Entire Fairness in the Trust Indenture Act

Recently, the Trust Indenture Act of 1939 has reappeared in out-of-court restructuring litigation. This piece of New Deal legislation was intended to prevent coercive restructurings whereby savvy institutional players took advantage of unknowledgeable or unengaged noteholders. Until recently, the Act was uncontested, but recent out-of-bankruptcy restructurings have resurrected it. These cases have implications for future restructurings, as courts continue to parse the legislative text and history to arrive at a workable solution. This Essay argues that a workable solution is already here: Delaware's entire fairness standard. By importing the tenets of Delaware's entire fairness review into Trust Indenture Act litigation, courts can navigate new terrain with a reliable map with which both courts and market participants are familiar. As such, this Essay proceeds first by recounting the history of the Act, with particular emphasis on Congress's requirement of “judicial scrutiny of the fairness of debt-readjustment plans.” Against this backdrop, the Essay then compares the standard debt-readjustment process with controlling shareholder mergers. In both cases, a dominant majority could abuse its control to the disadvantage of minority investors. In the latter case, Delaware corporate law has developed a set of judicial review standards to protect minority shareholders while not foreclosing beneficial transactions. Delaware's solution, the entire fairness standard, has served shareholders in good stead. While courts must reckon with the statutory language of the Trust Indenture Act, the intent of Congress is clear: to ensure judicial scrutiny of out-of-court restructurings. As such, this Essay concludes by arguing for an application of entire fairness review to cases involving alleged violations of the Act. Courts would be wise to adopt such a standard because it serves the purpose of the Act and provides socially optimal protection against coercive deals while allowing socially beneficial restructurings