Document Type

Article

Publication Date

Winter 2015

Abstract

This article analyzes the role of labor unions in corporate reorganizations and argues that labor union participation can improve corporate governance in the bankruptcy context. Generally, when a unionized corporation seeks to reorganize in bankruptcy, it does so with an eye towards obtaining concessions from its labor unions. The Bankruptcy Code permits corporate debtors to reject their collective bargaining agreements and to impose reduced wages and benefits, thus placing labor unions in a position of bargaining over concessions in bankruptcy. Such concession bargaining is vitally important to the labor union and to the debtor's reorganization efforts; however, the focus on concession bargaining overlooks the more activist role labor unions can, and do, play in corporate bankruptcy governance.

Labor unions have long played an important governance role when a corporation has suffered financial distress and sought protection under the Bankruptcy Code. This was true during the struggles of Pan Am Airlines in the late 1980s, and it was true in the more recent struggles of American Airlines. Current bankruptcy practice, characterized by a competition among creditors for control of the distressed corporation, has created an environment in which such labor participation is increasingly likely to occur. Further, labor participation in the current dynamics of Chapter 11 reorganizations may be especially important for corporate governance in this setting. Labor unions, with their inside information as to the corporation's practices and their unique perspective of managerial conduct, may improve decision making in the bankruptcy context by providing greater information about the bankrupt firm. In the competitive market for corporate control, such information may be a valuable currency that can help improve outcomes in Chapter 11 cases.

If labor union participation can improve upon bankruptcy governance, it is worthwhile to consider whether in an era of ever-decreasing unionization the bankruptcy laws could be changed in order to provide representation to nonunionized employees. While such committees are already permissible under current bankruptcy law, they are rarely used, in part, because of their perceived costs. The value contributed by labor union participation, however, suggests that these costs should be reconsidered in light of the benefits such committees can provide.

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