The COVID-19 pandemic has created severe economic hardship around the world, raising questions about what policymakers can do to mitigate the damage. On April 16, Harvard Law School Professors Mark Roe ’75 and John Coates participated in a global webinar hosted by the European Corporate Governance Institute to discuss challenges posed by the pandemic, and what might be done about them. The two focused on the possibility that the United States bankruptcy system could become clogged by a flood of filings just when the economy most needs it to run smoothly.
Roe and Coates spoke with Harvard Law Today about what could be done to lower the chances of a bankruptcy backlog and how other corporate governance challenges posed by the pandemic should be handled.
Harvard Law Today: What are your concerns about the bankruptcy system’s capacity to respond to the economic harm posed by the pandemic?
Mark Roe: Imagine that the economy is still in bad shape six months from now; big public companies haven’t made money for six months and are struggling under a tremendous debt burden. That could mean they can’t undertake new projects, make new investments, or hire new employees.
If it were only four or five companies, the companies could use the bankruptcy courts to restructure their debt, and some creditors could forgive debt and take ownership of part of the company or stretch out the terms of the debt repayment. Bankruptcy works expeditiously to make this happen for larger, public companies. But if the bankruptcy courts are backed up and a very large fraction of companies can’t recapitalize quickly, then too much of the economy can end up stuck in the doldrums for longer than it has to.
HLT: Can you give an example of why speedy court intervention can be important?
Roe: Suppose a company in bankruptcy needs a part from a particular supplier in order to keep operating. That company will seek a court order allowing it to pay this supplier for any of the back amount due or to push the supplier to the top of the list of creditors because the part is essential. If a court is backed up six weeks because it needs to deal with more pressing issues, like individuals dealing with rent payments, or because people are tapped out and file for bankruptcy after being sued on their credit card debt, or because of other companies in bankruptcy, then the court might not be able to get to that critical vendor motion for six weeks and the debtor and the supplier will languish. This doesn’t happen normally, but is something to expect if bankruptcy courts get clogged.
HLT: What could we do to keep bankruptcy courts from becoming overwhelmed?
Roe: One solution could be to allow for more bankruptcy judges, at least on a temporary basis. Congress should probably authorize a certain number of temporary judges in one of the bailout bills, and that can be held in abeyance until we know that we really need them. Another possible solution is moving some of the bankruptcy judges around from where there aren’t that many bankruptcy filings to where there are more bankruptcy filings. A third possibility is calling back retired bankruptcy judges. The best solution is medical: If we get COVID-19 under control soon and the economy bounces back, clogged courts could be a problem for which we prepared but didn’t have to deal with.
John Coates: Public policy interventions could help lots of individuals and small businesses avoid bankruptcy in the first place, which would take the pressure off the court system. But even without that, we could take the largest bankruptcies that affect the largest number of people and handle those differently. Health care systems triage when they’re being overwhelmed, instead of trying to do everything simultaneously, and we could do the same thing in the bankruptcy space.
HLT: What’s another big corporate governance challenge posed by the pandemic?
Coates: One is the corporate governance impact of public assistance. So, for example, the U.S. bailout bill that was passed, the CARES Act, explicitly says that the government is not allowed to take company voting stock even if it’s getting equity in the company when it provides assistance. That’s a corporate governance choice that is designed to keep the existing corporate governance structures in place. It makes a certain amount of sense but it’s at least debatable because if the government ends up effectively owning most of the equity but has no control rights, that might leave the government exposed.
A related issue is getting the right balance of oversight and transparency, and in the U.S. at least, I unfortunately think we have not done that. The Trump administration has taken the position that Congress cannot require it to report to Congress about the bailouts, and I think that’s bad policy, it’s probably bad law, and it’s certainly not going to help the public have any confidence that the money’s being used effectively.
HLT: What could the government do to create transparency over what happens with the public assistance?
Coates: Congress is clearly going to have to act again in any effective response to the crisis, and I would like to think that at the top of the list will be more effective oversight mechanisms than are currently in place. And frankly, if the Trump administration won’t agree, then there are statutory mandates that could be put into place that don’t require cooperation. For example, Congress could impose public reporting requirements on the recipients of the funding, who are not in as good a position to thumb their noses at Congress. Or Congress could specifically condition funding in stages, with each stage of authorization conditional on public reporting by the executive branch.