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Modern bankruptcy practice under Chapter 11
presumptively excludes the large and publicly-traded
corporate debtor's shareholders from the negotiation
table based on a longstanding assumption that they
have no economic interest to protect because most
bankrupt companies are insolvent. But bankruptcy
practice overlooks a shareholder's most important
economic interest: the right to enjoy the reorganized
firm's unlimited upside potential after all creditor
claims are satisfied. This interest, which is essentially
an option right, is totally ignored in the debtor's
hypothetical liquidation analysis. In a similar way,
the debtor's upside potential is not fully captured by
prevailing enterprise valuation techniques.
Of course, the economic uncertainties that drive
companies into bankruptcy---as well as the risks that
accompany most reorganization plans-also drive
down the value of equity's option right. In many cases,
the benefits to all other stakeholders of an efficient
reorganization will far outweigh the negligible value of
the upside rights. But in the case of commodity-based
firms that pursue bankruptcy reorganization in
declining or bearishprice markets (what I call "bearish
bankruptcies'), economic theory suggests that the
upside potential is likely to be substantial. I argue that
by excluding shareholders from the negotiation table,
modern bankruptcy practice effectively severs equity's
option right at the outset of the case. Then, bearish

debtors use a variety of complex and understudied
commercial instruments to eliminate uncertainty and
convert, in the earliest days of the case and with
minimal judicial oversight, certain creditors' limited
and fixed rights into unlimited upside rights