Matri Covenants and Third-Party Creditors

Empirical and Law & Economics Insights Into a Common Pool Problem
1. Auflage 2017
ISBN: 978-3-319-62036-7
Verlag: Springer Nature Switzerland
Format: PDF
Kopierschutz: 1 - PDF Watermark

E-Book, Englisch, 270 Seiten

This book adds to the debate on the effects of covenants on third-party creditors (externalities), which have recently become a focus of discussion in the contexts of bankruptcy law, corporate law and corporate governance. The general thrust of the debate is that negative effects on third-party creditors predominate because banks act in their own self-interest.After systematising the debated potential positive and negative externalities of covenants, the book empirically examines these externalities: It investigates the banks' factual conduct and its effects on third-party creditors in Germany and the US. The study's most significant outcome is that it disproves the assumption that banks disregard third-party creditors' interests.
These findings are then interpreted with the tools of economic analysis; particularly, with the concept of common pool resources (CPRs). Around the aggregated value of the debtor company's asset pool (as CPR) exists an n-person prisoner's dilemma between banks and third-party creditors: No creditor knows when and under what conditions the other creditor will appropriate funds from the debtor company's asset pool. This coordination problem is traditionally addressed by means of bankruptcy law and collaterals. However, the incentive structure that surrounds the bilateral private governance system created by covenants and an event of default clause (a CPR private governance system) is found to also be capable of tackling this problem.
Moreover, the interaction between the different regulation spheres - bankruptcy law, collateral and the CPR private governance system - has important implications for both the aforementioned discussions as well as the legal treatment of covenants and event of default clauses. Covenants alone cannot be seen as an alternative to institutional regulation; the complete CPR private governance system and its interaction with institutional regulation must also be taken into consideration. In addition, their function must first find more acceptance and respect in the legal treatment of covenants and event of default clauses: The CPR private governance system fills a gap in the regulation of the tragedy of the commons by bankruptcy law and collateral. This has particularly important implications for the German § 138 BGB, § 826 BGB and ad hoc duties to disclose insider information.

Autoren/Hrsg.

