Corporate reorganization rules is to be judged and the fundamental problem of valuation: THE AUCTIONS ALTERNATIVE TO EXISTING RULES continue

In contrast, under the auctions approach, the two issues will be kept quite separate. The question of what should be done with the assets will be dealt with first by auctioning these assets. Thus, the resolution of this question will not have to wait until the issue of division is sorted out. And the auction procedure, according to its supporters, is bound to produce the maximum value for the assets. To begin with, it will take little time until the assets will start operating outside insolvency proceedings (with their accompanying costs and inefficiencies). Furthermore, if the auction works sufficiently well, we can expect the assets to move to their highest-value use, in which they will operate under an optimal capital and governance structure.

The second question — that of dividing value among all the participants in the reorganization — will be addressed under the auctions approach after the company’s assets are sold. At this point, there will be no room for disagreement about the total value that will be available for division among the participants. Consequently, it will be possible to divide this total value in accordance with the distribution to which participants are entitled.
The main concern that critics of the auctions approach have expressed relates to the question of whether an auction will always work well. In particular, critics have expressed doubts as to whether an auction will generally enable the participants to capture the full value of the company’s assets and whether it will necessarily move assets to their highest-value use. For example, Shleifer and Vishny argue that, when a firm becomes insolvent, other firms in the same industry, which are natural potential buyers, are likely to face liquidity problems. Consequently, a mandatory auction upon entering insolvency proceedings might result in systematic under-pricing (as well as in an inefficient allocation of assets).