Controlling the Market for Information in Reorganization

Abstract

After cash, perhaps the most valuable asset in a chapter 11 case will be information-about the debtor, its prospects, its demise, and its stakeholders, among other things. Not surprisingly, parties in large corporate cases increasingly fight about information across a variety offronts, from the use of examiners to the presence and behavior of voting blocks. Avenues to resolve corporate distress, in chapter 11 and otherwise, increasingly resemble unregulated securities markets. One might think that the Securities and Exchange Commission ("SEC") would be a logical regulator of information in this context. Indeed, at least as a statutory matter, it had a large role in reorganizationf rom 1938 to 1978. Under current law, by contrast, the SEC plays a much more modest part. We might therefore think that reinvigorating the SEC's role in reorganization would solve growing problems of information asymmetry in this context. This paper argues that before we can make any serious claim about the role the SEC should (or should not) play in reorganization, we must answer a more basic question: What policy should inform the rules that control the flow of information in reorganization? Merely dilating the SEC's status, without understanding what it is supposed to do, is unlikely to benefit anyone. We explain that reorganization's information policy-to the extent it has onederives haphazardly from the federal securities laws. Yet, today, the two systems have different goals and functions; the policy aspirations of one hardly fit the other. We may learn from the SEC's successes and failures. But, like the legal regime of which it is a part, that agency serves different purposes and constituencies than does the reorganization system. We thus argue that reorganization law needs its own information policy, and suggest some things that such a policy should consider.