Financial Articulation of a Fiduciary Duty to Bondholders with ...

CREIGHTON LAW REVIEW [Vol. 20
Such compensation to bondholders is the logical counterpart of
our corporate law's policy of permissive managerial resistance to
takeovers 176 because it offsets the loss of the unrestricted capital
market takeover mechanisms which rectifies the policy manifestation
of the anomaly in the rule of corporate current-market-Value maximization.
177 Furthermore, such compensation is consistent with a
public policy of competitive business maneuver: 178 if the bondholders
and the corporation were to continuously recontract, then the alternatives
would be for the bondholders to receive such net
compensation through bond pricing in the efficient capital market 179
or for bond protective contractual provisions which would "severely
restrict the actions of the firm.' 8 0 The view that "[tjhe most obvious
and important characteristic of long-term debt financing is that the
holder ordinarily has not bargained for and does not expect any
substantial gain in the value of the security to compensate for the
risk of loss"'' 1 becomes irrelevant in this context because: (1) the
components of bond pricing are functionally equivalent and impound
the publicly known information regarding expected gain and risk
cause management does so act or contract when the bondholders have more or less
equal bargaining power with management. See Brody, supra note 39, at 19, col. 1; Farrell,
supra note 45, at 114.
176. For a statement of the policy of permissive managerial resistance to takeovers,
see Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955 n.10 (Del. 1985); Moran v.
Household Int'l, Inc., 500 A.2d 1346, 1350 (Del. 1985). See generally Veasey, Business
Judgment Rule: The New Incarnation, Legal Times, March 10, 1986, at 25, col. 1.
Debtor has instituted takeover defenses which restrict a possible takeover by the bondholders
or others. See supra text accompanying notes 117-18.
177. See supra notes 21, 43-44 and accompanying text.
178. In general, for-profit corporations compete with other for-profit corporations
for business. The public policy supporting such competition is manifested in the federal
antitrust laws.
179. See supra notes 28, 43-44 and accompanying text.
180. Galai & Masulis, supra note 27, at 55 n.5. See Jensen & Meckling, supra note
20, at 338 (stating: "To completely protect the bondholders ... these [bond protective
contractual] provisions would have to be incredibly detailed and cover most operating
aspects of the enterprise including limitations on the riskiness of the projects undertaken.").
Such restrictive contractual provisions are analogous to the imposition of
common law or statutory law rules." "[A]lthough the legal rules can protect against
fraud and particularly blatant forms of self-dealing by management, they cannot do
much more without denying the company the benefits of management's expertise in
making major corporate decisions." DeMott, supra note 138, at 1012 (summarizing the
view of professional managerial prerogatives regarding mergers and tender offers
stated in Lipton, Takeover Bids in the Target's Boardroom, 35 Bus. LAW. 101, 116-20
(1979)). "[T]he design of specific legal rules governing the terms of mergers ... affecting
managerial interests appears very costly if not impossible. In such areas, regulation
cannot feasibly go beyond very general rules, such as the requirement of 'fairness,'
without creating severe obstacles to efficient managerial decision-making." Anderson,
Conflicts of Interest: Ffficiency, Fairness and Corporate Structure, 25 UCLA L. REV.
738, 790 (1978) (discussing statutory rules).
181. AM. BAR FOUND., supra note 6, at 1.