Rethinking Corporate Bonds: The Trade-Off Between Individual and Collective Rights

This Article presents a framework for analyzing the tradeoff between structuring bondholder rights as individual or as collective rights. Individual rights cannot be modified without the consent of each affected bondholder and they can be enforced by any bondholder whose right is violated. By contrast, if rights are collective, they can be modified by a majority of bondholders and they cannot be enforced without the consent of a majority of bondholders. The framework developed in this Article identifies the respective theoretical problems of vesting bondholder rights individually or collectively and examines the institutional setting of the United States corporate bond market to assess the practical significance of these problems. The Article ultimately endorses the presently prevailing structure of rights governing amendments, but identifies a number of defects with respect to the enforcement of rights. It concludes with specific recommendations for revisions in the structure and judicial interpretation of bondholder rights.