Kenneth Ayotte (University of California, Berkeley – School of Law) and Jared A. Ellias (Harvard Law School) have posted Bankruptcy Team Sports and the Private Equity Playbook on SSRN. Here is the abstract:
This chapter explains how the growth of private equity has reshaped the agency-cost problem at the center of Chapter 11. Historically, bankruptcy law policed collusive transactions between managers and favored outsiders through three principal tools: creditor “teams,” which force creditors with similar claims to act collectively and share costs and payoffs; market tests; and judicial valuation. But as buyout-driven secured debt has come to dominate bankrupt firms’ capital structures, the central conflict has shifted from equity-versus-unsecured-debt or secured-versus-unsecured-debt disputes to intra-class warfare among secured lenders. In this new environment, private equity sponsors and managers increasingly pursue “team breakup” strategies: transactions that favor a majority creditor coalition while diluting excluded minority creditors. These strategies appear both outside bankruptcy, as in uptiering transactions like Serta, and inside bankruptcy, through exclusive DIP financing, exit financing, restructuring support agreements, and committee-flipping strategies, as in Peabody, J.C. Penney, and Nine West. We argue that these transactions weaken traditional market-testing protections because insider creditor coalitions can use their control rights to deter outside competition. As a result, bankruptcy courts should more actively police team breakup strategies to preserve priority, limit value diversion, and restore Chapter 11’s ability to police agency costs.
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