Facilitating Successful Failures

Approximately 80,000 businesses fail each year in the United States. This Article presents an original empirical study that surveys more than 400 business restructuring professionals. The study focuses on a critical factor that arguably contributes to these failures—the conduct of boards of directors and management. Anecdotal evidence suggests that management of distressed companies often bury their heads in the sand until it is too late to remedy the companies’ problems, a phenomenon commonly called “ostrich syndrome.” The data confirm this behavior, shows a prevalent use of loss framing, and suggest trends consistent with prospect theory. This Article draws on both the data and behavioral economics to examine the genesis and contours of this problem. It then discusses potential changes to applicable law and introduces a new “meet and confer” process to encourage timely restructuring negotiations. The meet and confer process is designed to promote meaningful changes in management conduct and to facilitate more “successful failures.” Policymakers should adopt regulations that foster this mentality, rather than rewarding fear or ignorance in the face of failure. INTRODUCTION 206 I. FINANCIAL DISTRESS AND MANAGEMENT DECISION-MAKING 211 A. Restructuring Alternatives 213 1. Out-of-Court Restructurings 215 2. Bankruptcy Restructurings 217 * Professor of Law, University of Maryland Francis King Carey School of Law. Professor Harner is the Reporter for the ABI Commission Studying the Reform of Chapter 11. The views set forth in this Article are Professor Harner’s personal views and do not represent those of the Commission. † Mathematica Policy Research; University of Nebraska at Lincoln, Ph.D. This project benefitted from the comments of, or discussions with, Daniel Bussel, Lynne Dallas, Joan Heminway, Kristin Johnson, the Honorable Duncan W. Keir, Donald Langevoort, Lynn LoPucki, Stephen Lubben, Christopher Mirick, Honorable Randall J. Newsome, Robert Rhee, and Lynn Stout. An earlier version of this Article was presented at the 2012 Law and Society Annual Meeting. The authors also would like to thank the numerous practitioners who provided valuable input on both the design and substance of the study. In addition, they appreciate the research assistance of Jennifer Ivey-Crickenberger and Adrienne Diverte. Nevertheless, all opinions, errors, omissions, and conclusions in this Article are their own. Finally, the authors would like to thank the University of Maryland Francis King Carey School of Law for financial support in connection with this Article. 206 FLORIDA LAW REVIEW [Vol. 66 3. Prepackaged Restructurings 221 B. Heuristics and Bias in Decision-Making 223 1. Examples of Heuristics and Bias 223 2. The Framing Bias and Restructurings 227 II. ASSESSING MANAGEMENT DECISION-MAKING IN DISTRESS: THE MANAGEMENT BEHAVIOR STUDY 229 A. Methodology 229 B. Study Design 230 C. Key Study Data and Results 231 1. General Types of Respondents and Their Experiences 231 2. What Professionals Say 232 3. What Clients Hear 235 4. Does the Dialog Matter? 238 III. CHANGING THE FRAME TO FACILITATE BETTER RESULTS 240 A. The Need for Change 241 B. Encouraging More Hybrid Restructurings 243 1. Overview of Meet and Confer 244 2. The MC Notice and the Parties 245 3. The Standstill 247 4. The MCO Exit Plan 248 5. The Potential Benefits 250 6. The Potential Challenges 251 CONCLUSION 251 APPENDIX A 253 Failure is simply the opportunity to begin again, this time more intelligently. -Henry Ford