The Law of Capital Fluidity

Abstract

With the evolution of corporate finance, driven by the rise of private capital and corporate indebtedness, the law of capital fluidity has become increasingly intricate. As a legal form, capital is ‘coded’ to be not just more flexible than labour; it is more fluid, in the sense that the holders of the capital have the legal capacity to dynamically switch and intertwine their debt and equity interests. These ‘chameleon capital’ instruments allow private equity, private credit, and venture capital funds to dynamically blur the distinction between equity and debt during the life course of an investment. Another instance is the shift from formal bankruptcy to a growing use of coercive liability management exercises, which effectively expropriate the interests of non-participating creditors. These instances of capital fluidity are sometimes justified as efficient responses to the organisation of risk, and, hence, as devices which ultimately serve to reduce the cost of capital and improve its allocation. However, fluidity for capital has distributional consequences, which may have second-order efficiency effects. Switching between legal forms is not generally available to labour, which is thereby exposed to losses in the form of wage cuts and redundancies. The risk of labour expropriation downstream operates as an ex ante disincentive to knowledge sharing between workers and managers, with negative implications for firm value. This Article provides the conceptual apparatus to view how law codes capital and labour, and its consequences for restructurings. The law of capital fluidity brings opportunities but also raises new questions in corporate, restructuring and bankruptcy, and labour law.