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

Under the options approach, the units of RC will not be initially distributed to the participants but rather held by a clearing agent (CA), and the participants will be given instead rights (options) toward the clearing agent С A. Participants that wish to exercise their rights will have to do so by a date T that follows shortly the distribution of options — say, a month following this distribution.

Specifically, in our example, each debtholder will get a type-A right. This right may be redeemed by CA for $1, but if it is not redeemed it will entitle the right holder to get one unit of RC. Each equityholder will get a type-B right, which entities its holder, if submitted by date T, to purchase one unit of RC for $1.

At time T, all the options will be settled and all the units of RC will be distributed by the agent CA. If type-B rights are not submitted for exercise, then CA will give all the units of RC to the holders of type-A rights. If the holders of type-B rights do exercise them, CA will give the units of RC to these right holders, and CA will use the $100 obtained from the exercise of type-B rights to redeem all the type-A rights.

We can now turn to consider whether any participants will have basis for complaining about the value received by them. As to debtholders, they will find themselves in one of two situations. Either they will have their rights redeemed for $1 each (in case type-B rights are exercised), in which case they will be paid in full. Alternatively, if the type-B rights are not exercised, the debtholders will get all the units of RC (which is all the value there is to give) and thus will again be unable to complain. As to the equityholders, recall that, if they are entitled to any positive value, each equityholder will be entitled to a value of V-l; and having the option to purchase one unit of RC for 1 will make this value accessible to each equityholder.