Recharacterization of debt to equity under U.S. law and its effects on corporate governance

Abstract

This Essay examines the practice of recharacterization under U.S. law and focuses, in particular, on the standard of review applied by bankruptcy courts in order to determine whether a purported debt transaction should be considered as an equity contribution and on the effect of such a recharacterization of debt to equity on corporate governance. In doing so, Paragraph 2 provides a brief overview of the concept of recharacterization in general. Paragraphs 3 to 6 describe some of the most commonly accepted factors taken into account by bankruptcy courts and try to identify two main approaches that may be taken in weighting these factors. Finally, Paragraph 7 identifies some of the policy reasons underlying the concept of recharacterization and explores whether this practice has an impact on corporate governance.