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89 Tul. L. Rev. 541 (2014-2015)

handle is hein.journals/tulr89 and id is 587 raw text is: TULANE LAW REVIEW VOL. 89 FEBRuARY 2015 No. 3 Revisiting the Voting Prohibition in Bond Workouts Carlos Berdej6* Economic theory suggests that corporate law should enable partes to contract feely in order to promote their best interests, thereby leading to socially optimal armangements. Nevertheless, the law governing the terms of bonds issued by US corporatbons contains numerous mandatory rules, including a complete ban on collective action clauses (CACs) that would allow a qualifying majony of bondholders to authonze modifcations of the core terms (such as the interest rate, maturty, and principal amouno of an entire issue of bonds after their initial sale. The economic impact of this long-standingprohibitio, which exacerbates the costs of f-mancial distress by unnecessarily forcing issuers into bankruptcy, has not been thoroughly examined in the legal literature. The limited attention devoted to this subject is puzzling given the ctitical role played by the corporate bond market in the US economy-on average, corporations issue $1 tilhon in bonds each year, seven tines the amount raised through the issuance ofstock. Tis Aricle argues that the ban on CACs in the US. bond market is misguided and proposes a rule that affords parties broad latitude in selecting the percentage of bondholders that may authorize changes to the core terms of a bond issue. To support this argumen this Atticle gathers empirical evidence on parties' contracting choices fom three counm'es-Chile, Germany, and Brazl--hat follow alternative approaches to the regulation of CACs and that have recently reformed the laws governing their corporate bond markets. The flexible framework proposed in this Artcle allows parties to tailor their agreements to their particular needs and provides a more favorable environment for the market-dn'ven evolution of contractual terms. Implementation of the rule proposed in tis Article would result in lower interest rates, thereby reducing the cost of capital for issuers and fomenting economic growth. More generall, the findings presented in tus Article provide an empincal dimension to the existing * © 2015 Carlos Berdej6. Associate Professor, Loyola Law School, Los Angeles. I want to thank Afra Afsharipour, Brian Broughman, Cdssio Cavalli, Michael Guttentag, Therese Maynard, Elizabeth Pollman, Viviane Prado, Mark Roe, Kathryn Spier, Matias Zegers, and participants at the 2013 and 2014 Conferences on Empirical Legal Studies and the 2014 American Society of Comparative Law Younger Comparativists Committee Workshop on Comparative Business and Financial Law for their thoughtful comments on earlier drafts. Any errors are my own.

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