Stephen Lubben has a concise but (should that be "and"?) valuable treatment of how corporate law's antipathy to precommitments drives "big chapter 11 cases" to be "done by way of a quick 363 sale."
I argue that the roots of the issue are corporate governance, and not bankruptcy. That is, if the tendency for debtors to show up in chapter 11 with no option but to engage in a quick sale process is a problem, that problem has its roots in non-bankruptcy corporate law.
I then begin the process of explaining how the decision to lock a company into an all-encompassing secured loan, and thus a likely quick 363 sale, should be regulated. Namely, I argue that ultimately this is a question of state law fiduciary duties, and that the foundation for this duty already exists in the Delaware Supreme Court’s oft maligned Omnicare, Inc. v. NCS Healthcare, Inc.
In short, state corporate law imposes a duty on the board to carefully consider any decision that will foreclose a future board’s choices. In times of financial distress, this duty includes an obligation to carefully consider the effects of a particular decision on future restructuring options.
I addressed the relevant corporate law in my article Dead Hand and No Hand Pills: Precommitment Strategies in Corporate Law (October 30, 2002), available at SSRN:http://ssrn.com/abstract=347089:
Corporations frequently make use of precommitment strategies. Examples include such widely used devices as negative pledge covenants and change of control clauses in bond indentures, fair price shark repellents, no shop and other exclusivity provisions in merger agreements, mandatory indemnification bylaws, and so on. This paper argues that poison pills also can be understood as a form of precommitment, by which the board of directors commits to a policy intended either to negotiate a high acquisition price or to maintain the corporation's independence.
In Quickturn Design Sys., Inc. v. Mentor Graphics Corp., the Delaware supreme court invalidated a no hand poison pill on grounds that a board of directors lacks authority to adopt such devices. In doing so, the court misinterpreted relevant Delaware law. It unjustifiably called into question the validity of a host of corporate precommitment strategies. Finally, and perhaps most troublingly, it called into question the central tenet of Delaware corporate law; namely, the plenary authority of the board of directors.
This article argues that the Delaware supreme court's decision was wrong both as a doctrinal and a policy matter. There simply is no firebreak between the sorts of board self-disablement deemed invalid by Quickturn and the host of other precommitment strategies routinely used by corporate boards of directors. The Delaware supreme court's conclusion that the former are invalid for lack of statutory authority thus threatens to invalidate all of the latter. The article concludes by arguing that the Delaware supreme court should have analyzed the no hand pill under standard fiduciary duty principles rather than creating a new prophylactic ban on precommitment strategies.
The Delaware courts' continuing hostility to precommitments remains a mystery, at least to me.