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Outside of bankruptcy, a board of directors’ decision to take control rights away from existing shareholders and grant them to another is subject to heightened fiduciary duties. As the sale of control represents a kind of end game, shareholders have one last chance to realize the full value for their investment. In such a context, their interests warrant special protection.  A similar sale of control can happen in a chapter 11 procedure when a bankruptcy plan revamps the capital structure of the firm. In such a restructuring of the firm, control rights can be newly created, redefined and redistributed to corporate stakeholders. As bankruptcy always implicates many more stakeholders than only shareholders, a sale of control thus implicates a wider array of control rights owners than a normal control transaction. However, in a chapter 11 procedure fiduciary duties protecting interests of such owners of control rights do not arise and this creates the potential for agency misdeeds.  We discuss three recent chapter 11 or 15 cases in which the bankruptcy plans lead to a restructuring of the capital structures, redistributing control in the process. Our viewpoint is that in such complex restructuring processes, private benefits of control provide incentives to a select group of investors to twist the plan to their advantage. Our three cases show: 1) a lack of openness to other investors who are not part of the plan proposing classes; 2) that plans redistribute control via penny warrants, private placements, and other similar devices, shutting out other shareholders or diluting holdings significantly; and 3) a deal and fee structure that explicitly rewards specific groups and not others.  We conclude that in chapter 11 procedures, a redistribution of benefits is possible to an extent not possible under state corporate law. However, as we discuss only three exemplary cases, caution is warranted at the moment as we cannot provide a full empirical picture of private benefits in chapter 11 and chapter 15 procedures.

Private Benefits Without Control? Modern Chapter 11 and the Market for Corporate Control