Matri, Daniela

Inhaltsverzeichnis

1;Acknowledgements;5
2;Contents;6
3;List of Abbreviations;12
4;List of Figures;14
5;List of Tables;15
6;Part I: Theoretical Framework and Development of Research Question;16
6.1;Chapter 1: Introduction: Covenants and Third-Party Creditors;17
6.1.1;1.1 Covenants and Creditor Protection;17
6.1.2;1.2 Relevance of Third-Party Creditor Protection;19
6.1.3;References;23
6.2;Chapter 2: Self-Help Devices of Creditor Protection;26
6.2.1;2.1 Credit Risk;26
6.2.1.1;2.1.1 Risk of False or Lacking Information;28
6.2.1.2;2.1.2 Risk of Bankruptcy;28
6.2.1.3;2.1.3 Risk of Loss;30
6.2.1.4;2.1.4 Corporate Groups as a Special Case;30
6.2.2;2.2 Mechanisms of Creditor Protection;30
6.2.2.1;2.2.1 Proprietary Devices;31
6.2.2.2;2.2.2 Covenants and Other Contractual Devices;32
6.2.2.2.1;2.2.2.1 Other Contractual Devices;33
6.2.2.2.2;2.2.2.2 Covenants;33
6.2.2.2.3;2.2.2.3 Mechanisms Suitable for Specific Creditor Types;34
6.2.2.2.3.1;2.2.2.3.1 Institutional Lenders;35
6.2.2.2.3.2;2.2.2.3.2 Bondholders;35
6.2.2.2.3.3;2.2.2.3.3 Trade Creditors;36
6.2.2.2.3.4;2.2.2.3.4 Customers;37
6.2.2.2.3.5;2.2.2.3.5 Employees;37
6.2.2.2.3.6;2.2.2.3.6 Tort Creditors;38
6.2.3;References;38
6.3;Chapter 3: Covenants and Bilateral Creditor Protection;43
6.3.1;3.1 Protection Against the Risk of False or Lacking Information;43
6.3.2;3.2 Protection Against the Risk of Bankruptcy;44
6.3.2.1;3.2.1 Financial Covenants;44
6.3.2.1.1;3.2.1.1 Framework of Financial Covenants;45
6.3.2.1.1.1;3.2.1.1.1 Setting of Financial Covenants;45
6.3.2.1.1.2;3.2.1.1.2 Inclusion of Subsidiaries;46
6.3.2.1.1.3;3.2.1.1.3 Compliance with Financial Covenants;46
6.3.2.1.2;3.2.1.2 Interest Coverage Ratio Covenant;46
6.3.2.1.3;3.2.1.3 Leverage Ratio Covenant;47
6.3.2.1.4;3.2.1.4 Tangible Net Worth Covenant;47
6.3.2.1.5;3.2.1.5 Gearing Covenant;47
6.3.2.1.6;3.2.1.6 Current Ratio Covenant;48
6.3.2.2;3.2.2 Negative Covenants;48
6.3.2.2.1;3.2.2.1 No Disposal Clause;48
6.3.2.2.2;3.2.2.2 No Merger Clause;49
6.3.2.2.3;3.2.2.3 No Change of Business/Management Clause;49
6.3.2.2.4;3.2.2.4 Other Negative Covenants;50
6.3.3;3.3 Protection Against the Risk of Loss;50
6.3.3.1;3.3.1 Affirmative Covenants;50
6.3.3.2;3.3.2 Negative Covenants;51
6.3.3.2.1;3.3.2.1 Negative Pledge Clause;51
6.3.3.2.2;3.3.2.2 CAPEX Covenant;52
6.3.3.2.3;3.3.2.3 Dividend Restrictions Clause;52
6.3.3.3;3.3.3 Financial Covenants as Supplements;52
6.3.4;3.4 Clauses That Ensure the Enforcement of Covenants;53
6.3.4.1;3.4.1 Information Undertakings;53
6.3.4.2;3.4.2 Pari Passu Clause;54
6.3.4.3;3.4.3 Event of Default Clause;55
6.3.4.4;3.4.4 Cross-Default Clause;57
6.3.4.5;3.4.5 MAC Clause;58
6.3.4.6;3.4.6 Performance Pricing Clause;58
6.3.5;3.5 Creating a Bilateral Private Governance System;59
6.3.6;References;62
7;Part II: The Systematisation of Third-Party Creditor Effects of Covenants: Preliminary Framework;65
7.1;Chapter 4: Academic Discussion and the Relevance of Third-Party Creditor Protection;66
7.1.1;4.1 Covenants Creating a Bilateral Private Governance System with Externalities;66
7.1.1.1;4.1.1 The Law and Economics Term of Externalities;67
7.1.1.2;4.1.2 Covenants and Externalities;67
7.1.2;4.2 The Relevance of Externalities;68
7.1.2.1;4.2.1 Covenants as an Alternative to Institutional Creditor Protection;68
7.1.2.1.1;4.2.1.1 Company Law;69
7.1.2.1.2;4.2.1.2 Bankruptcy Law;71
7.1.2.2;4.2.2 Rethinking Corporate Governance;72
7.1.3;4.3 Summary;73
7.1.4;References;74
7.2;Chapter 5: Potential Externalities of the Bilateral Governance System;77
7.2.1;5.1 Banks as Monitoring Agents for Third-Party Creditors;77
7.2.2;5.2 Potential Positive Externalities;78
7.2.2.1;5.2.1 Information Production;78
7.2.2.1.1;5.2.1.1 Direct Information About a Covenant Default;79
7.2.2.1.1.1;5.2.1.1.1 Privately Held Companies;79
