107 Iowa L. Rev. 1317 (2022)

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Abstract

Corporate law in the United States of America has been shaped and developed on the basic assumption that stakeholders in a firm want the firm to succeed. However, due to the rise of the credit default swaps (“CDS”) market and the emergence of decoupling voting and economic interests, this assumption is no longer safe. The relationships between hedge funds and the companies in which they invest have grown tenuous due to the emergence of a new phenomenon: debt activism. Debt activism does incentivize firms to honor debt covenants, but the negative impact of actively destroying firm value outweighs any potential benefits. No case has better illustrated the harmful consequences of debt activism than the 2019 case U.S. Bank National Association v. Windstream Services, LLC. The Windstream decision signaled open season for hedge funds to seek profit by affirmatively destroying firm value. The decision caused an uproar in the credit markets and cries for the eradication of debt activism immediately grew stronger. This Note, however, argues that debt activism should not be completely eradicated. Complex contract provisions drafted to curb debt activism or reliance upon judicial intervention to protect firms are unreasonable solutions, unlikely, and may actually cause more harm than good. Instead, this Note argues that curbing debt activism by limiting potential remedies for debt activists via default time-bar provisions is a realistic and effective path forward.