Corporate reorganization rules is to be judged and the fundamental problem of valuation: THE EFFECT OF EXISTING RULES ON DIVISION OF VALUE continue

Thus, the equityholders have an “option value,” and to forgo it they must be compensated by having the reorganization plan provide them with a value exceeding this option value. This element of the model of Bebchuk and Chang is consistent with the empirical evidence that, as the value of the company’s assets gets closer to the value of the debt (and thus as the option value gets larger), the larger the amount that the equityholders get.
Second, if the equityholders delay agreement, then, as discussed earlier, the company can be expected to incur during the lengthy process “financial distress costs” that will dissipate some of the value that debtholders can expect to receive at the end of the process. Therefore, because the equityholders’ consent to the plan can save these costs, they can obtain a share of these savings in return for their consent. Similarly, when a reorganization would produce a surplus over the sale of the assets through Chapter 7, then, because the equityholders’ consent to a reorganization plan would facilitate avoiding the losses that liquidation would produce, they would be able to extract in return for their consent a fraction of these savings.
Third, the equityholders’ bargaining power is enhanced by the exclusivity period established under the existing rules. The managers, who are often aligned with the shareholders, have an exclusive power to propose reorganization plans for a certainperiod (which can be, and often is, extended by the supervising court). Having such an exclusive power to make offers strengthens one’s bargaining position.