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

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CREIGHTON LAW REVIEW 2. Additional Dicta Aspects of Weinberger ..... 80 3. The Procedural-Fairness Structure ........... 81 VI. CONCLUSION .......................................... 83 I. INTRODUCTION [Vol. 20 The premise of this Article is that there should be coherence between the theoretical structures of corporate finance and corporate fiduciary law.' Because corporate finance is grounded in science, and because corporate fiduciary law is grounded in public policy, this Article views corporate fiduciary law as a corrective of corporate-financial anomalies. Under this view, the identification of a corporatefinancial anomaly points to the superimposition of corporate fiduciary law on that anomaly. A central dogma of corporate practice views the for-profit corporation as properly seeking to maximize the value of its stock without direct regard for the value of other classes of its securities. 2 This dogma operates through three assumptions: (1) that a managerial fiduciary duty to stockholders does not also imply corresponding duties to the corporation's other classes of securityholders, 3 (2) that equitable ownership of the corporation's assets by stockholders does not also imply corresponding ownerships by the corporation's other classes of securityholders, 4 and (3) that maximizing the value of the corporation's stock is equivalent to maximizing the value of the corporation's assets. 5 This Article challenges this central dogma and its operational assumptions on grounds of incongruity with and derivative unfairness under the established theoretical structure of corporate finance. 1. This Article develops the corporate law implications of the Black-Scholes option-pricing framework. See generally A. Barkey, The Black-Scholes Redistribution Argument in the Statutory-Fiduciary Context of Weinberger v. UOP, Inc. (Dec. 21, 1983) (limited distribution manuscript) (available from the New York University School of Law). 2. See Brudney, Equal Treatment of Shareholders in Corporate Distributions and Reorganizations, 71 CALIF. L. REV. 1072, 1089 n.42 (1983); Easterbrook & Fischel, The Proper Role of a Target's Management in Responding to a Tender Offer, 94 HARV. L. REV. 1161, 1191 (1981); Prokesch, Merger Wave: How Stock and Bonds Fare, N.Y. Times, Jan. 7, 1986, at 1, col. 1; Norris, Not the Preferred Treatment, BARRON'S, June 17, 1985, at 45, col. 1. 3. See Broad v. Rockwell Int'l Corp., 642 F.2d 929, 958-59 (5th Cir.), cert. denied, 454 U.S. 965 (1981); Norte & Co. v. Manor Healthcare Corp., Nos. 6827, 6831, at 6-7 (Del. Ch. Nov. 21, 1985) (available on LEXIS, States library, Del file). 4. See Norte & Co., at 6. Gibson & Campbell, Fundamental Law for Takeovers, 39 Bus. LAW. 1551, 1551 (1984). 5. See Easterbrook & Fischel, supra note 2, at 1190-91; Fischel, The Business Judgment Rule and the Trans Union Case, 40 Bus. LAW. 1437, 1442-43 (1985); Warden, The Boardroom as a War Room: The Real World Applications of the Duty of Care and the Duty of Loyalty, 40 BUs. LAW. 1431, 1431 (1985).
1986] FIDUCIARY DUTY TO BONDHOLDERS Also, this Article sketches a new line of development for corporate law based upon a new fiduciary articulation which reconciles the corporate conflict of interest between "bondholders" and stockholders. Because of the national influence of Delaware's law of corporations 7 and because of the elegance of the generalized fact pattern in Weinberger v. UOP, Inc. ,8 this Article employs aspects of Weinberger in an illustrative discussion of the new fiduciary articulation. II. THE CORPORATE-FINANCE FRAMEWORK A. CORPORATE CURRENT-MARKET-VALUE MAXIMIZATION An operating decision "efficiently" uses corporate assets when it maximizes their present value; 9 an operating decision "wastes" corporate assets when it reduces their present value.' 0 Corporate "financing decisions" are decisions regarding methods of providing capital to the corporation." Corporate debt is "risky" when there is a chance that the corporation might not be able to make full payments on all its debt promises. 12 A "side payment" is a transfer of wealth between classes of the corporation's securityholders.1 3 A central problem for the corporation is that there is, in general, no way of directly constructing managerial objectives from the diverse preferences of the corporation's securityholders. 14 This 6. The term "bond" is used herein for all debt securities. See AM. BAR FOUND., COMMENTARIES ON INDENTURES 7 n.3, 8 (1971). For a discussion of the "investment contract" definition of a security, see Schneider, The Elusive Definition of a Security, 14 REV. SEC. REG. 981 (1981) (discussing the definition of security under the federal securities laws). For a discussion of investor interest in bonds, see Ehrlich, The Smorgasbord of Bonds: Something For Almost Every Palate, Bus. WK., -, 122 (Dec. 30, 1985). The distinction between debt and equity is irrelevant to the conflict of classes of securityholders having nested claims on the corporation's assets and cash flow. The term "stocks" is used herein as a parallel to the term "bonds," and means "shares of stock" or "stock." 7. See Black, Jr., A National Law of Takeovers Evolves in Delaware, Legal Times, Nov. 25, 1985, at 6, col. 1. 8. 457 A.2d 701, 704-08 (Del. 1983). 9. In other words, the decision selects the use with the largest present value of its expected value. See E. FAMA & M. MILLER, THE THEORY OF FINANCE 180 (1972). The expected (mean) value is the sum over all outcomes of each outcome times the chance of that outcome occurring. See id. 10. In other words, the decision selects a use with a present value of its expected value which is less than the present value of the assets. See Stiglitz, Some Aspects of the Pure Theory of Corporate Finance: Bankruptcies and Take-Overs, 3 BELL J. ECON. & MGMT. SCI. 458, 460-62 (1972). 11. See E. FAMA & M. MILLER, supra note 9, at 109, 150-57. 12. Id. at 152 n.5, 179. 13. See id. at 179-80. A "side payment" is a payment made on the side. 14. Id. at 67-68 (discussing Arrow's proposition stated in K. ARROW, SOCIAL CHOICE AND INDIVIDUAL VALUES 48-59 (2d ed. 1963)). See generally J. KELLY, ARROW IMPOSSIBILITY THEOREMS (1978).
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