAs. From this we articulate a central norm of Chapter 11, namely that the common interest in value maximization may not be held hostage by individual creditors seeking to improve their priority. This underlying principle provides a general metric for how to distinguish coordination from opportunism in RSAs