7.2.2.1.1.2;5.2.1.1.2 Publicly Traded Companies;81
7.2.2.1.1.2.1;5.2.1.1.2.1 German Law;81
7.2.2.1.1.2.2;5.2.1.1.2.2 US Law;83
7.2.2.1.2;5.2.1.2 Indirect Information Through the Bank´s Reaction;84
7.2.2.1.3;5.2.1.3 Value of Information for Third-Party Creditors;85
7.2.2.2;5.2.2 Disciplinary Effect: Reducing the Shareholder-Creditor Conflict;86
7.2.3;5.3 Potential Negative Externalities;88
7.2.3.1;5.3.1 Influencing the Management Not in the Interest of All Creditors;88
7.2.3.2;5.3.2 Reducing the Pool of Assets;89
7.2.3.3;5.3.3 Unnecessary Bankruptcy and the Domino Effect;90
7.2.4;5.4 General Limits;91
7.2.5;5.5 Scale of Positive and Negative Effects Depends on the Covenant-Secured Creditor´s Conduct;92
7.2.6;References;93
7.3;Chapter 6: The Self-Interested Behaviour of Banks and Its Legal Limits;97
7.3.1;6.1 The Self-Interested Behaviour of Banks;97
7.3.2;6.2 Legal Limits of Bank´s Self-Interested Conduct;98
7.3.2.1;6.2.1 Acceleration Based on Covenant Default;99
7.3.2.1.1;6.2.1.1 German Law;100
7.3.2.1.1.1;6.2.1.1.1 Validity and Enforceability of Event of Default Clause;100
7.3.2.1.1.2;6.2.1.1.2 Treu und Glauben in Case of Acceleration;103
7.3.2.1.2;6.2.1.2 US Law;104
7.3.2.1.2.1;6.2.1.2.1 Validity and Enforceability of Event of Default Clause;104
7.3.2.1.2.2;6.2.1.2.2 Duty of Good Faith in Case of Acceleration;105
7.3.2.1.3;6.2.1.3 Conclusion;106
7.3.2.2;6.2.2 Additional Collateral Followed by Bankruptcy;106
7.3.2.2.1;6.2.2.1 German Law;107
7.3.2.2.1.1;6.2.2.1.1 Avoidable Preference;107
7.3.2.2.1.2;6.2.2.1.2 Nullity Under § 138 BGB;109
7.3.2.2.1.3;6.2.2.1.3 Treuepflicht of the Controlling Bank to Third-Party Creditors;111
7.3.2.2.1.4;6.2.2.1.4 Liability Under § 826 BGB;112
7.3.2.2.1.5;6.2.2.1.5 Liability as a Faktisches Organ;113
7.3.2.2.2;6.2.2.2 US Law;113
7.3.2.2.2.1;6.2.2.2.1 Avoidable Preference;114
7.3.2.2.2.2;6.2.2.2.2 Fiduciary Duty of the Controlling Bank to Third-Party Creditors;115
7.3.2.2.3;6.2.2.3 Conclusion;117
7.3.3;6.3 High Probability of Self-Interested Behaviour of Banks;117
7.3.4;References;118
8;Part III: Empirical Research: Results and Re-evaluation of Preliminary Theory;122
8.1;Chapter 7: Design and Methodology;123
8.1.1;7.1 Research Objective: The Factual Behaviour of Covenant-Secured Creditors and Its Effects on Third-Party Creditors;123
8.1.2;7.2 Research Object: Banks and Their Behaviour After a Covenant Default Under Bank Loans;124
8.1.3;7.3 Expert Interviews;125
8.1.4;7.4 Data Collection and Assessment;126
8.1.4.1;7.4.1 Conducting the Interviews;126
8.1.4.2;7.4.2 Transcription and Coding;127
8.1.4.3;7.4.3 Limitations and Bias;128
8.1.5;References;129
8.2;Chapter 8: Results: Covenants as a Reciprocal Private Governance Creditor Protection System;131
8.2.1;8.1 Private Governance: Enforcement Out of Court;131
8.2.1.1;8.1.1 Motivation for Private Enforcement;132
8.2.1.2;8.1.2 Method of Private Enforcement: Self-enforcing Agreements;133
8.2.1.3;8.1.3 Discussion;134
8.2.2;8.2 Negative Effects on Third-Party Creditors;135
8.2.2.1;8.2.1 Influencing the Management Not in the Interest of All Creditors;135
8.2.2.1.1;8.2.1.1 Debtor Company Pays Bank First or Only Pays Bank;136
8.2.2.1.2;8.2.1.2 Additional Risk Premiums;136
8.2.2.2;8.2.2 Unnecessary Bankruptcy and the Domino Effect;138
8.2.2.3;8.2.3 Discussion;140
8.2.3;8.3 Positive Effects on Third-Party Creditors;142
8.2.3.1;8.3.1 Disciplinary Effects;142
8.2.3.1.1;8.3.1.1 Similar Rights for Third-Party Creditors;142
8.2.3.1.2;8.3.1.2 Ensuring a Larger Pool of Assets;144
8.2.3.1.3;8.3.1.3 Keeping the Debtor Company Solvent;144
8.2.3.2;8.3.2 Information Sharing;146
8.2.3.2.1;8.3.2.1 Information Shared by the Debtor Company;146
8.2.3.2.2;8.3.2.2 Informal Exchange Between Creditors;146
8.2.3.2.3;8.3.2.3 Information Provided by Third Parties;148
