Book Description

The EU Directive on preventive restructuring frameworks gives the EU Member States ('MSs') the choice between implementing two fairness rules in cross-class cram-down: the US-style absolute priority rule ('APR') or the newly conceived relative priority rule ('RPR'). This Article argues that there is no good reason for the MSs to implement the RPR in domestic law. While the APR effectively protects the rights of the dissenting classes to get what they are entitled for, the RPR increases moral hazard and opportunism. Also, it might make debt investments in the EU unattractive. On top of that, this Article shows that the RPR lacks a clear theoretical justification. One of the main reasons why the RPR was introduced in the Directive alongside the APR is that the RPR was thought to provide a solution to some of the APR problems. This Article considers three of these problems (i.e., the 'valuation problem', the 'holdout problem' and the 'problem of the relevant shareholders') and explains the reasons why the RPR is not an appropriate solution to them. Among these three problems, the most troublesome one from the perspective of the EU is that the APR makes it difficult to award value to equity of SMEs (the 'problem of the relevant shareholders'). This Article argues that using the RPR to deal with this problem would incentivize the shareholders to behave opportunistically and to orchestrate the restructuring. Instead of the RPR, this Article suggests two alternative techniques which MSs can enact to better address the issue: the new value exception 'in kind' and the disposable income method.