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Vanderbilt Law Review

First Page

1813

Abstract

A corporation's managers generally owe a fiduciary duty to the corporation and its shareholders. Legal scholars interpret this duty as requiring the managers to maximize shareholder value. When a firm is solvent, the obligation to maximize shareholder value tends to give managers an incentive to deploy firm assets efficiently-that is, in a way that maximizes total value.

When a firm is insolvent, however, the duty to maximize shareholder value could lead managers to take actions that reduce the value of debt more than they increase the value of equity and therefore reduce total value. Accordingly, a number of courts have held that upon a firm's insolvency, managers owe a fiduciary duty not only to shareholders but also to creditors.

The courts have yet to clearly articulate how managers of an insolvent firm should balance the interests of shareholders against those of creditors. However, economically oriented legal scholars addressing this issue have argued that managers of an insolvent firm should have a duty to maximize the sum of the values of all financial claims (both those held by shareholders and those held by creditors) against the firm. Put differently, an insolvent firm's managers should maximize the total financial value of the firm, not just the value of its equity. We call this view the "financial value maximization" ("FVM") approach.

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