Contractual Approach To Corporate Reorganization

Before the adoption of the new bankruptcy law, scholars have made extensive researches on reorganization. The past literature focuses more on basic theories and mode of legislation of reorganization instead of comprehensive analysis on the implementation of this legal system. Moreover, the past research either focuses too much on ideology or limits on general introduction of foreign theories. There are twenty five articles in China's new bankruptcy law regulating reorganization which are far from sufficient to cover the legal and economic problems in real practice of reorganization. Since the new bankruptcy law has been in effect for less than one year, it is the right time to bring out this dissertation which, based on the practice of reorganization, studies the principles of the relation between contract autonomy and contract regulation by law, providing insights for the legislature and court.Reorganization concerns too many interested parties whose economic interests are inconstant and legal relations are complex which demand finding a common thread running through the whole reorganization process. This article grasps contract as the common thread and uses law and economics as basic idea of analysis to explore corporate reorganization from the perspective of contract. The core topic of this thesis is: The design of reorganization is to make legal and economic analysis on the large amount of complex contracts involved in reorganization and make contractual arrangement in conformity with equality and efficiency. The principle and rules of law making and the construction and application of law by the court are based on this core topic. In order to make specific illustration of this topic, this article deploys its body according to the following chapters:Chapter one is on the basics of legal and economic analysis of contract. This chapter introduces the basic theories of complete and incomplete contract. Complete contract does not need regulation while incomplete contract needs legal regulation. The law regulates incomplete contract in two ways: First, it provides defaults rules; Second, it provides mandatory rules. The mandatory rule constitutes mandatory regulation of contract which is analogous to regulating the market since under both circumstances the government changes private transaction. The first thing to do in regulation of incomplete contract is to regulate the disclosure of contract information to encourage the interested parties to timely disclose relevant bargaining information. Another important factor in contract regulation is to allocate residual control rights among the contract parties and the court. Last but not the least, law and economics maintain to grant contract autonomy priority to contract regulation due to the fact that the regulator is itself incomplete. The court should follow these ideas in construction and implementation of law. The first chapter lays the foundation for the whole article and leads to the analysis of reorganized corporation contracts.Chapter two is on the contract struture of reorganized corporation. This chapter first describes the basic theories of corporate contract and based on these theories establish basic contract structure for reorganized corporation. Although the reorganized corporation is a legally discrete corporation from the original corporation, it is, from the perspective of law and economic, still a nexus of contracts against a pool of assets left by the original corporation. The legal entity named corporation is no more than a carrier on which a nexus of contracts formed by corporate parties exist. Various contracts form a bundle of contracts and the nexus of this bundle of contracts is a legal entity named "corporation". The reorganized corporation is simply a specific state of the "corporation" in a particular time. Its nature is still a nexus of contract except the nexus is in the form of DIP , TIP, or CIP and the corresponding parties and contents of contracts have changed. In a word, the contractual analysis of corporate law applies reorganized corporation. This chapter is a theoretical transition leading to actual contractual analysis of corporation reorganization. Chapter three is on the nature of contracts in reorganization. After the establishment of contractual structure of reorganized corporation, the following question is how to mode the legislation of reorganization system. Shall we allow complete contract autonomy or to impose complete contract regulation? If contract autonomy is allowed, how should the court control contract autonomy and regulation? Fisrt, this chapter traces the legal and economic origin of reorganization system, that is, debt financing. Then, after a comparative analysis of the points of different schools, this article concludes that the legal design of reorganization system should be aimed at the protection and maximization of the value of assets. The specific principle is to make a comprehensive valuation of such factors as cost, benefit, incentive, efficiency and equality and encourage the parties to negotiate on the precondition of internalizing costs and benefits. And the issues, such as externality and opportunism, which can not be solved through negotiation or can not achieve efficiency through negotiation should be regulated. The court also follows this principle in constructing and implementing the law. This chapter makes a theoretical summarization of the nature of contracts in reorganization, which provides theoretical and methodological support for the specific contract designs in the following chapters.Chapter four is on the contractual analysis of the plan of reorganization. The plan of reorganization is the typical reflection