Corporate Failure Maxwell Communications - Case Study Example

Corporate Faliure Maxwell Communications In the last twenty years corporate bankruptcy has been pushed out of the shadows of legal and corporate marginality into the spotlight of daily business news. Its financial and human repercussions are enormous. In many advanced economies, including Britain and the United States, corporate bankruptcy has variously emerged as a new strategic device for corporate managers, as a new frontier for highly expert lawyers and accountants, and as a matter of new urgency for governments and officials who want to encourage entrepreneurial risk-taking while they lower tariff barriers, but preserve jobs and protect home industries. Bankruptcy is a defining characteristic of a market economy: it demarcates the limits of extending credit, confronting risk, entrepreneurial venture, and corporate self-determination; it engages all sectors of the economy; and it expresses fundamental conflicts at the heart of the capitalist political economy between labor and capital, owners and managers, debtors and creditors, and the state and the market. In Britain rates of insolvency have risen to historic highs, punctuated quite dramatically by company failures from Rolls Royce through the Olympia and York failure (the developers of London's Docklands), and the collapse of the Maxwell communications empire. Because struggling debtor corporations frequently raid their pension funds for cash, which consequently are under-funded when companies declare bankruptcy, significant private costs have been off-loaded onto the government. Furthermore, failing firms do not pay their taxes, and so the tax authorities frequently join the list of unpaid creditors (Altman2003). Yet bankruptcy is not without its beneficiaries. Just as a deadly epidemic is lucrative for undertakers and morticians, the vast sums of money involved in the largest corporate bankruptcies have exerted a magnetic effect on the most sophisticated--and expensive--corporate lawyers and accountants. In the United States, the bankruptcy boom propelled bankruptcy lawyers from the periphery towards the center of the profession. In England, marginal company undertakers became transformed into respected corporate reorganizers. Bankruptcy and reorganization specialties in law and accounting, in both the United States and Britain, have become prestigious revenue-centers for law and accounting firms, so much so that in the United States there is increasing pressure to pare down the size of professional fees. During the 1980s, several of the largest accounting firms in Britain merged with small boutique insolvency firms, such as Cork Gully's assimilation by Coopers and Lybrand, just as numbers of large United States law firms absorbed smaller bankruptcy specialist firms simply in order to acquire their expertise in a quickly growing area (Altman2003). the case of Maxwell shows that despite the far-reaching practical implications of such legal change, bankruptcy law opens up an almost virgin field of inquiry for sociolegal scholars and sociologists. Given the enormous impact bankruptcy reforms are alleged to have, little research has appraised what or who shaped the bankruptcy laws in either country. Empirical studies document the aftermath and apparent consequentiality of the reforms. Bankruptcy law provides an especially valuable site to account for the distribution of power among corporations for two reasons. On the one hand, at the moment of bankruptcy, every credit relationship, which is to say every financial relationship with other companies, banks, the state, consumers, suppliers, workers, and even communities, is simultaneously thrown into doubt. In principle, every player in the organizational network is at the bankruptcy table. All their interests are manifest, as each vies for a piece of a pie that will be too small to satisfy them all. On the other hand, who wins is directly contingent upon statutory priority or on the strength of their security--the legal instruments creditors have used to protect their interests. This conjunction between property rights, fixed by legal securities, and flows of credit, presents a quite distinct portrait of the distribution of power in the corporate field (Barzel 2005). If a corporate bankruptcy brings all creditors simultaneously into a bargaining situation, a comprehensive reappraisal of a nation's bankruptcy laws simultaneously places all these interests on the legislative table to decide what shall be the rules of the game that governs corporate death and resurrection. Since political "meta-bargaining" affects the interests of every major player in the market, and ultimately determines their relative power in all future corporate bankruptcy negotiations, it presents a tense arena for legal change--even more so given the rarity of bankruptcy reforms in this century. Just as commercial law, including bankruptcy law, is significantly shaped by the technical advice of the professionals who practice it, modern property rights are created and negotiated by professionals. However, scholarly research on professionals traditionally has stopped short of their creative role in shaping substantive statutory law (Barzel 2005). Theories of professions in the last twenty years have concentrated intensively on the mechanisms professionals employ to control markets for their own services. But they have generally failed to ask either how professionals shape wider financial, industrial, and labor markets, or how professionals' narrow self-interests in their own market projects cross over to structure market institutions, the state, and substantive law. Property rights lie at the foundation of market society. Their importance derives from the ways they constitute and shape the economy. Property rights affect economic behavior by structuring incentives