The Changing Nature of Debt and Equity: A Legal Perspective

Historically, the law has distinguished sharply between debt and equity, and between the duties a corporation owes to its stockholders and those it owes to holders of its debt securities and its other creditors. Over the past several years, changes in the business world, particularly the increase in leveraged buyouts and the use of nontraditional forms of securities, have put a strain on the traditional legal analysis. This paper will briefly examine the legal principles that historically have applied both to solvent corporations and to those that are insolvent and undergoing reorganization under the Bankruptcy Code. It will also explore how the courts are attempting to cope with the new problems, and the difficulties the courts face in applying traditional principles to solving those problems.