of contractual analysis of reorganization. The plan itself is a large bundle of contracts. Its main parties include the debtor, the creditors, equity holders, DIP financers, employees, and the community. This chapter makes legal and economic analysis on the main subcontracts of the plan—the contract between the debtor and the creditors, the contract between employees and employer, the contract between the debtor and other interested parties. In addition, this chapter makes a bargaining contract analysis based on the sample of debtor and creditor bargaining. It is based on the bargaining on the plan of reorganization that the parties form different contract relations. The bargaining on the plan depends on information disclosure. On by adequate information disclosure can the bargaining lead to efficient reorganization arrangement. The major information to be disclosed is the valuation of the reorganized corporation. Therefore, this chapter, through analysis on the bargaining of the plan of reorganization, further clarifies the relation between contract autonomy and regulation in corporation reorganization. We must make appropriate regulation on such issues as information disclosure and valuation in order to ensure equality and efficiency of private contract bargaining.Chapter five is on the contractual analysis of DIP financing. DIP financing is crucial to the success of reorganization and therefore is the most important reorganization contract. The essence of DIP financing is to alleviate or eliminate the worry of potential financers toward the uncertainty of the future of reorganization and their claims by securing their claims with priority. As provider of new money, the DIP financer becomes a party of the bundle of contracts of the reorganized corporation. So the DIP financing is in nature a process of renegotiation and recontracting. The contract theory of law and economics applies the analysis of DIP financing. As long as the contract is formed on reasonable equality, DIP financing will enhance the value of the reorganized corporation. Empirical study also proves that generally DIP financing improves the efficiency of reorganization and enhance the value of the reorganized corporation. But since the bargaining positions of DIP financer are unequal, and one party of the negotiation is actually representing multiple interests of the reorganized corporation, DIP financing contract tends to create externality. It is therefore necessary to impose regulation on this kind of contract to prevent the parties to damage the interests of other parties by manipulating contract bargaining and transferring value.Chapter six is on the contractual analysis of the governance of reorganized corporation. This chapter is the center of this dissertation. The governance of reorganized corporation is aimed at maximizing the value of the reorganized corporation and the system of the reorganized corporation contract is designed in accordance with this purpose. The core of corporate governance is control right. The law and economics literature maintains that the residual owner of the corporation enjoys the control right and the basic road map of corporate governance is to find out the residual owner and solve the agency problem. But the reorganized corporation is quite different from the corporation in normal business operation in bother capital structure and stake holders which makes its control rights and agency problems more complicated. The proponents of creditor-control governance of reorganized corporation suggest viewing the governance of reorganized corporation from a dynamic perspective. The opponents suggest that it is very hard to define the residual owner in a reorganized corporation. The regulation of management of reorganized corporation applies fiduciary duty and business judgment rule as well except that the object of fiduciary duty changes and points at the control rights holder in reorganized corporation. The control rights holder in reorganized corporation is not constant but changes with the change of the business situation of the reorganized corporation. In addition, since the act of the investors of the reorganized corporation might damage the interests of the original secured creditors, the control rights holder of the reorganized corporation also bears fiduciary duty to the original secured creditors. Last, the management or the debtor also bears fiduciary duty in the merger and acquisition in reorganization. But these fiduciary duties require flexible and practical interpretation for the purpose of satisfying the actual demand of maximizing the value of the reorganized corporation. This chapter, based on recognizing the complexity of governance of reorganized corporation, also makes specific research on the governance of reorganized corporation under the condition of DIP financing and marketized reorganization. In conclusion, the governance of reorganized corporation is the consequence of contractual bargaining under the restraints of legal and market regulation.Chapter seven is on the theoretical and empirical analysis of prepackaged reorganization. This chapter is not only an analysis of prepackaged reorganization but also a response to the main idea of this dissertation. The prepackaged reorganization is a perfect combination of contract autonomy and regulation. This chapter, based on the theoretical and empirical analysis of prepackaged reorganization, further proves that it is unlikely to realize efficient solution of corporate distress by solely depending on private contracting or rigid contract regulation. Only by allowing the maximization the contract autonomy under the institutional support of legislature and court can the value and object of reorganization system be realized.