9.2. THE AHM-BEBCHUK PROCEDURE The most senior class(class 1)is allocated 100% of firms equity(a creditor owed di receives a fraction d1/D, of shares ). The firm has the right to redeem the claim at a price of D, The next most senior class(class 2), is given the option to buy equity at a price of P2= Di; however, the firm can redeem this claim at a price of D2 Class i investors 3<i< n) have the option to buy equity at Pi > di, but the firm can redeem the claim at D Shareholders(i=n+1) can buy equity at a price of Pn+1=> di After the options have been exercised, there is a vote by the new equity holders on which of the cash and non-cash bids to accept Suppose that various bids have been received but that different classes of creditors believe the bids are worth different amounts(recall that there are non-cash bids). Let class i's valuation of the best bid be Vi. How will the Bebchuk scheme work? Class i>1 will want to buy equity if Vi>Pi. What if this is true for more than one class? Presumably the firm's right to redeem the claim takes precedence over the right to buy and the most junior creditor for whom Vi Pi gets to buy the equity. However, this may not be the creditor for whom the value of the firm is the highest. But perhaps one gets closer than by other method Aghion, Hart, and Moore(1992) claim that this procedure solves the financing problem by allowing non-cash bids It does not deal directly with the lack-of-competition problem, but they say that allowing non-cash bids is likely to mitigate it It replaces structured bargaining by a simple vote Unlike automatic financial restructuring, which leaves incumbent man- agement in place, incumbent management remains only if there is an explicit vote by shareholders to retain them References: Aghion, Philippe, Oliver Hart, and John Moore. " The Economics of Bankruptcy Reform, Journal of Law, Economics, and Organization 8(1992 523-546 Hart, Oliver. Firms, Contracts, and Financial Structure(Clarendon Lec tures in Economics ). Oxford: Oxford University Press(1995)9.2. THE AHM-BEBCHUK PROCEDURE 3 • The most senior class (class 1) is allocated 100% of firm’s equity (a creditor owed d1 receives a fraction d1/D1 of shares). The firm has the right to redeem the claim at a price of D1. • The next most senior class (class 2), is given the option to buy equity at a price of P2 = D1; however, the firm can redeem this claim at a price of D2. • Class P i investors (3 ≤ i ≤ n) have the option to buy equity at Pi = j<i Dj , but the firm can redeem the claim at Di. • Shareholders (i = n + 1) can buy equity at a price of Pn+1 = Pn i=1 Di. • After the options have been exercised, there is a vote by the new equity holders on which of the cash and non-cash bids to accept. Suppose that various bids have been received but that different classes of creditors believe the bids are worth different amounts (recall that there are non-cash bids). Let class i’s valuation of the best bid be Vi. How will the Bebchuk scheme work? Class i > 1 will want to buy equity if Vi > Pi. What if this is true for more than one class? Presumably the firm’s right to redeem the claim takes precedence over the right to buy and the most junior creditor for whom Vi > Pi gets to buy the equity. However, this may not be the creditor for whom the value of the firm is the highest. But perhaps one gets closer than by other methods. Aghion, Hart, and Moore (1992) claim that this procedure solves the financing problem by allowing non-cash bids. It does not deal directly with the lack-of-competition problem, but they say that allowing non-cash bids is likely to mitigate it. It replaces structured bargaining by a simple vote. Unlike automatic financial restructuring, which leaves incumbent man￾agement in place, incumbent management remains only if there is an explicit vote by shareholders to retain them. References: Aghion, Philippe, Oliver Hart, and John Moore. “The Economics of Bankruptcy Reform,” Journal of Law, Economics, and Organization 8 (1992) 523-546. Hart, Oliver. Firms, Contracts, and Financial Structure (Clarendon Lec￾tures in Economics). Oxford: Oxford University Press (1995)