and disincentives. They determine who bears the risks and rewards of economic action. They also determine who controls economic assets, and so directly empower some but not others. Property rights affect economic growth, investment, and income distribution. Market activity consists chiefly of the exploitation and exchange of property rights. A factory-owner uses the factory to produce goods for sale. Market exchange involves the exchange of property rights. In fact, the very possibility of legal exchange derives from property rights (in particular, the right of alienation). It involves a bundle of distinct rights which may or may not belong to a single owner: different persons may have different rights over the same asset; the owner may be an organization or institution rather than a person; furthermore, rights may be contingent on the status, circumstances, or behavior of the owner. All these permutations of ownership make the classic questions of control and power in the credit network much more complex than conventional social science customarily recognizes (Blair 2005). Corporations and their lenders negotiate the property rights shared between debtors and debt-holders. Depending on these, the corporation will have to pay more or less for the money it borrows. One of the basic distinctions concerns security. When a debt is secured, the creditor possesses rights over property held by the debtor; a home mortgage, for instance, gives to the bank a property interest in the borrower's home. Or bonds may be secured by particular assets. If the debtor defaults, a secured creditor can seize the collateral as compensation. Collateralization of loans attenuates the property rights enjoyed by the debtor, and the property serving as collateral is said to be encumbered. A secured loan may mean lower interest payments for the debtor, but this is done at the price of ceding property rights to the lender. Covenants are found in both term-loan contracts and bond indentures. The more detailed they are, the more they restrict the debtor. Bond holders and creditors do not have the voting rights of shareholders, but through the use of covenants they can shape property rights and so influence the actions of debtor corporations. The debtor acquires capital, but its dominion over that capital is neither sole nor despotic (Brealey and Stewart 2003). Maxwell acquires capital through equity, debt, or retained earnings. Equity and debt become important when retained earnings cannot meet the needs of a corporation. Debt has been of particular interest to organization theorists since it provides the basis for external control over organizations. Yet, the ownership rights obtained over capital acquired using debt are neither simple nor absolute. The complexities are usually spelled out in laborious detail in a financial contract. Property rights are shared, restricted, and made contingent on any number of conditions. Bankruptcy is a defining feature of market economies and plays a central role in the process that drives less efficient firms out of the market. It is the unfortunate and unhoped-for possibility that overshadows all financial contracting. When it occurs, all kinds of property rights must be renegotiated. But even when firms remain solvent, those who negotiate property rights must take into account its possibility and so provide for "worst case scenarios." The significance of bankruptcy is completely out of proportion to its relative infrequency. In societies entirely dependent on credit, bankruptcy law has a pervasive influence (Braithwaite.2007). Corporate failure involves more than shareholders and creditors. It affects employees' jobs, the economic viability of communities, the ability of suppliers and customers to conduct their business, the demand for professional services, and the competitive interests of the state. Bankruptcy upsets those commercial and employment relationships that are taken for granted, and lays bare simultaneously many of the power relations and economic interests that surround a firm. Since bankrupt firms cannot meet all their liabilities, there is a shortfall that must be distributed among claimants whose interests are consequently in conflict. One creditor's loss is another one's gain (Braithwaite 2007). Bankruptcy is a complex legal and economic process, and involves a substantial amount of work. Claims must be registered and evaluated, assets need to be collected and valued, and conflicts must be resolved. The work may be routine in a straightforward liquidation, but in a large reorganization it will be protracted and technically demanding. Who is to perform such work' How are they to be compensated' The answers to these questions raise jurisdictional rights, the other major dimension of bankruptcy. Property rights are not the only way a society regulates access to value. Jurisdictional rights function in a similar fashion. A jurisdictional right is a socially-sanctioned right to perform or control a particular kind of work. Modern jurisdictional rights are akin to special property rights which apply to work (exclusive rights of contingent usufruct, but not alienability or heritability). Both rights allow right-holders to exclude others. That is, whoever possesses jurisdiction can perform or oversee a type of work and exclude others. Many areas of work are subject to jurisdictional rights, but the one that concerns us here is bankruptcy work. Bankruptcy involves the suspension and modification of property rights and begins with recognition of the fact that claims on a debtor can no longer be satisfied. Assets are inadequate to meet liabilities and so there is a problem: somebody's property rights will be violated. The key bankruptcy question is who loses and how much: how will the shortfall be allocated among the competing claimants; how much will their property rights be attenuated' In