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

Corporate reorganization rules is to be judged and the fundamental problem of valuation: THE OPTIONS ALTERNATIVE TO EXISTING RULES endNote that between the distribution of the options and the date T, a trading in the options might take place and some rights might accordingly be passed from one hand to another. But, unlike the auctions method, the effectiveness of the options method does not depend on whether outside buyers acting in the market will value V correctly. Another related feature of the options approach, which might be viewed as attractive, is that it is decentralized. Each participant will be able to decide for itself how to go about using its rights, and no participants will be able to complain that they are getting less than their entitlement.

Having thus far dealt with the effects of the options approach on value division, let us now turn to its effect on the maximization of the value of the company’s assets. To begin, the approach would shorten the reorganization process, though it would not do so as much as the auctions approach would. Once a company enters reorganization, it will be only necessary to determine all the claims outstanding against the company and to fix the capital structure that the reorganized company will have. After that, the division of the reorganized company’s securities will follow automatically and swiftly from the option scheme’s principles.

As to the question of how the capital structure and governance of the reorganized company will be chosen, Bebchuk noted several possible procedures for dealing with these issues. The contribution of Aghion, Hart and Moore to the options approach was their proposal to supplement the options scheme with an additional procedure (“solicitation of bids”) for dealing with these issues. Under their proposal, once all of the reorganized company’s tickets are divided using the options scheme, the choice of ultimate capital structure and course of operation will be determined by a vote among the company’s sharholders among alternative proposals (bids) submitted to them. Both the procedures proposed in bebchuk and the additional procedure proposed in Aghion, Hart, and Moore should be able to ensure that, following the exercise of the options, the company’s assets will likely operate in the most efficient way.