AuthorRadwan, Theresa J. Pulley


Bankruptcy law allows a debtor to shelter itself from the advances of creditors seeking to collect their debts. (1) While it does not prevent the debtor from having to pay all of its debts, (2) it provides the debtor relief in two primary ways. First, the automatic stay (3) takes effect to provide the debtor with a "breathing spell"--time to coordinate its financial affairs without the ever-present threat of collection efforts. (4) Second, the discharge eviscerates many of the debts to the extent not paid in the bankruptcy case. (5) Together, these protections provide a fresh start for bankruptcy debtors--a chance to start anew. (6) Not surprisingly, creditors frequently hope that the debtor will not file for bankruptcy protection because the stay prevents them from engaging in collection actions permitted under state law, and the discharge potentially eliminates any chance of full payment. This Article considers the development of "golden shares"--a procedure by which a creditor becomes an owner of a debtor entity with the goal of preventing the entity from filing for bankruptcy protection, (7) and argues for the use of a bad-faith standard akin to designation of creditor votes in acceptance of a chapter 11 plan for determining whether a creditor's golden shares can be used to block a bankruptcy tiling.


    1. Formation, Structure, and Control

      1. Corporations

        Those creating a corporation do so by filing a relatively simple document known as the articles of incorporation. (8) This document provides basic information about the business, such as the name of the business, shares authorized for issuance, and the names of those incorporating the business. (9) It might also provide information about the purpose of the business or limitations on the fiduciary duties of those managing the business. (10) Most businesses also create bylaws, which provide more detail about the governance of the business. (11)

        Once formed, shareholders select directors to oversee the business. (12) The board of directors, in turn, selects officers to oversee the daily affairs of the business. (13) The primary roles of the shareholder-owners of the corporation after incorporation include selection of the directors and approval of major business decisions, such as amendment of the articles of incorporation. (14) Separation of function between the shareholders and management constitutes one of the defining features of a traditional corporation. (15)

        However, some corporations, colloquially known as "close corporations" differ from the traditional corporation. In Delaware, a close corporation must have no more than thirty shareholders and affirmatively elect close corporation status. (16) Other states, such as those that have adopted provisions of the Revised Model Business Corporation Act, lack a specific close corporation designation, hut do allow shareholder agreements to limit the function of directors or even eliminate the board of directors altogether. (17) Because such shareholder agreements often require unanimous agreement of the shareholders, (18) they are most likely in a very small corporation. Whether in a state that allows a designation of a close corporation or in a Model Act state, which allows shareholder agreements, a close corporation provides more overlap of the shareholder-owners of the company and management of the company.

      2. Limited Liability Companies

        Limited liability companies (LLCs) start with the same process as corporations, being formed under state law by the filing of the articles of organization. (19) The articles of organization require minimal information about the LLC, such as its official name and address. (20) The real heart of the LLC lies in the operating agreement, which provides a contractual relationship between members--the owners of the LLC--regarding the various rights and obligations of its members. (21) While the operating agreement resembles corporate bylaws in that it provides more detail about the operations of the business, its impact on an LLC is hard to overstate. Where a corporation is controlled by the officers and directors of the business guided by the bylaws provisions, (22) the LLC's operating agreement can provide a clear and more direct framework to manage the LLC and provides the flexibility to modify almost any provision of law. (23) The Uniform Limited Liability Company Act, promulgated by the National Conference of Commissioners on Uniform State Laws, demonstrates the breadth of what may be regulated by the operating agreement. (24) It provides for a handful of things that cannot be done by the operating agreement, (25) but otherwise provides that the operating agreement governs:

        (1) relations among the members as members and between the members and the limited liability company;

        (2) the rights and duties under this [act] of a person in the capacity of manager;

        (3) the activities and affairs of the company and the conduct of those activities; and

        (4) the means and conditions for amending the operating agreement. (26)

