ABSTRACT I. INTRODUCTION II. BACKGROUND: THE FAILURE OF TRADITIONAL LEGAL STRUCTURES TO PROMOTE SHAREHOLDERS' INTERESTS IN BANKRUPTCY. A. The Debtor's Management B. Official Committees to Represent Claimants in Bankruptcy C. Ad Hoc Groups; Direct Action by Large Shareholders D. The Office of the U.S. Trustee, the Bankruptcy Court and the SEC III. THE ROLE OF GRASSROOTS SHAREHOLDER ACTIVISM A. Motivations for Grassroots Shareholder Activism 1. Shareholder Perceptions Regarding the Meaning of Equity Ownership in the Modern Corporation 2. Shareholder Perceptions Regarding the Relationship Between Market Power and Influence 3. Shareholders' Loyalty to the Debtor Corporation B. Methods of Grassroots Shareholder Activism C. A Postscript to Eastman Kodak: Shareholder Responses to the Restructuring Outcome IV. OPPORTUNITIES FOR LEGAL REFORM V. CONCLUSION I. INTRODUCTION
In recent years, individual shareholders of large and distressed publicly traded corporations in Chapter 11 (1) bankruptcy have increasingly engaged in direct action and grassroots organization in their efforts to influence the restructuring. (2) By "direct action" (3) I mean personal involvement in the Chapter 11 case as a "party in interest," (4) generally on a pro se basis, by filing motions, making formal appearances at court hearings, and taking other steps to be heard on issues pertaining to a corporate debtor's restructuring. By "grassroots organization" (5) I mean spontaneous and organic efforts to mobilize outside of the legal structures (6) designed to protect stakeholder interests in large commercial bankruptcies. (7) These activities include holding meetings, disseminating information, collaborating to conduct research and prepare filings, and donating time, money, and in-kind resources to advance restructuring outcomes that better preserve the rights of non-insider holders of common stock in the debtor corporation.
Individual shareholders are engaging in direct action and grassroots organization because they are almost entirely disenfranchised once a corporation enters bankruptcy. (8) In the case of an insolvent company, the board of directors no longer owes its fiduciary duties exclusively to the corporation and its shareholders; instead, directors are generally expected to maximize the value of the firm for the benefit of creditors, who have also become residual stakeholders of the firm. (9) Even when the debtor is solvent, managers typically focus their efforts on gaining consensus to a Chapter 11 plan, often making significant concessions to creditors at the expense of shareholders. (10) Further compounding matters, the U.S. Trustee and bankruptcy courts have grown hostile to shareholder requests to appoint official equity committees in Chapter 11 proceedings, (11) making it very difficult for widely dispersed shareholders to come together and gain a seat at the bankruptcy negotiation table. (12)
In this way, bankruptcy law magnifies the severe collective action obstacles that shareholders already face under modern corporate law. (13) But in Chapter 11, the stakes are often much higher. This is because the modern commercial bankruptcy reorganization process relies upon party consensus rather than judicial edict, (14) meaning that claimants and interest holders must have a seat at the negotiation table if they ever hope to defend their rights and influence the proceedings.
