Rights of Shareholders and Creditors in the Context of Bank Insolvency
The survival of shareholders’ governance rights can significantly complicate the search for an effective bank resolution. To avoid this eventuality, a sound bank insolvency regime can transfer control over the institution to the official administrator, in particular, through the suspension of the governance rights of shareholders. Where bank insolvency proceedings take place within the general framework of corporate insolvency law, the possibility of appropriate exceptions should be considered.
When official administration and liquidation are organized as distinct legal proceedings that are subject to separate rules, the commencement of liquidation will imply that the survival of the bank is no longer possible and will generally result in the outright termination of shareholders’ governance rights (although shareholders will retain a residual, purely financial interest in the estate’s assets, in the event that those assets prove sufficient for the satisfaction of all remaining liabilities).
By contrast, in the case of official administration (or of single-stream proceedings, in which rehabilitation and liquidation are alternative results), many legal systems seek to ensure that the restructuring will not be conducted in ways that violate shareholders’ property rights, including their continuing stake in a potentially viable enterprise. For the same reason, some jurisdictions continue to recognize shareholders’ governance rights during the official administration, even though this recognition can make the process more cumbersome and potentially inefficient. The property-rights-based rationale for the continuing participation of shareholders in the governance of an insolvent bank is stronger when the bank still has a positive net worth (e. g., because it has crossed the threshold of regulatory insolvency but is not insolvent in a balance-sheet sense). Nonetheless, to provide appropriate safeguards for shareholders’ property rights without undermining the effectiveness of the insolvency proceedings, alternative solutions can be used.
For instance, the law could enable the official administrator to seek a special court order for the approval of restructuring plans if the consent of shareholders is not forthcoming. Alternatively, the official administrator could be empowered to formally invite shareholders to participate in the bank’s recapitalization and to expel them only if they fail to do so in time. In any event, the recognition of any shareholders’ rights in the context of official administration (including their preemptive rights of participation in the bank’s recapitalization) should not affect the powers of the banking supervisory authority to take swift action as needed, including the power to decide on the fitness of large shareholders of banking institutions.
A more difficult question concerns the dilution or expropriation of the shareholders’ financial participation in the bank as part of a restructuring plan that involves recapitalization with public funds, with outside private capital, or both. If the bank has a positive net worth, dilution or expropriation should not be done without compensation, whether at the time of the relevant action or at a later point. Nonetheless, because of constitutional or other considerations, dilution or expropriation—with or without compensation—may not be possible in some countries other than by order of an insolvency court. If dilution or expropriation is possible, the relevant corporate actions should be conducted in a legally secure way and should be based on an explicit ordering of potentially conflicting rules
so that the old shareholders do not have surviving claims on the restructured bank (e. g., under general rules of commercial or company law).
Whatever the domestic legal position, under no circumstances should shareholders’ rights provide an excuse to allow shareholders to appropriate the benefits of outside financial support to an insolvent bank. For instance, when a bank is successfully restructured with public financial assistance, the old shareholders should not be restored (after the termination of the official administration) to ownership rights beyond the measure justified by the bank’s net worth immediately before the commencement of the restructuring effort. To do otherwise would have the effect of transferring the value of the public assistance from the taxpayer to the bank’s preexisting shareholders.