Options, Reorganization Right And Bankruptcy

Faculty: Economic LawMajor: Economic LawAuthor: Raphael LeeProfessor: GongYun GuMy proposal is to establish a new bankruptcy on the basis of options, and this thesis discusses it below.In the introduction, I provide three existing bankruptcy models at present.After that, The thesis starts by discussing in the chapter 1 the three goals- of ex post efficiency, ex ante efficiency and preserving the bonding role of debt by penalizing the managers and shareholders adequately-?that should guide the design of efficient bankruptcy procedures. From a theoretical perspective, the liquidation should generate an ex post efficiency outcome if the market works well, but the reality is not and a company is always worth as a going concern more than liquidated. As to the reorganization, unfortunately, the reorganized company does not have an objective value. Consequently, It is hard to know what fraction of the post-bankruptcy company's securities each group creditors is entitled to receive even if there is no dispute about the amount and seniority of each creditor's claim. Perhaps more serious, there is a danger that the wrong decision will be made concerning the company's future. The voting mechanism is fixed in advance, which means that those people whose payoff ought not to be affected by the outcome (either they are full protected away, or they are not entitled to anything) may end up controlling the pivotal votes. I also mention the quasi-out-of-court workout, which emerged on the background of East-South Asia Financial Crisis from 1997. Because of the particularity, this procedure couldn't be applied as a standard. Further more, this procedure will loose the bonding role of debt and the warning to other company owners.In the chapter 2, I firstly introduce a new approach to bankruptcy by using options, which initiated by Lucian Bebchuk, a professor of Harvard Law School. Under the method, the value of the reorganized company doesn't require to be identified, and the participants in the reorganization would receive a set of rights with respect to the securities of the reorganized company-options and reorganization rights. The senior claimant should own the reorganization rights and the junior and the shareholders own other different classes options. After the options is exercised, the last owner of reorganization rights will decide the company's future, partial or full liquidation or reorganization. Following that, I also introduce the view proposed by P Aghion, O Hart and J Moore. They pointed out the shortcoming of the new method and proposed two anamorphous. The major modifications focus on two aspects: non-cash auction and the mechanism by bidding to confirm the reorganization company's value. Base on this, this thesis further proposes three modifications: (A) the priority of the outside soliciting bids to exercising the options; (B) the evaluation of the liquidation value of the bankrupt company in advance, which should be considered by the court or the designated receiver before the period of designing the reorganization rights and options; and (C) the transactions of options either among the claimants and shareholders or among the outsiders.In the chapter 3 in this thesis, I point out the special effect of this modified bankruptcy procedure in our country and try to establish its framework. Because of the localism, the local government always helps the bankruptcy company escaping the obligations of paying their debts by the means of demanding the independence accounting institution to low-evaluate the company's asset. But, if this procedure is applied, the bank will prevent this situation by exercising the options. Besides this, this procedure should have a positive role in the privatization of the bankrupt state-owned enterprises in our country. Considering these or other facts mentioned in the thesis in detailed, I believe the menu bankruptcy procedures on the basis of my proposed idea, as the core of option should be a better choice. At last, I designed t...