The Governance of Firms in Japanese Bankruptcy Reorganization

Abstract

The Civil Rehabilitation Act leaves very unclear the extent to which corporate law regarding directors’ fiduciary duties and shareholders’ rights to participate in the operation of a business applies with respect to bankruptcy reorganization proceedings. It is likely in these circumstances that corporate law in reorganization becomes inapplicable based on the insolvency regime. This means that if the company is insolvent, the value of shareholders’ claim is deemed to be zero, and consequently the shareholders rights are disregarded entirely in relation to reorganization or rehabilitation proceedings. This paper considers the topic from an economic perspective and argues that ignoring shareholder value completely in insolvency situations could force debtors-in-possession (DIPs) and directors to abandon an efficient project if it reduces the creditor value. It proposes a new approach that would enhance efficient results by imposing on DIPs/directors fiduciary duties to maximize the total value of the firm – an approach that can be adapted for use within the current Japanese statutory structure.