a liquidation, bankruptcy law provides a way to determine total assets in an insolvent estate, to assess total claims on the estate, and to distribute the assets to the claimants. In a business reorganization, bankruptcy law provides an orderly way to stop the enforcement of rights by creditors, to renegotiate terms of credit, and to return the company to the market better able to compete successfully. The importance of meta-bargaining about bankruptcy rules derives from the importance of bankruptcy (Maxwell Communication Corporation 2008). If bankruptcy had only a trivial effect on the disposition of property, there is no doubt but that few would care how and when bankruptcy law was revised. But in fact, the property stakes are very high under bankruptcy. And if bargaining under bankruptcy law is a relatively rare event, the opportunity for metabargaining about bankruptcy law is rarer still. Bankruptcy law specifies the circumstances under which companies may seek protection from creditors. It indicates who--corporate directors, management, creditors, courts--can trigger legal interventions into corporate affairs. It also grants to directors or corporate managers various powers once bankruptcy law has been activated. The law allows some prior agreements, such as labor or commercial contracts, to be renegotiated or rejected. It ranks creditors for priority in the distribution of assets, and protects them from further losses incurred by the debtor The great divide in bankruptcy law falls between creditors and debtors. Creditors want to be sure that the money they lend will be repaid, that they will be paid for goods they provide on credit, and that prepayments--a form of credit--will result in delivery of the goods or service. In general, lenders prefer to have legal rights over the debtor's property and so increase the probability of repayment. In contrast, debtors want to maintain maximum control over the money they borrow or the goods they acquire. Consequently, lenders' and borrowers' interests clash (Altman 2005). Creditors struggle with debtors, but creditors also struggle among themselves. Bankruptcy law governs conflicts among creditors who compete over insufficient assets. To forestall a destructive "race to the assets," bankruptcy law ranks creditors from the most senior, who are first to retrieve their assets, to the most junior, who will share whatever is left after other creditors have been satisfied. The rules that govern financial transactions also determine the order in which creditors can satisfy their claims if a firm defaults: creditors are ranked from the most senior to the most junior. Then sometimes follow administrative expenses that go to professionals for doing the work of liquidation or reorganization. The state frequently stands high in priority in order to recoup unpaid taxes. Workers and consumers also sometimes get a high priority. Then everyone else--the unsecured creditors--share equally with what is left--and often that is nothing at all. The great advantage of secured transactions is their seniority (Altman 2005). Bankruptcy law can impede the ability of secured creditors to realize their claims on the debtor. Some forms of security allow creditors to seize collateral assets immediately upon default. However, modification rules can alter rights that pertain outside bankruptcy. some modification rules allow courts to over-ride the power of creditors to confirm or veto plans for corporate reorganization. While the value of claims and the kinds of security largely determine the relative influence of creditors in negotiations over corporate reorganization, courts can step in and usurp the power of higher ranked creditors in favor of creditors as a whole (Altman 2005). In parlance, this power is appropriately termed "cramdown," for the secured creditors can find a decision on a reorganization plan "crammed-down" over their objections. These eight groups differed in their ability to mobilize politically, and consequently some were better positioned for meta-bargaining than others. Political mobilization depended on several factors: the resources available for collective action; whether or not the groups were repeat players in the bankruptcy arena; their level of organization; and the quality of the professional expertise to which they had access. How groups meta-bargained depended on their property and jurisdictional interests in combination with their level of mobilization (Braithwaite 2007). Influence on law-making follows two general patterns--global and targeted. On the one hand, some actors exert comprehensive influence over all facets of a given piece of legislation. They have a generalized interest in every element of a statute or group of statutes, usually because the law effectively regulates or empowers their commercial, administrative, or occupational interests. Such political actors understand the law as an integrated whole, and any change in one or another element affects the relations among all the elements. They seek some sort of equilibrium, a balancing of interests, of costs and benefits, in which no aspect of the proposed statute is irrelevant to the functioning of the whole. BIBLIOGRAPHY 1. Altman Edward I. 1993, Corporate Financial Distress and Bankruptcy, ( 2nd edn.) New York: John Wiley and Sons. 2. Barzel Yoram. 1989, Economic Analysis of Property Rights, Cambridge: Cambridge University Press. 3. Blair Margaret M. 1995, Ownership and Control, Washington DC: Brookings Institute. 4. Braithwaite John 1989, Crime, Shame and Reintegration, New York: Cambridge University Press. 5. Brealey Richard and Stewart Myers 1984, Principles of Corporate Finance, ( 2nd edn.) New York: McGraw-Hill. 6. Maxwell Communication Corporation plc. 2008. http://www.fundinguniverse.com/company-histories/Maxwell-Communication-Corporation-plc-Company-History.html Read More