The Fairness Rights of Corporate Bondholders

Lawrence E. Mitchell, Case Western University School of Law


An accepted article of faith in corporate law holds that the rights of bondholders are governed exclusively by the terms of the bond contract. Relying on this doctrine. courts have denied bondholders the benefit of management's duties of care and loyalty en- joyed by stockholders and have failed to examine analytically their claims that certain corporate actions impermissibly transfer the value of their investments to stockholders Professor Mitchell questions the wisdom of this dogma arguing that, in many In- stances, bondholders should be afforded rights analogous to those possessed by stockholders. Examining "vertical" relationships between bondholders and management and "horizontal" relationships between bondholders and stockholders; he demonstrates that the enforcement of a more expansive notion of bondholder rights can further the traditional corporate law goals of deterring self-dealing and irresponsible risk-taking by management without unduly burdening the corporation's obligations to stockholders. Professor Mitchell also considers a larger question raised by his analysis: whether, generally speaking, corporate law ought to impose duties that serve to improve the character and conduct of corporate actors instead of simply holding them accountable for what it currently views as inevitable ethical lapse.