        The section continues by expressly allowing the operating agreement to eliminate the duties of a member to account for property or compete with the company; (27) define behaviors that meet or violate fiduciary duties if reasonable; (28) or limit the ability to obtain damages for some breaches of fiduciary duties. (29) These broad provisions allowing the members of an LLC to contractually define their relationship are the central identifying feature of LLCs. (30)

        By default, members run limited liability companies, (31) a model commonly known as "member-managed" LLCs. Unlike a traditional corporation, a member-managed LLC merges the ownership and management of the business. (32) In a member-managed LLC, every member may participate in decision making, though the member might lack authority to bind the LLC. (33) However, LLC documents can provide for management by persons selected by the members, generally known as "manager-managed" LLCs. (34) Manager-managed LLCs more closely resemble the traditional corporate separation of ownership and management of the business. (35)

    2. Who Represents Rusinesses

      Most business forms enjoy a separate legal identity from the owners of the business, (36) and exist as legal "persons" for the purpose of a bankruptcy filing. (37) However, though persons, the businesses cannot speak for themselves or sign a bankruptcy petition. Instead, they rely upon the constituencies within the business--typically the management of the business--to make decisions. (38) In determining authority to file for bankruptcy, courts look to the law of the state of organization for the business. (39) Thus, when a business opts to voluntarily (40) file for bankruptcy protection, it is typically the directors of a corporation, the members in a member-managed LLC, or the managers in a manager-managed LLC who make that decision on the business's behalf. (41)

    3. Fiduciary Duties

      In a corporation, those charged with making decisions--including the decision to put the business into a bankruptcy proceeding--have fiduciary duties in connection with that decision making. (42) As with the board of directors in a corporation, those managing an LLC owe fiduciary duties to the LLC. (43) Limited liability companies evolved as a hybrid of partnerships and corporations, (44) and share the same basic fiduciary duties as those types of businesses. (45) The duties owed by those managing a business generally include the duty of care (46) and the duty of loyalty, (47) with an underlying obligation to act fairly and in good faith. (48) These duties fall upon the officers and directors of a corporation, (49) managers of a manager-managed LLC, (50) and members of a member-managed LLC. (51) Consistent with the policy of maximum flexibility for LLC's, the operating agreement may modify or even eliminate fiduciary duties as long as those modifications do not eliminate the requirements to act fairly and in good faith. (52) The same is true in corporations, (53) particularly for close corporations. (54) Nonmanaging owners of a company generally do not have any fiduciary duty to the company. (55)


    Creditors employ several techniques in an effort to prevent businesses from filing for bankruptcy protection. The bankruptcy code and the courts have limited the use of these techniques in order to ensure the debtor's ability to use the bankruptcy system when needed. (56) In response, creditors continue to find clever new ways to prevent or dissuade bankruptcy filings. (57)

    1. Ipso Facto Clauses

      The Bankruptcy Code generally disapproves of ipso facto provisions that absolutely prohibit a company (or individual debtor) from filing for bankruptcy protection, or that operate to eliminate the benefits of a bankruptcy filing for the debtor: (58)

      * property enters the estate regardless of contract provisions providing otherwise in the event of a bankruptcy filing; (59)

      * property of the estate may be used, sold, or leased despite contractual provisions limiting the ability to do so in bankruptcy: (60)

      * provisions in law or in an executory contract (61) that modify that contract upon a bankruptcy filing are unenforceable; (62) and

      * an executory contract may be assigned to another party in most cases despite a provision providing otherwise in the event of bankruptcy. (63)

      These prohibitions ensure that debtors do not forfeit the ability to obtain a fresh start through bankruptcy before such a need comes to fruition. (64) Even in the absence of a specific Bankruptcy Code provision invalidating a specific type of ipso facto clause, courts have extended the policy to invalidate other types of clauses that limit a debtor's rights upon a bankruptcy filing. (65) Because creditors cannot require debtors to absolutely give up the right to file for bankruptcy protection. (66) creditors developed...

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