8.2.3.2.4;8.3.2.4 Discussion;148
8.2.4;8.4 Influence of Third-Party Creditors on the Bilateral Private Governance System;149
8.2.4.1;8.4.1 Linked Contracts;149
8.2.4.2;8.4.2 Banks as Third-Party Creditors in a Small Community;150
8.2.4.3;8.4.3 Third-Party Creditors That Are Essential for Operational Business;150
8.2.4.4;8.4.4 Sense of Responsibility;151
8.2.4.5;8.4.5 Discussion;151
8.2.5;8.5 Conclusion;152
8.2.6;References;153
8.3;Chapter 9: Re-evaluation: Collectivisation of Creditor Protection Through Private Governance;155
8.3.1;9.1 Common Pool Resources;155
8.3.2;9.2 Aggregated Value of the Debtor Company´s Pool of Assets as a CPR;156
8.3.3;9.3 Mechanisms to Reduce the Coordination Problem;158
8.3.3.1;9.3.1 State Regulation: Bankruptcy Law;159
8.3.3.2;9.3.2 Privatisation of Rights: Collateral;161
8.3.3.3;9.3.3 Self-governing CPR Institutions;163
8.3.3.3.1;9.3.3.1 Clearly Defined Boundaries;164
8.3.3.3.2;9.3.3.2 Congruence Between Appropriation, Provision Rules and Local Conditions;165
8.3.3.3.3;9.3.3.3 Collective-Choice Arrangements;165
8.3.3.3.3.1;9.3.3.3.1 Linkage of Contracts;165
8.3.3.3.3.2;9.3.3.3.2 Linkage of Interests;166
8.3.3.3.4;9.3.3.4 Effective Monitoring;167
8.3.3.3.5;9.3.3.5 Graduated Sanctions;167
8.3.3.3.6;9.3.3.6 Conflict-Resolution Mechanisms;168
8.3.3.3.7;9.3.3.7 Minimal Recognition of Rights to Organise;168
8.3.4;9.4 Collectivisation of Creditor Protection Through the CPR Private Governance System;169
8.3.5;References;170
8.4;Chapter 10: Consequences for Legal Discussion;174
8.4.1;10.1 Covenants as a Supplement to Bankruptcy Law;175
8.4.2;10.2 Covenants as a Supplement to Capital Requirements;175
8.4.3;10.3 Creditors as Part of Corporate Governance;177
8.4.4;10.4 Fostering the CPR Private Governance System in Germany;178
8.4.4.1;10.4.1 Legal Treatment of Covenants: § 138 v. § 826 BGB;178
8.4.4.2;10.4.2 More Mandatory Disclosure;178
8.4.5;10.5 Summary;180
8.4.6;References;181
9;Part IV: Summary and Outlook;183
9.1;Chapter 11: Summary;184
9.2;Chapter 12: Outlook;190
9.2.1;References;192
10;Appendices: Empirical Research;194
10.1;Appendix 1: Interview Guideline;194
10.2;Appendix 2: Results;198
10.2.1;1 Private Governance: Enforcement Out of Court;198
10.2.1.1;1.1 Reasons for Enforcement Out of Court;199
10.2.1.2;1.2 Through Self-Enforcing Agreements;203
10.2.1.3;1.3 Limits of Private Governance via Covenants;207
10.2.2;2 Negative Effects on Third-Party Creditors;209
10.2.2.1;2.1 Debtor Pays Bank First or Only It;209
10.2.2.1.1;2.1.1 Not Likely;209
10.2.2.1.2;2.1.2 Likely;210
10.2.2.2;2.2 Exploiting Third-Party Creditors;211
10.2.2.2.1;2.2.1 Not Likely;211
10.2.2.2.2;2.2.2 Likely;214
10.2.2.3;2.3 Domino-Effect;218
10.2.2.3.1;2.3.1 Not likely;218
10.2.2.3.2;2.3.2 Likely;222
10.2.3;3 Positive Effects on Third-Party Creditors;226
10.2.3.1;3.1 Similar Rights for Third-Party Creditors;226
10.2.3.1.1;3.1.1 Not Likely;226
10.2.3.1.2;3.1.2 Likely;229
10.2.3.2;3.2 Ensuring a Larger Pool of Assets;233
10.2.3.2.1;3.2.1 Not Likely;233
10.2.3.2.2;3.2.2 Likely;235
10.2.3.3;3.3 Keeping the Debtor Solvent;236
10.2.3.3.1;3.3.1 Not Likely;236
10.2.3.3.2;3.3.2 Likely;238
10.2.3.4;3.4 Information Sharing;245
10.2.3.4.1;3.4.1 Not Likely;245
10.2.3.4.2;3.4.2 Likely;247
10.2.4;4 Influence of Third-Party Creditor on the Bilateral Private Governance System;255
10.2.4.1;4.1 Not Likely;255
10.2.4.2;4.2 Likely;257
11;Table of Cases;266
11.1;1 German Case Law;266
11.1.1;1.1 Supreme Court of the (German) Reich;266
11.1.2;1.2 German Federal Supreme Court;266
11.1.3;1.3 Higher Regional Court;268
11.1.4;1.4 Regional Court;268
11.2;2 European Union Case Law;268
11.3;3 US Case Law;268
11.3.1;3.1 US Supreme Court;268
11.3.2;3.2 State Supreme Courts;269
11.3.3;3.3 Courts of Appeal;269
11.3.4;3.4 District Courts;270