Chapter 33: Corporate Restructuring & Bankruptcy

Corporate Restructuring & Bankruptcy transactions are characterized as "diet deals" that enforce financial discipline, reduce agency costs, and incentivize management through equity stakes to improve operating efficiency and cash flow. A major focus is placed on the private equity market, detailing the structure of limited partnerships where general partners manage the fund and earn carried interest—a compensation structure functioning like a call option—while limited partners provide capital for a finite period, typically ten years. The discussion contrasts these private equity "temporary conglomerates" with traditional public conglomerates, highlighting the inefficiencies and cross-subsidization often found in the internal capital markets of diversified public firms. The chapter then shifts to corporate "fission" or divestitures, distinguishing between spin-offs, where shares of a subsidiary are distributed to existing shareholders; equity carve-outs, where a subsidiary is sold via an initial public offering; and asset sales, where business units are sold to other firms to sharpen strategic focus. The concept of privatization is also addressed, explaining how government-owned enterprises are transferred to private investors to enhance efficiency. Finally, the text covers financial distress and the bankruptcy process, comparing Chapter 7 liquidation with Chapter 11 reorganization. It details the complexities of the restructuring process, including the automatic stay, Debtor-in-Possession (DIP) financing, the absolute priority rule (and its occasional violation), and the conflicts of interest between senior creditors, junior creditors, and shareholders that can lead to inefficient outcomes or prolonged workouts.