Boardroom Governance with Evan Epstein

Jared Ellias: "The Elevation of the Board is an Important Trend in the Bankruptcy Process"

Episode Summary

In this episode, I talk with my colleague Jared Ellias, the Bion M. Gregory Chair in Business Law and the Faculty Director of the Center for Business Law at the University of California, Hastings College of the Law in San Francisco. In 2020, he was honored by the American Bankruptcy Institute as one of the "40 Under 40 Leaders in Insolvency Practice." His research interests include corporate bankruptcy; corporate governance; empirical legal studies; financial markets and commercial law. In this podcast, we talk about his latest article “The Rise of Bankruptcy Directors” where he and his co-authors show that many distressed companies, especially those controlled by private equity sponsors, prepare for bankruptcy by appointing bankruptcy experts to their boards of directors and give them the power to make key bankruptcy decisions. These supposedly independent directors (who are usually appointed repeatedly) often seek to wrest control from creditors of self-dealing claims against shareholders. We also discuss bankruptcy in more general terms including topics at the intersection of corporate governance and bankruptcy. If you like this show, please consider subscribing, leaving a review or sharing this podcast on social media. You can find all the show notes on the website boardroom-governance.com and please feel free to subscribe to the Boardroom Governance Newsletter at evanepstein.substack.com

Episode Notes

  1. Intro.
  2. (1:39) - Start of interview.
  3. (2:15) - About UC Hastings and the Center for Business Law [that we are building together!]
  4. (5:10) - Jared's "origin story": he grew up in Michigan, attended the U. of Michigan (BA political science) and Columbia Law School (JD). A book on the bankruptcy of Marvel Comics led him to bankruptcy law and practice. After graduation he joined Brown Rudnick in NYC (’07-’11). He later joined academia as a Teaching Fellow and Lecturer in Law in Corporate Governance & Practice at Stanford Law School ('11-'14). He joined the UC Hastings Faculty in 2014.
  5. (9:38) - Start of discussion about his latest article The Rise of Bankruptcy Directors: "Traditionally bankruptcy is about a court process, not a board process." But his research shows that the boardroom increased its prominence in bankruptcy starting in about 2012-2013, where many distressed companies, especially those controlled by private equity sponsors, prepared for bankruptcy by appointing independent directors (which they call "bankruptcy directors") to their boards of directors with the power to make key bankruptcy decisions.
  6. (13:03) -  On the new cohort of "bankruptcy directors" and the parallels with venture capital and Silicon Valley [Their dataset consists of the boards of directors of 528 firms and the 2,895 individuals who collectively hold 3,038 directorships at firms in bankruptcies from 2004-2019]: "The change is that a practice that was once relatively uncommon has become ubiquitous and a central and standard part of the process of preparing for a Chapter 11 bankruptcy filing, leading to the growth of an industry of professional bankruptcy directors who fill this new demand for bankruptcy experts on the board of distressed firms."
  7. (15:08) - On the question of fiduciary duty of loyalty and conflicts of interests of bankruptcy directors (particularly regarding the private equity controlling owners) and the emergence of "super-repeater directors".
  8. (16:38) - The example of the Nine-West bankruptcy.
  9. (21:34) - Whether bankruptcy judges will incorporate some standards such as those used (for example) by the Delaware Chancery Court on the independence of directors, board conflicts and the decision-making process of the board.
  10. (23:02) - On his finding that unsecured creditors recovered 21% less when a bankruptcy director is appointed.  On the lucrative new bankruptcy director role.
  11. (26:04) - On his proposal that the court regard bankruptcy directors as independent only if creditors support their appointment.
  12. (29:03) - "The elevation of the board is an important (new) trend in the bankruptcy process." "The Board is going to play a more central part in bankruptcies."
  13. (31:52) - On the current growth of the economy and deal-making despite pandemic, and projected bankruptcies. "It's caught all of us by surprise." "It just shows you that Washington can change the rules on Wall Street on they want to." On the Hertz bankruptcy.
  14. (34:49) - His thoughts on the next trends in bankruptcies: "I think we are going to continue to see the democratization of the bankruptcy process." "Bankruptcy is less of a black box today and retail investors are becoming bigger players (the participation of normal people in Chapter 11 is a trend that we are going to see continue."
  15. (36:46) - On bankruptcy forum shopping. "This issue goes back to the 1990s, and we will continue to see a concentration of bankruptcy cases in the hands of a few judges."
  16. (38:53) - On his advocacy to increase the number of bankruptcy judges (in response to Covid-19).
  17. (40:17) - The books that have greatly influenced his life:
    1. Comic Wars (2002), by Dan Raviv.
    2. The Strategy of Conflict (1981), by Thomas Shelling.
    3. The Selfish Gene (1990), by Richard Dawkins.
    4. Germs, Guns and Steel (1997), by Jared Diamond.
  18. (41:30) - His mentors:
    1. J.David Singer, Professor at U. of Michigan.
    2. Jeffrey Fagan, Professor at Columbia Law School.
    3. Edward Morrison,  Professor at Columbia Law School.
    4. Robert Stark, Brown Rudnick.
    5. Michael Klausner, Professor at Stanford Law School.
    6. George Triantis, Professor at Stanford Law School.
    7. Kenneth Ayotte, Professor at Berkeley Law School.
  19. (43:23) - His favorite quote: Benjamin Disraeli on William Gladstone: "He had only one idea, and it was wrong.”

Jared A. Ellias is a  Professor of Law, the Bion M. Gregory Chair in Business Law and the Faculty Director of the Center for Business Law at the University of California, Hastings College of the Law in San Francisco. In 2020, he was honored by the American Bankruptcy Institute as one of the "40 Under 40 Leaders in Insolvency Practice." 

Contact: Faculty Profile • SSRN • LinkedIn •Twitter

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Music/Soundtrack (found via Free Music Archive): Seeing The Future by Dexter Britain is licensed under a Attribution-Noncommercial-Share Alike 3.0 United States License