The University of Chicago
The University of Chicago Law School

Debtholders and Equityholders
Author(s): Hideki Kanda
Source: The Journal of Legal Studies, Vol. 21, No. 2 (Jun., 1992), pp. 431-448
Published by: The University of Chicago Press for The University of Chicago Law School
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DEBTHOLDERS AND EQUITYHOLDERS
HIDEKI KANDA*

I.

INTRODUCTION

the economic and the legal status of equityholdershas been
WHILE
much studied in the past, that status of debtholders has been poorly understoodin the literature.Recent ventures for restructuringcorporate capital incident to corporatetakeovers and leveragedbuyouts, however, have focused attentionon the importanceof corporateborrowingand the claimednecessity of protectingdebtholderswho face a risk of unexpected decrease in the value of their investment as a result of such restructuring transactions.Thus, it is no surprisethat argumentshave emerged to the effect that corporate law should offer strongerpredictions to bondholders.'
Simply put, these argumentsrun as follows. Bondholderssuffer economic loss if their corporationincurs furtherrisky-or high-yield-borrowing. Contractualprovisions in bond contracts do not sufficientlyprotect them because predicting future events in advance is difficult and costly. Consequently, corporate law should provide bondholders with
* Associate Professor of Law,
University of Tokyo. I thank Douglas Baird, Lloyd Cohen,
Saul Levmore, and Jonathan Macey for their help and suggestions. I also received helpful comments and criticism on earlier drafts from Albert Alschler, Michael Dooley, David
Haddock, John Hetherington, Thomas Jackson, Mark Ramseyer, Robert Scott, George
Triantis, and the workshop and seminar participants at University of Chicago, Cornell
University, and University of Virginia Law Schools.
See Morey W. McDaniel, Bondholders and Corporate Governance, 41 Bus. Law. 413
(1986); Morey W. McDaniel, Bondholders and Stockholders, 13 J. Corp. L. 205 (1988);
Albert H. Barkey, The Financial Articulation of a Fiduciary Duty to Bondholders with
Fiduciary Duties to Stockholders of the Corporation, 20 Creighton L. Rev. 47 (1986); Note,
Fiduciary Duties of Directors: How Far Do They Go? 23 Wake Forest L. Rev. 163 (1988).
See also Note, Creditors' Derivative Suits on Behalf of Solvent Corporations, 88 Yale
L. J. 1299 (1979); Lawrence E. Mitchell, The Fairness Rights of Corporate Bondholders,
65 NYU L. Rev. 1165 (1990). But see Kenneth E. Scott, The Law and Economics of Event
Risk (Working Paper No. 62, Stanford Law School, Olin Program in Law and Economics
1990).
[Journal of Legal Studies, vol. XXI (June 1992)]
? 1992 by The University of Chicago. All rights reserved. 0047-2530/92/2102-0005$01.50
431

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THE JOURNAL OF LEGAL STUDIES

432

greater protection. Specifically, directors and officers should bear fiduciary duties to bondholders, and bondholdersshould be given standing to bring derivative suits. These