By Yeejin Jang (University of New South Wales), Jenny Jihyun Tak (University of New South Wales) and Wei Wang (Queen’s University)
Summary
The restructuring of financially distressed multinational companies is often complex and costly because these companies must comply with bankruptcy laws in multiple jurisdictions. Poor coordination between domestic and foreign courts often creates significant inefficiencies in the restructuring process. Recognizing this challenge, the United Nations Commission on International Trade Law (UNCITRAL) proposed the Model Law on Cross-Border Insolvency to enhance judicial coordination in cross-border insolvency proceedings. In 2005, the U.S. introduced Chapter 15 to its Bankruptcy Code as part of adopting the Model Law. This provision allows foreign companies to access U.S. bankruptcy courts via Chapter 15 as ancillary to the main proceedings in their home countries.
In this study, we use the adoption of Chapter 15 in the U.S. as a unique setting to examine how reducing uncertainty in resolving global insolvency affects cross-border merger and acquisition (M&A) activity and financing.
Compiling a comprehensive dataset of Chapter 15 filings from 2005-2020, we find that Chapter 15 has been used extensively by foreign debtors since its adoption. These debtors mostly come from common law countries, countries with significant bilateral trade with the U.S., and importantly, countries with strong creditor rights and efficient bankruptcy systems. The evidence suggests that firms from certain countries benefit more from utilizing Chapter 15 than others.
We then investigate whether foreign firms located in countries that make active use of Chapter 15 acquire more U.S. assets after the law’s adoption compared to those in countries that would not seek Chapter 15 to restructure their assets. Our results show that firms from countries with high use of Chapter 15 acquired 22% more U.S. targets after the enactment of Chapter 15 than foreign firms from countries with no use of Chapter 15. These results are robust to various matched sample analyses. Importantly, we do not find significant changes in the acquisition of non-U.S. targets or in domestic acquisitions by non-U.S. firms.
To explore the economic mechanisms behind the relationship between Chapter 15 and cross-border acquisitions, we examine the financing channel. We find that the long-term leverage ratio of firms from countries that utilize Chapter 15 increases by 8.6%. Firms in those countries also issue more corporate bonds and secure more trade credit from suppliers. Additionally, we document that U.S. lenders extend more credit to non-U.S. firms following the adoption of Chapter 15. Taken together, the evidence suggests that the rise in cross-border investment is supported by the improved debt capacity of non-U.S. firms.
To broaden our analysis beyond the U.S. setting, we leverage the staggered adoption of the Model Law in 17 countries from 1997-2020. Our international findings shows that countries reforming their international insolvency codes experienced a significant increase in inbound acquisitions. Importantly, these inbound acquisitions are largely driven by acquirers from countries with efficient home-country bankruptcy systems.
In summary, this paper shows that judicial cooperation is essential to reducing legal uncertainties and promoting consistency in the enforcement of bankruptcy law for multinational firms. Our empirical evidence suggests that improvements in international judicial processes have real effects on cross-border capital flows.
* The summary post was originally published by at the Harvard Bankruptcy Roundtable. The full paper is available at SSRN.