In an attempt to overcome these and related challenges, a grassroots shareholder movement has been taking shape. (15) Angry investors from around the world, who stand to lose all or part of their life savings in prominent corporate bankruptcies, have taken to the Internet to parse through the debtor's financial information, critique the proposed restructuring plan and exchange information and expertise. (16) Many file their own motions and supporting documents with the bankruptcy court, (17) and some even attend hearings and make formal appearances in the case. (18) Meanwhile, others dedicate their time and resources to maintaining websites, (19) transcribing information, and fundraising to support the needs of similarly situated shareholders. (20)
For the most part, these individuals are not part of the economic elite or the so-called one percent. (21) They are working- and middle-class persons who invested their life savings in the stock market through retail brokerages or employer-sponsored retirement accounts. And, while they clearly possess courage and conviction to intervene in the federal bankruptcy proceedings of America's largest corporations, these shareholders are not affluent persons with great influence. (22) Rather, they are ordinary people who recognize that they are disenfranchised but refuse to be silenced; they hope that their collective efforts will augment their individual voices. (23)
From a shareholder-rights corporate theoretical perspective, (24) grassroots shareholder activism is an expression of democratic values in corporate governance; it is the quintessential exercise of voice rather than exit. (25) In particular, grassroots shareholder activists believe that today's commercial debtors are not necessarily insolvent such that the restructuring process ought to presumptively exclude equity owners; rather, they believe that large corporate debtors are able to creatively shield substantial economic wealth and use it to reward preferred corporate stakeholders. (26) In this way, these activists strive to underscore certain structural problems that are inherent in the commercial restructuring process under Chapter 11: the tendency for certain privileged stakeholders with existing market power to take control of the restructuring, shield wealth and extract excess returns at the expense of other constituents; (27) the failure of bankruptcy law's most vital safeguards to fully take into account the intangible assets that drive modern restructurings, such as intellectual property, litigation claims, and valuable tax attributes; (28) and the inherent difficulty of valuing complex corporations and their assets. (29)
Of course, grassroots shareholder activism might also be viewed as a nuisance, hindering an already protracted and costly commercial bankruptcy process. Nonetheless, direct action, grassroots organization, and collective outbursts by angry, disenfranchised shareholders should be understood as inevitable in today's large commercial restructurings. This is because the legal process, as determined under U.S. bankruptcy and corporate laws, harbors enormous structural strain. (30) Chapter 11 relies primarily on negotiated settlement by powerful players, pitting the interests of average working- and middle-class persons who own corporate stock against the interests of much larger stakeholders, such as corporate insiders, dominant creditors, and activist venture capital funds that specialize in distressed investments.
Individual shareholders serve as instruments of social change when they attempt to organize and obtain a voice in Chapter 11 proceedings. Their efforts complement a global social movement that decries unjust corporate enrichment and seeks to hold corporations and others in positions of power accountable to ordinary citizens. (31) But grassroots shareholder activism threatens the interests of those who have grown accustomed to controlling corporate restructurings with little to no interference by widely dispersed common shareholders. It also threatens to impose additional costs upon already distressed companies, even potentially impairing long-term access to credit. For these reasons, the topic deserves careful consideration. Although recent scholarly attention has been given to large and powerful activist shareholders, (32) on one hand, and to less powerful "citizen shareholders," (33) on the other, grassroots activism by individual common shareholders in large commercial bankruptcies has never been thoroughly investigated. In striving to fill this void in the literature, this Article addresses the following questions: Why are individual common shareholders resorting to grassroots organization and direct action? What specific methods do they use? Finally, are direct action and grassroots activism effective ways to influence Chapter 11 case outcomes? In practical terms, given that equity security holders are often perceived as "wiped out" as a consequence of a company's bankruptcy filing, (34) non-insider shareholders probably have little to lose from direct action and grassroots activism. But do they actually benefit from these attempts to organize and influence the proceedings? And, from a normative perspective, should the law discourage or facilitate their participation in the case?
This Article addresses these and related questions through empirical investigation. It focuses mainly on a single case study, the recent bankruptcy reorganization of the iconic, publicly traded Eastman Kodak Company. (35) In particular, it analyzes qualitative data gathered through direct observation of grassroots shareholder activism, in-depth interviews with several activist shareholders, and dozens of written documents produced and disseminated by activists. Such in-depth, qualitative analysis of grassroots shareholder activism contributes to a broader understanding of corporate relations, even beyond the bankruptcy arena. In particular, the study sheds new light upon the essential characteristics of equity investment in the modern corporation, (36) such as the separation of ownership and control, while reminding us of the risks that are inherent in a commercial restructuring process that empowers a few stakeholders to make decisions that impact the investments of all others. Finally, it reignites the discourse on equity and fairness in the financial markets, and highlights the importance of a more transparent and equitable commercial restructuring process in carrying these principles through the entire life cycle of the firm.